A few weeks ago, I wrote about writing a will and naming guardians for your children, acknowledging that, as a parent, it’s a hard subject to talk about. Today we’re going to tackle another that I’d file under the same category: Life insurance.
If you have children, or anyone relying on your income, for that matter, life insurance is a must. It doesn’t have to be expensive, or complicated, or scary. In fact, it’s rather simple: A good term policy is enough to cover the needs of most people.
Term life insurance is very much what it sounds like – a policy that terminates at a set point in time. It includes a death benefit, with no investment attached, and when the amount of time you’ve purchased the policy for (you can buy 1 year, 10 years, 20 or 30 years) lapses, your coverage ends. Because of this, it’s significantly cheaper than many other options. The average 40-year-old’s annual premium for a 20 year policy is $198.
Your other option is permanent insurance, also called cash-value, which stays in place until your death, whenever that happens, and consists of two parts – a death benefit and an investment account. On portion of your premium funds the death benefit, and the other portion is invested in mutual funds, stocks, bonds or money markets. The hope is that the interest you earn on the investments will increase the policy’s cash value. All of these extras will cost you more in annual premiums.
In either case, in order to purchase, you need to figure out how much your benefit needs to be. That means taking a look at your current income and how much of it your dependents (children, partner, aging parents, whoever) would need to replace if you were to pass away. You need to look at it on a one-year basis, then decide how many years they’d need to replace your income for, and do the math. If your children are in college, for instance, you may only need a few years of coverage. If they’re toddlers, you’re looking at a 20-year policy. And if you have children with special needs, a permanent policy is probably going to be your best option. You also want to look at whether your you want your death benefit to pay for college, pay off the mortgage, or provide an inheritance.