When younger people create their long-range financial plans, there’s an important component they may not know to include: life insurance.
Stocks, bonds, IRAs, 401(K), savings, pension and other investments are the typical tools for building the wealth you’ll need to buy a home, educate children, enjoy travel and retire comfortably. To keep on building wealth, you and your spouse must be able to depend on at least one salary and often, these days, on two. For that reason, if even one spouse passes away, your financial future and that of your children could be thrown into turmoil.
That’s where life insurance comes in. It gives you a way to safeguard your financial plan, replacing your earnings in the event of your death so your children will have the caregivers, schooling, housing, food, clothes, transportation, supplies and equipment they’ll need until they’re grown. Life insurance proceeds can also ensure that your spouse can afford to pay off the house, or that other financial goals can be met even if one of you is gone.
“Anybody that has dependents or some type of financial obligation that will continue after they die does need to consider getting life insurance,” says Marvin H. Feldman, president and CEO of the non-profit the Life and Health Insurance Foundation for Education (LIFE), an industry-funded organization for consumer education.
Figure out what type of life insurance you need
There are two main kinds of life insurance – term and permanent. You buy term life insurance to cover a temporary need; however, just because a need is temporary does not mean that it is short-term. For example, you may need life insurance to ensure your children have the means to pay for a college education. In such a case, you’d buy a term policy that would expire soon after your children graduated from college.
On the other hand, whole life or universal life insurance policies, two types of permanent life insurance, are meant to provide coverage for your entire life. You keep up the payments and your heirs receive the death benefit payment no matter when you die.
Term insurance works for young families
Ironically, says Feldman, young families who need life insurance the most are usually least able to afford it. For them, the best product often is term life insurance.
There are several things to consider in deciding how much term life to buy:
Figure out what you can afford and what your budget allows.
Consider the cost of raising a child
Calculate your needs using a life insurance calculator
Ideally, you’d purchase enough insurance to cover each wage earner’s salary in case of death. For example, if you and your spouse each earn about $50,000 a year, you should consider purchasing a $1.25 million policy for each parent — $2.5 million in all. If you both were to die, your insurance policies would pay your heirs $2.5 million.
Although that may sounds like a huge amount of money, that’s what it takes to completely make up for both salaries. By calculating the numbers, you’ll see that investing at a return of 4 percent a year, you’ll need a $1.25 million nest egg to replace each $50,000 salary.
Rates for that kind of life insurance policy vary, depending on your age, gender and health. But, roughly, premiums run $40 to $100 a month to replace a $50,000 salary for a healthy 25-year-old, says Wayne Blanchard, a fee-only certified financial planner in Florida who’s affiliated with the Garrett Planning Network.
That premium amount should be doubled for a two-parent family. “It’s not a lot of money to provide that sleep at night factor,” Blanchard adds.
If you can’t afford to pay that out of your monthly budget, buy what you can and add coverage as you’re able to. Blanchard suggests a 20-or 30-year level term policy. Feldman, though, says that you should investigate buying permanent insurance — because the total cost over your lifetime could be lower — if you’re considering a term policy that is longer than 20 years.
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