The Long & Short of it...
It’s easy to postpone making decisions on life insurance, because imagining your own death is so unpleasant.
But try to put that aside, because if you have a family or a spouse or a partner or love someone, it’s important to make sure they’d be prepared to handle their finances if something happens to you
Love means you are willing to sacrifice for someone else, and obtaining and keeping a proper amount of life insurance coverage may well represent a very small sacrifice for you.
We’ll get to some numbers in a moment, but first we have to provide a definition: Term life insurance is the lowest-cost form of life insurance. It is really “death insurance” that pays a benefit to the survivors you name, if you die. The “term” refers to the number of years the policy lasts.
There are many types of life insurance products. “Whole life” refers to a life insurance policy that will have some cash value at the end of its term. It combines investing with term life coverage, and is therefore more expensive.
People have many troubling perceptions about life insurance. This 2016 study by LIMRA — an organization that tracks data for more than 850 financial companies — found that the most common reason (49%) for buying life insurance cited by millennials was to cover funeral and burial expenses. The same study found that households with life insurance had enough coverage to replace just three years of income, on average. If you die or lose your spouse or partner, those three years will seem very short.
Since there’s such a problem with Americans not having enough coverage, we’re confining this discussion to term life. It pays to get a term policy as early as you can, because the younger you are, the lower the fixed annual premium will be for the term. Not only will a new policy get more expensive each year, you might develop long-term medical problems, such as high blood pressure, which can cause a life insurer to raise the premium.
A 2015 study by LIMRA indicated that most consumers who chose not to buy life insurance did so because of the cost, but also that 80% of consumers “misjudged” the price of life insurance, “with millennials overestimating the cost by 213%, and Gen Xers overestimating the cost by 119%.”
The 2016 LIMRA study estimated that 30% of U.S. households had no life insurance. According to the organization’s “Facts About Life” report, “Among households with children under 18, 4 in 10 say they would have <-- there was a word missing here, i’m guessing it’s this? immediate financial trouble if a primary wage earner died today.”
You are probably aware of at least one family that lost an adult member at a relatively young age. Consider how much income the survivors needed to replace, and how long they needed to replace it for. Life is expensive, and if a middle-aged parent passes away, the surviving spouse and children may have great difficulty.
How much coverage and how expensive?
It’s very easy to estimate how much it might cost for you to purchase life insurance. Let’s make up a scenario. You are 35, male, married with children, you don’t use tobacco and are in excellent health, living in downtown Houston. Since you are still young, it makes sense to take out a 30-year term policy as soon as you can. This way you can lock in a relatively low annual premium.
When discussing how much coverage is needed, people often react with horror at the figures I tell them to consider. “Why would I need $500,000 in coverage?” Well, you might need a lot more. You might think that all the life insurance should do is provide a lump sum for your survivors to spend for a while. But maybe it would be better if the money could work for them. If your survivors invest the money and make a 5% annual return, which may not be so easy with interest rates still at historically low levels, they will earn $25,000 a year. So if you can reasonably afford it, get more coverage.
Our 35-year-old married man wants to get $500,000 in coverage with a term of 30 years. He is in excellent health and wants the insurer to be rated A-minus (Excellent) or better, by A.M. Best.
The lowest annual premium available is approximates to $500.00 Maybe the man in our example, with a young family, will find this a difficult premium to pay. Then again, making relatively small sacrifices over the course of a year, such as bringing lunch to work one extra day each week, or avoiding the Starbucks (fourbucks) drive-through on the way to work, might easily cover the cost.
Then, as time goes on, maybe it will be time to add another policy. Let’s say the same man is now 45, and his health is considered “average”.Well if he buys another $500,000 in coverage, this time with a 20-year term, the lowest available estimated annual premium is $695. Now that premium is significantly higher than the premium for his first term-life policy, and the term is 10 years shorter, but our man now has a million dollars of coverage until he is 65, for a combined $1,139 a year.
Now assuming our sample life-insurance customer doesn’t die before he is 65, he might think the $13,320 in premiums he paid over 30 years for the first policy and the $13,900 he paid for the second were wasted. Then again, he might have bought himself 30 years of better sleep.
‘Oh, I have that at work’
This is another common excuse people make for not looking into term life insurance. Many companies will provide life insurance coverage for a year’s salary automatically for their workers. It’s probably not enough, and it may or may not have a portability option if you change jobs. Find out. These benefit plans may also allow you to apply for additional coverage through your company’s life insurer, but, again, you need to know if the additional coverage is portable, how long it might last if it is and how much that would cost, if your employment were terminated or if you were to move to another employer. It might be better to take what is given at work and buy additional term life coverage on your own. One might easily have several term policies, added at different times as financial circumstances change.
A final bit of advice. Discuss life insurance with your husband, wife or partner as soon as possible. Yes, it is a painful topic, as are most financial discussions. But talking over all aspects of your financial life with the love of your life can only help your finances -- and your relationship.