We’re all watching our expenses these days. Here’s how to fit life insurance into your plans.
Life insurance is a little like clothing, in that it’s an essential part of a responsible person’s life. Also: That you have a nearly limitless array of options, and you can spend a wide range of money on those options — from thrift-store bargain bin finds to custom clothing made with the finest and rarest fabrics.
But just like no one really needs, say, a bespoke cashmere jacket encrusted with precious diamonds and the yolks of Faberge eggs (we assume), it’s unlikely that you will need the highest-value life insurance policy you qualify for (and the higher premiums that will come with it). And just like that thrift store cardigan might come with a few holes, buying a cheap policy will save you money — but it might leave you with less coverage than you want when you need it most.
So how do you find the right policy for you? And how do you make sure you get the most affordable rate? We’re so glad you asked. Here are our tips for finding affordable life insurance on a budget.
Determine what type of life insurance you need
As with anything else you can shop for, the first step is to zoom out and learn what your options are. So first, let’s define life insurance. In short, it’s a policy wherein the customer pays a regular premium, typically every month, in exchange for a financial payout if and when the policyholder dies. This money, in turn, can help offset a whole host of costs, from burial expenses to college tuition for any children the deceased has left behind.
Bigger picture, what’s happening is that customers are paying premiums to the life insurance company, which uses that money to pay out those death benefits (and cover the costs of administering their life insurance policies). Insurers use actuarial tables to determine how likely a customer is to pass away after a certain time period, based on factors including the customer’s health. This is all done to help make sure that when a customer dies, there is money in that fund to cover the death benefit.
So why get life insurance? Because as we all know, sometimes the unexpected happens. And if something were to happen to you, having a life insurance policy can help your loved ones pay for anything you leave behind. This includes immediate, one-time needs like the cost of a funeral. It also includes long-term, ongoing needs like offsetting the loss of your income. If you have outstanding debts — from your college loans to your mortgage — your beneficiaries can use the money to pay those off. When you take out a life insurance policy, you hope you’ll never need to use it. But if the worst should come to pass, you’ll be glad you have it.
So who needs life insurance, and when in life should you think about it? A few examples:
You’re a new parent (or planning on starting a family).
You use your income to pay (or help pay) the bills for your family.
You are concerned with leaving behind a financial legacy.
You and your partner or spouse share financial commitments, like a mortgage.
So what are your options? Let’s start with these.
Term life insurance
True to its name, term life insurance is life insurance with a set term. Typically, you take out a policy that covers a set period of time — common term lengths are 10, 15, 20 and 30 years — during which your beneficiaries will receive a death benefit should something happen to you. Yes, the term ends, and that’s why many people choose a term length that coincides when their expenses decline — after their kids have completed college, for example. If you are still alive when the term expires, you will not receive a payout. But you’re still alive, which should provide some comfort. (At least, we hope so.
One major advantage of term life insurance is that the rate is typically fixed throughout the term, something called guaranteed level premiums. That is to say, the premium you pay in month one will be the same amount you pay in the last month of your term (and every month in between). (That’s why many professionals suggest getting life insurance when you're young and healthy, as it will help you lock in a lower rate throughout the entirety of your coverage. More on that in a bit.) This consistency helps you budget for the future, and also means that once you take the time to get an insurance policy, you won’t have to worry about it again so long as you keep making payments. A few decades’ worth of peace of mind? Priceless.
Add it all up, and term life insurance is one of the most affordable types of coverage out there. Which is also why it’s the most popular, especially if you’re on a budget.
Permanent life insurance
Also known as whole life or universal insurance, permanent life insurance is exactly that: Permanent. The policy will last your entire life. A permanent life insurance policy typically also has a cash value that can grow or shrink over time, which is why it’s best if you work with a financial professional when considering whether it’s right for you. Because it lasts your lifetime and builds cash value (unlike term insurance), the rates are higher than what you’d pay for term life insurance, anywhere from 5 to 20 times as much as a term life insurance policy.
Decide how much life insurance you need — and how much you can afford
If you’ve read this far, you’re probably thinking that life insurance sounds like a good idea. You might even be thinking that term life insurance is the right fit for you. Great! But the next question is: How much do you need? Well, you’ve come to the right place.
A rule of thumb for determining your life insurance needs
The reality is that what's affordable to one person might be expensive to someone else, and vice versa. That’s why there’s a quick rule of thumb that most people use when determining how much insurance to get. Take your annual income. Multiply it by five or even ten. And there you have it: A good starting point to understanding how much life insurance you might need.
Why that number? Think about it. If something were to happen to you, your annual income would become $0. But your annual expenses might remain — think of any outstanding debts you might have. And the expenses of your loved ones — your kids, if you have them, your partner or spouse, even an aging parent who counts on you financially — will continue. A term life insurance policy is a way to soften that blow by creating a source of income (typically a lump sum, typically tax-free) that will help your family absorb the financial blow of losing your salary. (This will also leave them with one less thing to worry about during an already-stressful period of mourning.)
Let’s be clear: You should run the numbers before committing to this back of the envelope math. And there is such a thing as too much coverage. (Didn’t expect to hear that from a life insurance agency, did you?) But if you are the major breadwinner in your family, you might need more coverage. If you are a stay-at-home parent, you might need less. (Though you probably still need some, because while you might not earn a salary, you still provide value to your family, which might need some form of paid child care in your absence.) But the basic idea is to give you a window of roughly what kind of coverage you need.
For more information about Life Insurance call JCT Insurance Agency at (626)354-2000 or email email@example.com