Think you don’t need life insurance? Think again.
The cost of a funeral alone can run $11,000 or more. You might also have family members who depend on your income to live. And if you have debt such as a mortgage or private student loans that you wouldn’t want to pass on to your loved ones, life insurance can protect them from inheriting it.
“Losing a parent, partner or spouse can be one of the most emotionally challenging experiences any one of us can face. If you add the financial aspects of this loss, it can seem unbearable,” said Chris Mason, senior vice president of sales distribution for HealthMarkets, one of the largest independent health insurance agencies in the U.S. “Having life insurance helps mitigate some aspects of financial stress.”
So if you have yet to sign up for a life insurance policy ― or aren’t sure if the one you have is right for your situation ― here are nine things you need to know.
1. You almost certainly need term life insurance.
When it comes to life insurance, there are many types to choose from. However, the two most common forms of life insurance are “term” and “whole.” You might find that some insurance brokers will try and push you into a whole life insurance policy. “Many people end up getting pressured into buying a more expensive whole life policy from a commissioned agent,” said John Holloway, a licensed life insurance agent and co-founder of digital life insurance brokerage NoExam.com. In truth, term life insurance is what 90% of people actually need.
Patricia Russell, a certified financial planner and founder of FinanceMarvel.com, said that she recommends most people opt for term life insurance. “Whole life insurance is really a rip-off.”
Term life insurance provides coverage for a set period of time, usually around 20 to 30 years. The goal is to protect your beneficiaries financially should you die during your working years.
Term life insurance policies are also much more affordable than whole, as the policy doesn’t have a cash value until you die. Even so, the payout is usually much higher.
Whole life insurance, on the other hand, lasts for your entire lifetime and accumulates cash value over time. It’s also more expensive with a smaller death benefit.
2. Insurance is a product, not an investment.
That brings us to the next important point. To convince you to buy whole life insurance, some brokers will stress that it’s an investment, since the policy has a cash value that can grow over time. But if you’re concerned about growing your wealth, you’d be better off putting your money in the market or another true investment.
“Insurance is a product, not an investment. If no one is worse off financially should you pass away unexpectedly, you probably don’t need life insurance,” said Patrick McDowell, a certified financial planner with Arbor Wealth Management. The best-case scenario, he said, is that you pay monthly premiums for the duration of the policy and you get nothing back because you didn’t die.
3. Use the DIME method to calculate how much you need.
When it comes to the size of your policy, many experts recommend 10-15 times your income. However, a more personalized way of estimating how much life insurance you need is the DIME calculation. DIME stands for debt, income, mortgage and education, according to Michael A. Lucy, a broker and field underwriter for Funeral Funds of Michigan.
For example, you’ll want to add up all your outstanding debt, including your mortgage, so that your beneficiary can pay it off in the event of your death. You’ll also want to add up the income they’d lose out on, as well as the cost to put your children (if you have any) through college. Lucy said it’s safe to estimate that at $100,000 per child.
4. It’s cheaper than you might think.
Even though we’re talking about some very large numbers here, life insurance is fairly inexpensive for the average person, according to Holloway.
In fact, according to the industry organization LIMRA, 80% of people overestimate the cost of term life insurance. Millennials, in particular, overestimate the cost by 213%.
5. The earlier you buy life insurance, the better.
Your age and health will impact the cost of your premiums. Mason recommends getting life insurance while you’re young and healthy to avoid paying more than necessary.
For example, a man who takes out a $250,000 term life insurance policy at the age of 30 can expect to pay $16.14 per month, according to Policy Genius. However, if he waits until he’s 45, that cost increases to $32.71 per month. In fact, those in their 40s can expect a rate increase of 5-8% for every year they wait to get insurance, while those in their 50s might see as much as a 12% increase year over year.
“It only gets more expensive as you get older. I always advise people to not procrastinate because every year you age, the cost almost always goes up,” Mason said.
6. It’s a good idea to name more than one beneficiary.
When you buy life insurance, you name a beneficiary ― the person who receives the death benefit should the unthinkable happen. But what you might not realize is that naming only one beneficiary isn’t enough.
“What if your beneficiary passes before you and you never named a new beneficiary? Your policy will still be paid out, but it will go to your estate and will take a long time for your family to have access to the money instead of the immediate protection life insurance policies are supposed to offer,” explained Michael Outar, owner of personal finance education website Savebly.com.
It’s hard to imagine that something could happen to both you and the person you name as your beneficiary, but it’s possible. “Be sure you name a secondary and final beneficiary so your family doesn’t have to go through this long and painful process,” Outar said.
7. You should review your policy regularly.
Once you buy life insurance, you shouldn’t follow a set-it-and-forget-it approach to your policy. “Your circumstances can often change, so it pays to check your life insurance policy at least once per year to ensure you have adequate coverage in place,” McDowell said.
That means if you change jobs, move, have a baby or experience another life change, it might be time to update your policy.
8. Your insurance might not pay out if you die from certain causes.
Life insurance is meant to pay out if you die during the coverage period, but it’s important to note that’s not always the case. Before you settle on a particular policy, you should find out under what circumstances your policy won’t pay out a death benefit. “One of the most common reasons a life insurance policy will not pay out is the case of suicide,” Outar said. “Other reasons include dangerous activities like sky diving, riding a motorcycle, bungee jumping, etc.”
Outar also noted that while your life insurance provider should mention any reasons why your life insurance policy wouldn’t pay out, they might not, so it’s up to you to find out.