Life insurance. We’ve heard of it, we know how important it can be, we think we probably need it, but do we know how it works? What are we paying for when we make monthly policy payments? If you’re single with no children, do you still need it?
Bottom line: Acquiring life insurance is one of the most positive financial moves you can make. It’s an even better decision to get it when you’re young and healthy, resulting in a more affordable rate. Here are six questions worth asking yourself before you buy.
1. What kinds of life insurance are there, and which one is right for me?
There are essentially two forms of life insurance: term and permanent.
A permanent life insurance policy lasts your entire life, while a term life insurance policy lasts for a specific amount of time, typically 10, 15, 20, or 30 years. Term life is generally simpler, more affordable, and easier to manage. Permanent life insurance has a cash value component that can grow over time and be borrowed against while you’re alive, making it more complex and typically more expensive.
For many people, term life is a sound, cost-efficient choice that protects loved ones during the years they need it most. Permanent life insurance may also serve as a vehicle for cash accumulation and estate planning purposes.
One often-overlooked advantage of permanent life insurance is the ability to access the cash value that accumulates over time. Policyholders may be able to take tax-free loans or withdrawals against that cash value while they’re still alive. Additionally, the death benefit passes to beneficiaries generally income-tax-free, making permanent life insurance a meaningful tool not just for protection, but for tax-efficient wealth transfer.
The best type of life insurance is the one that’s in force when it’s needed and a financial advisor can help you determine which approach fits your specific situation.
2. If I’m single or don’t have kids, do I still need life insurance?
If you have any sort of financial obligation like student loans, co-signed debt, or a mortgage then life insurance is always good to have. That way, in the event of an untimely death, someone else won’t be left with those obligations. Especially if you have a partner, whether or not you’re married or have children, you share financial responsibilities.
Life insurance is a way to protect the people you care about, and you control who you designate as beneficiaries. There’s also another reason to consider coverage even without current debt: locking in your insurability. Your ability to qualify for life insurance, and at what rate, is tied to your age and health at the time of application.
Getting covered while you’re young and healthy secures your insurability for the future, regardless of what health changes may come. Waiting until you have debt or dependents may mean paying more or finding coverage harder to obtain.
3. If I’m married, does my spouse need life insurance too?
Typically, both spouses benefit from having a life insurance policy with each other listed as beneficiary. You want to avoid your partner grieving while simultaneously managing finances alone.
A common misconception is that stay-at-home parents don’t require coverage since they don’t earn an income. This couldn’t be further from the truth. A stay-at-home parent has an irreplaceable impact on a household. If they were to pass away, the surviving partner would need to account for childcare, household needs, and more. All of which carry real financial cost.
4. How much coverage do I need, and for how long?
Most financial professionals recommend life insurance coverage of 10 to 15 times your annual income, though the right amount depends on your specific circumstances such as your debts, dependents, savings, and long-term obligations. What matters most is that the policy amount is adequate to cover the major expenses your loved ones would face.
The length of your policy depends on how long your loved ones would need a financial safety net. If you recently purchased a home with a 30-year mortgage, you’d want coverage to last until the mortgage is paid off. You’d also want to consider how long until your children are financially independent, and how long until major debts like student loans are resolved. These factors together should guide your choice of term length.
5. What would a life insurance payout actually cover?
A life insurance payout can be used for anything your loved ones need. That includes, but not limited to, funeral and end-of-life costs, mortgage payments, childcare or caregiving for dependents, healthcare costs, children’s education, and everyday living expenses.
When you purchase life insurance, use it as an opportunity to talk with your beneficiary about the coverage amount and your vision for how the proceeds might be used. Ensuring your loved ones’ financial stability no matter what happens speaks volumes.
6. How do I start the conversation with my family?
Death isn’t the most comfortable topic to bring up with the people you’re closest to. But life milestones are a natural starting point. Getting married, expecting a baby, buying a home are life events that provide ideal segues. This approach takes the focus off mortality and puts it on protection, turning what could be a difficult conversation into a positive discussion about financial planning and your family’s future.
These conversations also open the door to broader financial planning discussions. Think of life insurance as the contingency plan that complements the most exciting areas of your life and your plan for tomorrow.
September is Life Insurance Awareness Month. There’s no better time to make sure the people who depend on you are protected. Have questions about which type of policy is right for you or how much coverage makes sense for your situation? A qualified financial professional at Barnum Financial Group is ready to help.
Disclaimer: Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters.
