I first want to tell you that I have wanted to write this post since before I started this blog. The reason is because I decided to become a licensed life insurance provider about a month before I discovered how much I love blogging. I actually took a 16 hour training class on life insurance policies and spent 40 hours studying for my life insurance exam before passing. I love all the knowledge I gained from doing this, and I feel confident that my husband and I are going to be prepared if one of us should pass unexpectedly. Now I am not an expert by any means, but I do hope my limited knowledge can help you in some way. Please know, that I am not attempting to sell you in this post. Legally, I’m not even allowed to do that, and personally I wouldn’t want to. All I hope to do is provide you with the knowledge you may be looking for, and the information you may need to make a more educated decision.
Here is what I will cover in this post:
- What is the purpose of having life insurance
- When should you consider getting life insurance
- What are the different types of policies to choose from and which one is best for you
- How much coverage do you need
- What can you be doing to prepare to no longer need life insurance
What is The Purpose of Having Life Insurance
Life insurance, just like any other type of insurance, is meant to provide you with coverage if your family, or your children were to lose their main source of income. Life insurance is intended to protect those you love and who have an invested interest in your death, meaning that they rely on you for income. Ideally, you don’t want to have life insurance your whole life. The goal is to have life insurance at the beginning of your life when you still need it, and then to no longer be paying for it when you are no longer in need of this protection.
Using myself and my husband as examples, we decided to get life insurance when we were first married because we now have an invested interest in each other’s lives. If my husband were to die I need to make sure I have enough money to cover his funeral expenses, and our joint debt. If I were to die he would need the same. We decided to get life insurance when I was 25 and he was 31 because we have a significant amount of debt right now, and a low amount saved for retirement. Our policy is good for 30 years and by that time, we hope to be debt free, and have enough money in retirement, investments, and savings to cover any necessities or unexpected expenses. Basically, we are doing our best to be prepared for the worst case scenario financially.
When Should You Get Life Insurance
You should get life insurance as soon as you have someone relying on your income, or you have any serious debt that would need to be paid off upon your death. When someone is relying on your income this is considered an invested interest. This would include your spouse, your family (if they co-signed your student loans or mortgage, etc) and your children. You will also want to get life insurance at as young of an age as possible and hopefully before you have any serious medical conditions arise. If you get life insurance at a young age, and prior to being diagnosed with any serious medical issues, you will be considered low-risk and will have a lower monthly premium rate. (A premium is the monthly payment you would make every month to keep the policy active)
Types of Life Insurance Policies
Please keep in mind, that I am only licensed in one particular state of the US, so these policies may be different throughout the country and especially globally. These are also only intended to provide you with an overview of the different categories life insurance policies fall into, as there are many sub-types of each of the categories above to choose from. I am by no means an expert and I strongly suggest that you do your research, and read your policy agreement and terms before signing.
Whole life insurance is a policy that lasts for the entire duration of your life or until you reach age 100. This is intended to provide protection throughout your lifetime, while also providing you with a savings element. This sounds great right? Let me tell you why it’s not. When you pay your monthly premium (monthly bill), that amount is converted into the “cash value” aspect in your policy. This means that your risk increases as the risk of the company you purchased through goes down. Essentially, you would just be getting your money back instead of the company actually paying anything to you when you pass on.
Here’s an example: If you purchase a $100,000 life insurance policy and over the life of your policy, your policy has accrued a $99,000 “cash value”, you would still only get the $100,000 coverage instead of $199,000 like you may think. This means that the insurance company would only end up paying $1,000 out of their own pocket and they got to keep the interest your payments accrued. When you receive that $100,000 you are just getting your money back with no interest! It’s like you gave the insurance company a loan they didn’t have to pay anything on! That $99,000 you paid into this policy would have been better spent in an IRA or another investment account where it could have been accruing interest that you would get to keep and not the insurance company.
This type of life insurance policy is also known as a “flexible premium adjustable life.” This policy provides you with a “cash value” element, and offers you the flexibility to increase or decrease the amount of premium you pay each month. You could even skip paying your monthly premium if you wanted to! This sounds pretty awesome right? Nope and here’s why.
Let’s say you purchased a $100,000 universal life policy that you pay a monthly premium for. Every time you make a payment, expenses and fees are taken out of your “cash value”. These could be mortality expenses, load expenses, and just general policy fees. Now let’s think about this. Isn’t your premium supposed to cover those things initially? Yes! But instead you’re paying $100 each month and only $50 of it goes into your “cash value”. If you choose to decrease or skip a monthly premium payment, they deduct it from your “cash value.” The mortality expenses typically double every 10 years. Guess where that money comes from? Your “cash value”! Are you angry yet? Because you definitely should be if you have a universal life policy!
Term life insurance is the purest form of life insurance because it provides you coverage for a pre-determined amount of time. It is intended to provide coverage while your need is still high. Your need could be a large amount of debt, a mortgage, your children’s reliance on you as a parent, etc. But because you have been making your monthly payments and working diligently to pay off your debt, that need should decrease as you age. The goal is that you will no longer need life insurance by the time your policy term has ended. There is no “cash value” attached to term insurance, meaning the insurance provider you choose would be paying you out of their own pocket! Which is ultimately what you are intending for them to do right?
How Much Coverage Do You Need
I’m not going to go into specifics, because you really need to speak with a licensed professional in your area for them to make personalized recommendations. However, experts do recommend that you purchase a life insurance policy that is 8-9 times more than your current income. Please remember, that life insurance is very similar to auto or home insurance. It is intended to provide coverage for when an unforeseen death occurs which is why they recommend such a large amount. You do not want to use a life insurance policy as a safety blanket for any other reason.
What Can You Be Doing So That You No Longer Need Life Insurance
- Create and stick to a budget
- Reduce your spending
- Increase your savings
- Decrease your debt
I hope that this post, provides you with some insight and information into the world of life insurance policies. My goal in writing this was to give you a general overview of what you should be asking when you are looking for a life insurance policy, and to motivate you to get a life insurance policy if it is in your best interest to do so. Again, I am not an expert and I strongly encourage you to do your own research before signing and purchasing a policy. I would love to hear your thoughts on this subject so feel free to share your thoughts and experiences below! Also feel free to share on social media so that this knowledge can hopefully reach even more people!