Life insurance can be an intimidating topic. I know I always felt like I didn’t have access to this secret club of adults who understood insurance. It was a totally foreign language to me. For the longest time, I just chose to ignore the topic rather than try to understand it. Now that I know how important it is, I really want to help you understand the difference of Term Life vs. Whole Life Insurance.
Somewhere during my young life, I became an adult. Not really sure how that happened, but one day I realized, “Crap, I’m a married adult and I should probably look into life insurance.” But, again, I got busy and forgot about it.
The good news for you is, life insurance isn’t really that complicated and you should know about and understand it. Turns out, it’s super important.
I remember driving to my first day of work as a real veterinarian. My husband and I were living in a hotel waiting to close on the purchase of our first home. I thought to myself, “What would happen if I died today? Would my husband have to pay for my loans? Would he be okay? Would he have to sell the house we just bought?”
I suddenly had a panicked feeling about death and leaving my husband with so many burdens, I actually drove the speed limit that day.
When I got home from my first day of work, I started researching life insurance to figure out what I needed, how much I needed and how to go about getting it. I couldn’t live with the risk of leaving my husband with financial burdens/obligations.
What I found was basically it all boils down to two types of policies and lots of people have lots of different opinions on these. The two policy types are called Term and Whole. So, do you want a term policy or a whole policy?
What is the Difference between Term Life vs. Whole Life Insurance?
Term Life Insurance = cheap.
Term Life insurance is something that you have for a set amount of time, like 20 or 30 years. If you die during that time, the money goes to the person/people you select (ie. beneficiaries). These policies are only worth something if you die.
Whole Life Insurance = expensive.
Whole Life insurance is coverage that also has a built-in cash value (because you are investing the cash). These policies last for your whole life and are essentially you investing in the cash value of them. These policies are worth something even if you aren’t dead.
So which type of insurance should you get?
If you plan to become debt free and invest intelligently, you shouldn’t need life insurance coverage forever. The idea behind taking control of your finances, budgeting, getting out of debt and planning for expenses is to eventually have lots of money. Sounds nice, right?
All that money you have worked so hard to accumulate will become your own life insurance policy. You will essentially be “self-insured.” This is why, if you plan on being in control of your money, a term life insurance will be the very best type of insurance policy for you.
At first, I was super confused about why I actually needed life insurance, but after all of my own research, there is something that will help you decide what is best for you.
If you are married and/or have children, the question to ask yourself is, “If I died, would they still need my income to survive?” Meaning, does your family currently survive thanks to your financial contributions? If your answer is a resounding, “Yes!” then you need life insurance.
The purpose of life insurance is to replace your income for your family so they can continue to live as if you were still alive. You wouldn’t actually be there anymore, but your financial contribution would be.
If you have no one relying on your income, then maybe you don’t need life insurance. BUT, you still need to think about paying for funeral expenses and/or any outstanding debts you may have. You would still need a small policy to cover those costs.
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How much Life Insurance do you Need?
If you have someone relying on your income, you should be getting a Term policy that is 10-12 times your income. Both you and your husband should have that amount of policy for each of you.
For example, if you make $50,000/year, your policy should be $500,000-$600,000. If you died, your husband would then be able to invest your life insurance policy and withdraw your annual salary every year, while the money continues to accumulate where it is invested. It’s like you are still working and bringing home a paycheck!
If you have nobody relying on your income for survival, or if you have children, a whole life policy may be the right thing. It is smart to have a $25,000 whole life policy per child. In case of a tragedy you will have enough for funeral costs and if you need to take time away from work, you will still have an income.
I know this may all seem very callous, but I think it is important to acknowledge there will be a level and time of grief that may completely incapacitate you if you were to lose a child. A larger life insurance policy value will give you the time you would need.
How long do you need the policy for?
Term life insurance:
These policies are typically 20-30 years. This is where you just need to think about where you are at with your family. In 20 years, are you still going to be building your family and your wealth? If yes, then you should get a 30-year policy.
If you already have 10 year or older kids, then a 20-year policy will probably work out just fine for you. These policies just need to cover you until you are able to provide your own life insurance in the form of your wealth.
Whole life insurance:
These can be kept as long as they need to be. My intention with my own children is to keep it until they are 18. Then I will give them the policy. If they want to cash it in for its “cash value,” then that is theirs.
Or, if they want to take over the payments on it every year, they can have continued life insurance until they get married and someone else is relying on their income for survival. When that happens, they would then get a term policy and cash in the whole policy.
How do you get insurance?
There are approximately one million insurance agencies out in the world (not an exact number, but you catch my drift). You can either work with someone your parents trust or do your own shopping online. What you are looking for is someone who is patient and is willing to teach you what you don’t understand.
Don’t ever work with someone who makes you feel inferior for not understanding something. You should always feel better about yourself after working with your insurance agency. Remember, you are paying them to help you. You don’t have to work with someone who makes you feel stupid.
When Should I get Life Insurance?
If you have anyone relying on your income for survival, you need to get life insurance like yesterday. If you have no one relying on your income for survival, you still need to get insurance to not burden anyone with the costs associated with your death.
Stop putting this off because you are intimidated by it. I just explained it, so now you have no excuses! I put this off for years because I thought it was too hard to understand. It really isn’t that hard.
As you can see, the term policies will be the best investment for you if you have anyone relying on your income. The policies are affordable and should be part of your budget. This will give you and your husband security as you build your life together. I knew if my husband were to die unexpectedly, I could still survive with his policy because it would be like I still had his income.
Give yourself peace knowing you will be taken care of if something happens to your husband. Eliminate that risk from your life!
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