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This is a common question posed by people seeking to get insured and I would like to share some insights.
Whole Life or Term Life?
The first thing I want to address are the two categories of life insurance, whole life and term life. Whole life is insurance that protects you until you die (for your whole life) and term life only protects you for a portion of your life (whatever term you choose). Common terms for term life insurance are 10, 20, and 30-year policies. A whole life policy will cost you more money but comes with benefits such as accruing cash value (which you can borrow) and also the ability to take money out in your retirement years without paying taxes (that’s a different topic, however). The type of life insurance that you choose really depends on where you are in life with factors such as your age, savings, and retirement planning coming into play.
It’s not a “one size fits all” question, however, if your primary goal is to cover your final expenses and financial obligations upon your death, then term life should be sufficient and will definitely be less costly. If you are starting out young, I would actually recommend whole life because you can structure a policy such that the growth or dividends pay the policy so you don’t have any additional outlay of cash after a certain number of years.
So How Much Life Insurance Coverage Do You Need?
This figure will depend on several factors such as your current debt load and the number of your dependents. Please know this is just a general guide because I don’t know your specific situation. For best results, you should meet with a trusted insurance professional.
If you have no debts and no dependents and you have the funds to handle your final expenses (i.e. funeral, burial, or cremation), then you likely don’t need any life insurance at all. This is the premise behind the term life insurance philosophy. If you plan well financially and don’t die prematurely, you should be able to be debt-free and have enough funds to handle your final expenses, and still leave money behind for family, charity, or whomever you choose (all before your term life insurance policy expires). Sadly, the statistics show that seniors are carrying much more debt than in years past, indicating the need for at least burial and final expense insurance.
For those with dependents and debts, here are some factors to consider when determining how much life insurance you need:
- Your Mortgage Balance. If you are leaving a spouse and children behind, it would be great if they could stay in the house they enjoy without the burden of paying for it.
- Additional Debts. Ideally, you would have enough life insurance so your surviving spouse could pay off any additional debts outside of the mortgage.
- A Nest Egg. Assuming you are leaving a spouse behind who will be raising children, It would be great if they didn’t have to consider working outside of the house as well. To determine the size of the next egg to leave, consider how much money your spouse will need to live on, then back that into a number using a 4% annual return.
- Children’s Education Expenses. Some people like to prepare for this so that it does not become a burden to their surviving spouse or their children.
- Your Final Expenses. According to the National Funeral Directors Association, the median cost of an adult funeral (with burial and a vault) was $8,755 in 2017.
Based on the above factors, here is a sample scenario:
- Mortgage Balance – $200,000
- Additional Debts – $38,000
- Nest Egg – $1,500,000 (at 4% = $60,000 in annual income)
- College for 2 Children – $200,000
- Final Expenses – $10,000
Based on this scenario, a $2,000,000 life insurance policy would accomplish the intended financial goals.
In the past, I used to hear of people taking out 7 figure insurance policies and it sounded like a lot of money. Perhaps you had some of the same thoughts, and hopefully you can now see why it’s not such an overestimation after all.
How to Apply for Life Insurance?
You can often talk to a local insurance agent about your life insurance needs, and there are also lots of nationwide insurance companies that can provide insurance coverage. What you need to know is that insurability depends on your health, so the younger you are, the more likely you are to get approved for coverage at a reasonable rate. If you have any concerns about your health you might want to choose what is called “guaranteed issue” issue insurance which does not require a medical exam. Please know that these policies cost more money due to the extra risk that the insurance company takes by not doing a medical exam. Guaranteed issue insurance (contrary to its name) is also not 100% guaranteed in some cases because they will ask some basic questions in terms of what kind of health history you have had. If you have had a major illness (i.e. cancer) or have suffered a major medical event (i.e. stroke, heart attack) you could still be turned down. Bestow is a life insurance company that does not require a medical exam, so if you need life insurance and don’t want to go through the hassle of a medical exam, I would apply with Bestow.
The last thing to know is that getting turned down for life insurance is a “ding” on your insurance record, so you may want to avoid applying for life insurance if you know that you won’t qualify. When in doubt, have a conversation with a trusted life insurance professional before you apply.