Why is life insurance important?
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When we think about the future, it’s often not top-of-mind to think about the possibility of our untimely death, or what will happen to our families in the event of our demise. While it may be uncomfortable to plan for it in advance, doing so can ensure a tragedy is not made more difficult than necessary.
Your family could be on solid financial footing now, but what if they lost your income? Would they be able to pay off the rest of your mortgage and stay afloat with daily living expenses? What about your funeral costs? This is where life insurance comes in.
Reasons life insurance is important
Life insurance is intended to protect your family financially in the event of your death. “Life insurance is a contract with an insurance company that gives one or more of your named beneficiaries a payment, known as a death benefit, when you die,” explained insurance and financial expert Laura Adams.
“This coverage is critical in situations where you have dependents, such as a spouse, partner, or children, who financially depend on you. If your death would cause a financial hardship for someone, you need a life policy to protect them.” Here are the reasons why life insurance is so important, and how the death benefit is typically used.
Pay off debts
Most outstanding loans are not forgiven at the time of your death. If whoever inherits your home can’t pay the mortgage without your income, they’ll need to sell it or face foreclosure. The same is true for a vehicle that hasn’t been paid off; if you leave the car to your spouse and they can’t afford the payments, the lender can repossess the vehicle. Depending on what state you live in, your credit card debt could be passed on to your spouse as well. If you don’t want to leave your family with unaffordable bills, having a life insurance policy in place is a good way to compensate.
Provide for children
Your death could also leave your spouse with insufficient income to afford things like childcare, even if they are gainfully employed. And if you were planning to help your children pay for college (Sallie Mae found that about 44% of college costs are funded by parents), your spouse might have a hard time accomplishing that goal on their own, especially if you die before accumulating any college savings.
Fund your spouse’s retirement
Your spouse may have their own retirement account, but if you were the primary breadwinner, their personal nest egg may not be enough to retire comfortably. A death benefit can help ensure your spouse is provided for in their retirement years.
Protect your business
You may want to purchase a business life insurance policy as well, often referred to as key person insurance. If the operations of your business will fall apart without you, naming your company as a beneficiary can help your business stay afloat while your surviving partners look for a replacement.
Cover funeral expenses
When it comes to a funeral with a viewing and burial, the national median cost comes in at $7,640. They can cost much more than that if a vault is required. This figure also doesn’t include cemetery costs or ceremony preparations. If you die unexpectedly, the last thing your grieving loved ones should have to worry about is affording your burial.
Where to get life insurance
Life insurance can be purchased from a traditional provider or online insurance company. Some life insurance providers don’t even require a physical medical exam, and can give you a quote in a matter of minutes.
It’s also possible to get life insurance through a workplace group policy, but you may want to supplement that benefit with your own policy, according to Adams. “If you have the option to enroll in life insurance through a group policy at work, that can be convenient and affordable coverage. However, it may not be enough insurance, depending on the size of your family and financial situation.”
It’s also important to keep in mind that you’ll lose your coverage if you lose your job, she added. “Remember that if you get terminated or voluntarily leave your job, you typically lose the policy. To avoid leaving your loved ones unprotected, you can purchase an individual policy on your own.”
Coverage levels and premium amounts vary by insurer, so it’s recommended to shop around to find the best policy for you. Some major auto and homeowners insurance providers, such as Nationwide and State Farm, offer life insurance policies as well.
You may be able to get a discount by bundling your life insurance policy with your other coverages. Military members and their families may qualify for military life insurance through USAA. Several online life insurance companies could be worth considering as well, including:
- Haven Life
What are the types of life insurance coverage?
There are several different types of life insurance coverage with varying costs and duration. Within each type, you can also choose different levels of coverage. If you shop around and compare policies, you should be able to find something that meets your needs and fits into your budget. The following types of policies are most common:
- Term life: One of the most affordable types of life insurance is term life insurance, which covers you for a specific length of time (typically between five and 30 years). Your beneficiaries won’t receive a payout if you die after the term is over, but the idea is that you should have amassed savings and paid off your debts by then. In the event you pass during the term, the payout would come at a time period when it is typically most needed.
- Whole life: Whole life insurance policies cover you until you die and also accrue cash value, which you have some access to. But they can cost significantly more than term life insurance policies.
- Guaranteed universal life: If you can’t afford a whole life policy but you want a death benefit that’s guaranteed up until an old age, a guaranteed universal life policy can be more affordable because it has minimal cash value. Just make sure you keep up with the payments so you don’t lose the policy.
- Variable life: This type of life insurance policy has a cash value that can fluctuate with the market, since it’s held in investment accounts. The premiums are fixed and the death benefit is guaranteed, unless you choose a variable universal life policy.
- Burial insurance: This is a type of whole life insurance with a low coverage limit intended just to cover funeral costs.
Why it is important to pick the right coverage level
If you don’t purchase sufficient coverage, your family could be on the hook for your loans and other expenses. Since you can choose your coverage level, you should make sure the death benefit is enough to cover any outstanding debts, provide for your children and spouse and pay for your burial expenses. “The beneficiaries of your life policy can spend the benefit any way they like, such as for college, debt, or everyday living expenses,” noted Adams. “So, make sure your policy is enough to cover their foreseeable financial needs.”
Start by totaling the costs of your debt, your children’s future education and your funeral. Then add in the total of your lost wages and any other assets you want your family to have access to. Once you’ve run the numbers, you’ll be able to assess approximately how much life insurance coverage you need.
- If you have a spouse or dependents, you should purchase a life insurance policy.
- There are many different types of life insurance and coverage levels to choose from.
- It’s best to pick a policy with a sufficient death benefit that fits into your budget.
- Life insurance doesn’t have to cost a fortune and can even be obtained online without a medical exam.
If you die unexpectedly, your family could be left with the burden of your debts and without the support of your income. A life insurance policy is a great way to ensure they’ll be financially provided for after you’re gone. Deciding on how much insurance to obtain largely depends on your budget, financial goals, quality of life you want for your beneficiaries and the needs of your dependents.