Life insurance – a topic that can quickly become complex and confusing when trying to decide what is best for you and your family.
Is it a topic you shudder to even think about? Probably. Should life insurance make it to the top of your “to-do” list? What happens if the unexpected happens and you leave your family with no financial cushion?
I am going to break down two product categories that most often get compared and contrasted, term life insurance and whole life insurance. Within these product classifications there are many different “flavors” of products, but let’s not get bogged down with this issue right now. In general we’re talking about term life insurance as being temporary protection and whole life insurance being permanent protection. So which product you should buy and in what amount? Well that depends – what are your goals? What can you afford?
Let’s see if I can chart a path to help you get some answers.
Step 1
Contact your benefits department at work. Find out how much life insurance coverage you have provided through your job. In many cases, employers will provide you with a term life insurance benefit that is equal to 1 year of salary. Don’t forget to add anything you may have already purchased.
Step 2
Determine how much coverage you need. You can use a simple approach by looking at what you can afford and then buy as much coverage as you can. Ideally, you should shoot for 7-10 times your annual income in coverage, but even if you can add a few more multiples on top of your work benefit, your family will be better off. Life insurance isn’t just to cover the funeral expenses but to also provide your family with some income replacement.
Step 3
Determine what product you should buy. This requires a little more discussion.
As mentioned earlier, permanent protection typically refers to whole life coverage, which includes a death benefit (eg. $100,000) that would be paid to your beneficiary upon your death and a savings component. Depending on the product, the savings component can be anything from an interest bearing account to securities. The savings component grows tax deferred and it can be borrowed from the policy. This type of protection is called whole life insurance because as long as you pay the level premium, the coverage stays in-force until you die. Whole life tends to be more expensive than temporary coverage because you are essentially overpaying to fund your coverage in later years and part of the premium goes into the savings bucket. Simply put, permanent life insurance or whole life insurance provides coverage that lasts a lifetime (as long as premium is paid) and accumulates cash value that you can access when available.
Temporary protection typically refers to term life insurance, which only includes the death benefit component. There are a few different types of term insurance, but the most popular one is called level term life insurance. Level term life provides coverage for a specified period of time (eg 10, 20, 30 years) with guaranteed rates during the term period. This type of product is designed to provide the most amount of life insurance protection at the lowest cost. This often a great solution for people who need a large amount of protection while their family is young and money is tight. Eventually as your assets grow and the kids become adults, you can decide to cancel the insurance and self-fund this risk.
There are good reasons to own both types of products, but that discussion takes us into the world of estate planning, which I’ll touch on at a later date. In any event, review your needs periodically throughout your life to make sure you have the right solution in place.
Written by John Mulloy
This blog post is from the Author's perspective and doesn't speak for brightpeak financial. Contact brightpeak if you want to know more about brightpeak products, and keep in mind that they are not available in all states and there are some limitations (some exclusions and restrictions may apply).
