Today’s topic is life insurance. The good news is that many of you won’t really need life insurance. However, it’s better to know that you don’t need something than it is to never consider it.
A note: this is focused on the US when it references any laws. Also, I don’t sell any insurance so I get no monetary benefit from you buying something.
Life Insurance Basics
Life insurance pays someone (clearly not you) money when you die. Its main purpose is to cover someone who was economically damaged by your death. A little morbid, huh? That’s the reality of it though. Better to think about it and deal with it than have something unfortunate happen and be caught unprepared.
The secondary function of life insurance is to pass on tax free inheritance to your heirs (at least in the US). With the new tax law you don’t need to worry about an estate tax until you hit $11million ($22mil for a couple) so I’m guessing that doesn’t apply to most of you. If it does, do you have a financial planner? 😉
Term Insurance
Term insurance lasts for a certain term (usually 10-30 years) and at the end of the term you’d need to get new insurance.
It’s also the closest thing to “pure” life insurance as you get it to cover a specific need and if that need goes away you can ditch the insurance.
Term life insurance is generally extremely inexpensive. It also doesn’t carry much of a commission for salespeople. It’s also usually the correct option for someone seeking life insurance.
Whole Life
Whole life insurance is a type “permanent” insurance. That means that when you pay premiums some of the money goes to paying the associated fees and some build up cash value.
You might consider whole life if you had a permanent insurance need. We’ll talk about that later.
This is the most expensive type of insurance and carries the biggest commission for salesmen.
Universal Life
Universal life has a component of whole life and a component of term life. Generally, I don’t think it makes sense for many people and if you’re looking at insurance basics it’s surely not for you.
This is a quite expensive type of insurance and can carry hefty commissions.
When do you need it?
Generally, you need life insurance if you have someone who would be economically worse off if you died. As I said, it can also be to pass on tax free wealth.
Term
Term life makes sense if you have an insurance need that will go away. For instance, if you’re looking at insurance as a way to support a spouse in the case of your death that insurance need goes away at retirement. Why? Because you’re no longer economically productive so they won’t be economically hurt by you passing.
The same thing can be said with kids until they’re through college, a mortgage, and likely even a dependent parent.
Whole Life
You get whole life when you have a permanent need. One of the biggest permanent needs that people have is some funding to cover funeral costs. Funerals can be expensive! So it can make sense to get a small whole life policy to cover that permanent need.
Another potential permanent need is something like caring for a child that will never be able to be independent. In that case, it might make sense to insure yourself throughout your life to provide the funds to help with that child.
Universal life
If you’re considering getting a UL policy come talk to me. Insurance salespeople love them and I don’t.
How much do I need?
I have my own calculators but I also think Nerdwallet has a good calculator. Start there and reach out to me if you want more info.
Conclusion
Life insurance is an important part of your overall financial picture, at least in some cases. It’s important to know when it’s relevant for you and what type of insurance is important to you. Unfortunately, a lot of insurance salespeople push insurance in improper amounts and push improper types of insurance. There are two reasons for it. First, they’re HEAVILY monetarily incentivized to push you into certain products. Second, they’re often only trained on insurance and when you only have a hammer everything looks like a nail.
You don’t have to figure this out alone. This is what we do- help streamers make great money decisions. If that’s something that sounds interesting to you reach out me or schedule some time for a free consult. You can check out what I do here.
