When to get life insurance and when to drop it.
For most people, life insurance is a necessary part of an overall financial plan. It is needed to protect your assets and income, and the people you care about. But life insurance is not for everyone and you may not need it (or not very much of it) for your entire life. For that reason, it needs to be evaluated at different times in your life. Also, make sure you get the right kind of insurance or you will end up paying a lot for what you get. Let’s look at it by stage of life.
- Life insurance for children.
Many children are born into this world and seem perfectly healthy. This was the case for my brother, who was later diagnosed with Becker’s muscular dystrophy. In cases like this, sometimes the only insurance that child can ever be approved for is the policy his or her parents took out at birth. Particularly if you have genetic issues in your family, getting early insurance can be a good idea.
- Young adults
You’ve graduated from college, landed that first job, and life is good. You’re young and healthy with no dependents. Why consider life insurance? Most deaths in young adults occur by accident. A funeral can cost $6-$10,000, and the cost to a grieving family of a young person is probably on the higher side, and certainly not a planned expense. Consider getting enough insurance to cover funeral expenses when you are young and single. Term insurance is very cheap at this age. You may even get enough coverage as an employee benefit. You don’t need anything else. Your beneficiary should probably be the person who would pay for your funeral.
- Greater responsibilities
Now you have met your soul mate, gotten married, and are thinking about children or have some already. Maybe a house is part of your ‘portfolio’. You have more to think about than yourself. Insurance is your safety net. It not only will pay for the cost of a funeral, it now needs to cover income loss until your spouse and children can get back on their feet. Mortgage insurance is a special type of life insurance that will pay off your mortgage if you die. You also need to think about future college costs for children. I still feel that term insurance is the most cost effective way to go. Yes, you get nothing back if you live. But you are not paying high premiums to add an investment component that you can get just as easily outside of an insurance policy. If you haven’t maxed out your 401k, Roth, SEP, etc. then don’t pay for whole/universal/variable life insurance. Make sure to update beneficiaries when life events occur.
- Empty Nest
The kids are grown, your house is paid for, you have built a solid nest-egg to carry you through retirement. If you were to die, you have enough money invested that the cost of a funeral is once again all you would have to worry about. Term insurance gets more expensive the older you get. When the policy term expires, the renewal rate goes up. Many people at this stage of life elect to drop life insurance all together. The high premium payments are better used to invest for the future. Ditto for annuities. Funeral or burial insurance can cover those related costs.
- Special Needs
There is a type of insurance for just about every imaginable risk in life. If you have a disabled child, a business, or a host of other concerns, you will need to explore insurance options in more depth. Just remember that there is usually more than one way to skin the cat and you need to do your research before making any long-term financial choice.
My personal view is that term insurance is the best way to go for protection. Permanent life insurance, which has a death benefit and an investment component, and annuity policies have their place, but are appropriate less often. Many in the investment world agree that it is better to split your protection from your investing. As a daily money manager, I identify when clients have missing pieces in their portfolios and refer them to the appropriate professional for advice or review. Seek a Certified Life Underwriter (CLU) to specific advice for your insurance needs.