Unexpected death is not the most pleasant of subjects. Nevertheless, it’s one that every family must realistically examine and prepare for.
Many times, when families think about the possible death of a spouse, the only part of the equation that crosses their mind is the cost of burial. At an average of $7,000 for a simple funeral, they think they are well protected with a $10,000 life insurance policy.
A day or two after the burial service, it hits home how much the loss of their spouse is going to affect everything from where they are going to live to what kind of a lifestyle they will be able to enjoy.
When purchasing life insurance, there are some basic guidelines to consider when you start calculating how much life insurance you should really have…
Questions To Ask Yourself
#1 How much income would be lost if your spouse died?
When you calculate income needed for your family to continue in its current lifestyle, consider that possibly both husband and wife may be contributing to family income, and you need to be protected in the event either or both should die in an accident.
#2 How quickly would you be able to find help to replace your spouse’s income?
Bills don’t wait. Life must go on. And creditors expect to get paid. House payments, car payments, taxes and utility bills will all continue to arrive in the mail every month. Once you fall behind, you could quickly find yourself in foreclosure with no place to live.
#3 Would you need to downsize (house, stuff) to cut expenses?
After building your new dream house, the financial impact of losing a sizable amount of the household’s income could really make it difficult maintain your current lifestyle.
#4 How would your own career & lifestyle need to change if your spouse died?
That fun little part-time job probably won’t provide enough money to continue living as you were before. For example, maybe you had put your career on hold to raise your children. Or, are you in the middle of furthering your education with expectations of a professional advancement in the future? These are all possibilities that would be dashed if your financial situation took a drastic downturn.
Try this life insurance calculator to help you determine exactly how much life insurance you really need.
Types Of Life Insurance
Examining the life insurance question further brings up the question, what kind of life insurance do you need?
- Term Life Insurance– This is a cost-effective way for young families to provide protection at a higher level during the period of time when they would have a harder time coping with the loss of income. Term policies are usually set up for a period such as 20 years.
An example of such a policy is one that provides $500,000 of insurance during the first 20 years of marriage when the children are living at home. At the end of the 20 years, assuming the insured is still living, the term life insurance policy ends and you receive nothing for the payments you have made.
- Whole Life Insurance– This is an investment in the future. Your payments accumulate cash value, and the insurance company pays you dividends on your cash value as well. Designed to help you accumulate wealth over the long haul while providing protection in case of an untimely death, whole life insurance continues to build in value as long as the insured continues to make payments.
Whole life insurance provides a safety net throughout your life for the times when you might need cash but might not otherwise be able to get it. For example, if you lose your job and need money to make ends meet, if you have cash value built up in a whole life policy, then you can lend yourself money from your policy and pay it back when your financial picture improves. Try borrowing money from a bank with no job and excessive debt. It’s not likely to happen.
My parents advised me to purchase a modest $20,000 whole life policy when I was only 18 years old. At the time, the premiums started at $7 a month, and at age 21 they jumped to $28 a month. Even then, it was only a minor inconvenience to make those payments. But for that effort, a number of times during the past 40 years I’ve been forced to tap into that cash reserve.
The key is to pay back what you borrow, so that safety net remains intact. Now as I get closer to retirement, I see that cash value building to the point I will have a nice little nest egg that will cover many age-related expenses that are bound to come up.
Life insurance is definitely for those you leave behind. Beyond that, it can also be for your own future as well. Choosing a well-balanced combination of both term and whole life insurance is the best protection you can have for the unknown future ahead.
