If you recently got married, talking about death is likely the last thing on your mind. But your wedding vows may have included a statement like “’till death do us part.” So what happens if death does part you? Suddenly a spouses debt becomes your debt or vice versa. While losing your spouse would be devastating, you needn’t also deal with the prospect of financial ruin.
Term life vs permanent
On the one hand, term life is cheap. The death benefit is guaranteed, and usually the premiums remain level for the term of this kind of policy. On the other hand, permanent life insurance is, of course, permanent. You carry it with you until you die. Moreover, if you work with a good financial planner, you can recover all of the premiums paid to date so that you save money in the long term.
But there’s a catch: Permanent life insurance (whole life) is initially more expensive but neither policy is a wrong choice. The best choice is the one you can afford, which covers all of your current and future debt.
Don’t discount term life because it is temporary insurance. Likewise, avoid scoffing at the initial high premiums of permanent life insurance. If you can afford it, try to buy a blend of term and permanent life insurance. This way, you will cover short-term debts, and long-term expenses like burial and funeral costs.
How much life insurance coverage should you buy?
There are many “rules of thumb” out there, but most are misleading. You need an amount of life insurance that will cover current debts, anticipated future debts, and a little extra as a precaution.
This task isn’t difficult. Add up your current debt balances. Next, add up future debts like college expenses (if you plan on having children), automobile expenses (if you plan on buying a vehicle every 5, 6, 10 years, etc.), and retirement contributions. Also add future income for your spouse to survive on.
Finally, project expenses to cover your up to the year you are planning to retire. For example, if you currently make $50,000 a year after tax , multiply this amount by the number of years you have left until retirement. So, if you’re 40 years out from retirement, you would multiply $50,000 by 40 years. That equals $2,000,000. This sounds like a lot, but this amount is affordable with the right term policy or a blend of term and permanent (whole) life insurance.
Life insurance quotes are tricky in terms of the buying process. Most people go for the cheapest quote, which is a mistake. The best policies are ones that are paid off at your convenience. Buy from companies that offer a high Comdex score (i.e. above 90%), excellent financial ratings, and a history of good financial management. Also opt for policies with a low cost index, and which focus on maximizing profits and protection for policy holders.
There may be insurance companies who focus their policies on aspects like social responsibility and green energy.While that is great, you will want to make sure that these items are important to you too. If not, buy insurance which meets your needs and not the marketing charter of the company.
Source an insurance company that has your best interests at heart and who’s commitment is to policyholders. Mutual insurers are a good start, but some stock insurers do a great job of aligning management interests with policy holder interests.
Finally, grill your insurance broker or agent. Avoid purchasing insurance until you are fully satisfied with the terms of the policy. Make sure you have found the best possible policy, which provides value for you, and at the best possible price.
Jessica Watts is a long-time life insurance and financial advisor. When she gets some free time, she likes to help others by sharing what she has learned on a variety of blog sites.