Two Minute Money: Do You Need Life Insurance?
A recent survey found that 29% of adults between the ages of 30-49 don’t have life insurance, often because they think it’s too expensive.
But in some cases, life insurance can be worth the expense.
Imagine a 30-year-old named Ted, who’s in good health and lives in Colorado. He has a stay-at-home wife and two kids, and he earns $100,000 a year.
Ted doesn’t have life insurance, and if he were to die unexpectedly, his family would be left with no income to pay for bills like housing, childcare and utilities — not to mention the cost of his funeral.
Life insurance would help Ted’s family in that situation. If he decides to get life insurance, he will most likely choose one of the two most common types: term and whole.
Term life
Let’s say Ted bought a $1 million term life insurance policy. Most experts agree the death benefit on your policy should be seven to 10 times your annual salary. Ted’s premium — the dollar amount he pays each month — will be based on his age, his health and how much he wants his family to get if he dies.
Ted could choose to cover himself for up to 30 years, which would likely cost him less than $100 a month.
That’s because term life insurance only covers you for the length of the plan — which can range from one to 30 years. And the longer you wait to sign up, the more you’ll have to pay per month.
If Ted outlives his coverage, he won’t get back any of the money he paid. But any time before the policy ends, Ted could renew his term or convert to whole life insurance without having to get a health exam.
Whole life
Whole life insurance premiums are significantly higher than term life because they guarantee the insurance company will pay out, and monthly premiums vary greatly — from a few hundred to greater than $1000. However, the cost depends on how healthy you are (sorry, smokers).
But whole life insurance also has a cash value that you can draw from. Essentially, that means Ted builds up a stash of money he could borrow against later if he needs to. The cash will grow at a guaranteed interest rate and is tax deferred. But borrowing from your policy could reduce your death benefit payout — so it’s not free money.
If you’re 25 and have no spouse or dependents, life insurance may not be worth the cost. But if you have a family, it’s worth considering.
While it can feel morbid to make plans for your own death, you’ll be able to relax knowing the people who depend on you are taken care of.
