Life insurance is sometimes tricky to discuss because it involves death. However, ensuring that you have the right amount of life insurance is important to provide for those that rely on your income. There are many types of life insurance and we will provide you a preview here, but we generally recommend term life insurance for the cost and coverage.
History of Life Insurance
The concept of life insurance dates back to ancient Rome when soldiers went off to war they would pay an amount into a burial club so that if they died the club would cover the expenses for a proper burial. Even in Game of Thrones while Arya is selling crockels and oysters the man she was spying on was offering “life insurance” to the sailors.
Today we use life insurance not only for potential burial costs, but to ensure our family can survive financially after departing. This is exceptionally important for parents or in relationships where one individual relies on the income of another. In the case of children, if one spouse were to pass away there would need to be a plan to financially provide for the children’s care, schooling and other expenses.
Types of Insurance
There are many different types of life insurances to choose from that best fit your circumstance so be sure to contact your agent. The cost of each insurance will depend on the type, term, age and health of the insured. Below is a list of the most common types and benefits of each:
- Term Life Insurance is generally the most cost effective when you are trying to replace income of the deceased. It is for a fixed period of time (term) for a pre-determined lump sum payment.
- Whole Life Insurance is similar in death benefits as term life insurance, but also includes an investment component. The investment component takes a portion of the monthly payment and divides it between insurance, investment and fees. The investment component may be withdrawn tax free up to the amount of the premium and then the investment earnings are taxable.
- Universal Life Insurance is the cousin to Whole Life Insurance, but the cash amount paid monthly can be divided up differently between premium, investment and fees.
How much insurance do you need?
The general rule to determine the amount of insurance you need is 8x – 10x your annual salary. So if you make $100,000 per year this is $800,000 – $1,000,000 of life insurance. If you are a self-employed or stay at home parent you might need to reconsider the amount. A stay at home parent still needs life insurance because if the stay at home parent passes, who will fill that role? Additional funds will be needed to pay for childcare and possibly schooling.
Continue the conversation with us at our podcast with Emily Stroud of Stroud Financial Management on Plaid Radio.