Do I need life insurance?  

Like the answer to many good financial questions, the answer is, it depends.  But, you probably need it.  

Do you love someone (or something)?  Do you owe someone (or something)?  

Do you have a family, people you care for, or something in your community you care about?  If the answer is yes, you probably need life insurance.  

Do you have debts like a car payment, mortgage, or student loan?   If the answer is yes, you probably need life insurance. 

But before I go any further, I want you to know that I don’t think you’re going to die anytime soon and the odds of you dying before you’re supposed to are very low based on statistical evidence.  

But, here’s the thing.  If you were to die, the consequences are far too great for you to not protect yourself and your loved ones with life insurance.   

Here’s how it works in really simple terms.  You and the life insurance company enter into a contract that says, “I (the insured) agree to pay an agreed upon premium (monthly cost).  You (the insurance company) agree to provide me with a death benefit that you will pay to my loved ones (beneficiaries) should I die during the agreed upon terms (length of time) of the contract (policy).”

Who commonly buys life insurance?  

  • Rich people.  Rich people who want to create liquidity when they die, who want money to pay estate taxes, or want to leave additional money to heirs, as well as many other reasons.
  • Poor people.  Two young, broke people starting a family can be at greater risk than rich people because the loss of one income could be catastrophic.  There’s a saying that sums this up nicely: “If you can’t afford to have life insurance, you can’t afford not to have it.”
  • Business owners.  Business owners are often required to have life insurance on themselves for banking reasons. They use it to insure their key employees and they have it to fund legal agreements, as well as many other reasons. 

People from every background, economic, and family situation buy life insurance to protect someone or something and it’s been used to do that for a really long time. Life insurance dates back to the 1760s.  

Those are compelling reasons for needing it. So, are there living benefits of having it? 

Yes, there are many living benefits to life insurance, depending on the type of policy you purchase. 

  • Peace of mind.  I don’t think I can overstate the peace of mind you get when you have your financial matters in order.  Life insurance is a key component to getting your financial matters in order. 
  • Cash value.  Many types of life insurance have a cash value component that you can use on a tax-preferenced basis while you’re alive.  
  • Policy riders.  Many policies have additional provisions known as riders that provide benefits like waiver of premium which eliminates the need to pay premium in the event of a disability meaning, if you get hurt, you don’t have to pay the premium.  

All right, you’ve talked me into it, how do I get it?  

Determine the death benefit

This is the most important part of a life insurance policy and there are several ways to decide the right amount.  

  • Select an amount that eliminates all debt and provides additional money.
  • For example, if you have a $100,000 mortgage and you’d like to provide $50,000 for a child’s education, the proper death benefit would be $150,000.
  • Select an amount that replaces the insured’s (your) lifetime earning potential.  
  • If the insured (you) earns $50,000 per year, is 35 years old, and intends to work till 65 years old, the proper death benefit would be $1,500,000 ($50,000 X 30 years).  

This is by no means a perfect science and there are tools and resources available to help you determine the death benefit that’s appropriate for you and your situation.  

Determine policy type

While there are a lot of different types of life insurance. They can be divided into two main categories: term and permanent.  

Term insurance is pure life insurance protection available in increments of time.  For example, there are 10 year, 20 year, and 30 year term policies.  Commonly, the premium is fixed for the duration of the contract (the number of years the policy covers you.)

So, you can buy a $100,000 20-year term policy that costs $30 a month, and it will cost $30 a month for 20 years.  Should you die at any point during that 20 year period, the insurance company will pay your beneficiary $100,000.  At the end of the 20 years, the insurance policy would end, you would no longer pay premiums, and would no longer have the coverage.  

A good way to think about permanent insurance is to think of it like buying a home versus renting an apartment.  Once you’re done paying the premium, the policy will last as long as you’re alive, just like when your mortgage is paid off, you own the house.  

Similarly to your home appreciating in value and developing equity, your policy can also increase in value and can build “equity” over time.  

Again, there are a lot of different kinds of policies available, so you’ll have the opportunity to personalize the details of your policy to suit you and your family’s needs. 

While both types of policies have their merits, term insurance is the more affordable option and can be a great place to start.  

Determine how and where you’re going to buy your life insurance

In 2020, there were over 700 life insurance companies and over 400,000 people working in insurance sales.  You can work with an agent or financial professional to select the right coverage for you, or you can also buy your policy online.

Complete the application

Whichever policy you choose and wherever you decide to buy it, you’ll need to complete an application.  You’ll just need to know your personal information.    

Complete underwriting

Life insurance is different from other accounts you may have opened in the past because you have to qualify for it.  The insurance company will look at a lot of things including but not limited to:

  • Your work history: A history of cancer or heart disease can make qualifying more difficult.  
  • Your credit: A poor credit history can make qualifying more difficult.
  • Your driving record: A poor driving record can make qualifying more difficult.
  • Your criminal record: A criminal record can make qualifying more difficult.
  • Your prescription drug history: Certain prescription drugs can make qualifying more difficult.
  • Your parent’s medical history: Early death or disease can make qualifying more difficult.
  • Your current physical health: Current health conditions can make qualifying more difficult.

The insurance company is trying to assess their level of risk.  Keep in mind, you may be applying for millions of dollars of life insurance and the insurance company wants to make sure you look as good on the inside as you do on the outside. That’s an insurance joke, but I’m trying to express that the insurance company wants to make sure you’re healthy at time of application and that there aren’t any other factors that would prevent you from getting coverage.  

Each one of those factors will go into determining your insurance rating which determines your premium amount.  The younger and healthier a person, the better the rating and the lower the premium. 

Putting coverage in force

Once you’ve completed the underwriting process, the insurance company will let you know your rating, premium amount, and offer you coverage.  If you’re happy with the premium amount, you’ll pay the first month’s premium and your coverage will be “in force” or active.  

Wrapping up

So now you know if you need life insurance, a little about the living benefits, and how to get it.  Now I’d like to hear from you. Are you ready to move ahead with a policy?  How much coverage do you think is right for you and what kind of policy (term or permanent) are you leaning towards?  

Let us know if you’d like additional guidance and we can connect you with someone who can help you determine the right policy type and coverage for you, as well as guide you through the process.  

As always, I encourage you to talk with someone about what you’re working to get better at.  Talk to a friend, coworker, or your favorite cousin.  Don’t feel like doing that? Get info on financial coaching and hop on a call.  As always, ask us anything.  Enter your question here. We answer all of them.