Thinking about life insurance means thinking about death. During the coronavirus pandemic, it’s hard not to dwell on the topic.
That’s not necessarily a bad thing. Life insurance is a key part of any estate plan. Its purpose is to provide your family a financial cushion after you pass. Whether it’s covering funeral expenses or everyday costs, like a mortgage, life insurance provides peace of mind that your family won’t be forced to go into debt. And although death does not discriminate based on gender, around the time the Spanish Flu swept through the world, women weren’t even allowed to purchase a policy.
Times have certainly changed — but not as much as you might think. A recent survey by online life insurance agency Haven Life found that fewer women have life insurance compared to men (67% vs. 79%). And when it comes to coverage, our average policy of $231,342 is almost $200,000 less than what men have (more than $400,000).
How does life insurance work?
When you buy life insurance, you make regular payments on your policy to your insurance company. When you die, the insurance company pays out the insurance policy to your beneficiaries.
There are a few different types of life insurance policies to choose from: term, whole, and universal.
- Term: This type of insurance covers you for a certain amount of time, from five to 30 years. If you die within that term, your beneficiaries will collect the payout. Cost for term life insurance is typically cheaper compared to whole life insurance because term lasts for a set amount of years. This means it could expire before you die and the insurance company doesn’t have to make a payout to your family. The downside: There’s a chance you could pay for a term life insurance policy and never see it used. The upside: That it goes unused because you live through the entire term.
- Whole: While term life insurance lasts for a set amount of years, whole life insurance lasts your entire lifetime. Once you die, your family receives the death benefits payout regardless of how long you’ve had the policy. Because of its extended coverage (which you pay for every year you’re alive), a whole life policy is usually more expensive than term.
- Universal: Universal life insurance is a type of permanent life insurance, like whole. But payments and policies are more flexible than whole. Instead of fixed payments, which term and whole both offer, universal has variable payments based on the policy you have in place. If you want the flexibility of changing your policy, universal might work best for you.
There’s no right or wrong answer to which kind of life insurance policy is best for you. But you’ll want to consider your health, income, line of work and the needs of your family when making a choice.
How much life insurance do I need?
There’s no blanket answer to this question since everyone’s needs are different. It’s dependent on a few different factors, like:
- Your family’s needs. How much does your immediate and extended family depend on your income or financial support? For instance, do you care for your children or grandchildren? It’s estimated that the annual value of tasks performed by a stay-at-home mom is equal to $163,000 in salary. So don’t under-value your contributions.
- Your income. Traditional rules of thumb advise purchasing a policy that’s five to 10 times your annual income. If you’re the sole breadwinner of the family (or if you earn a significant amount in a dual-income household), the loss of income could be devastating to your loved ones.
- Your health. This might not only influence the type of coverage you get, but how much you get covered for. If a loved one has stopped working or reduced their working hours to care for you, that might also influence how much you buy.
- Your debt. This includes things like your mortgage and other outstanding financial obligations you may leave behind. If it’s a significant amount, you may want a higher payout.
- Policy affordability. Term is usually less expensive compared to permanent, which could be a factor in the type of insurance policy you get. But keep in mind longevity: if you outlive your term life insurance, it’ll expire and you won’t get anything from it. Term life insurance has no cash value, so if you die within the term, you’re safe. Otherwise, you may want to consider other options.
Don’t pay for more than you need
Unless you think it’s necessary, you don’t have to have a $1 million life insurance policy. After you do the math you might find that you only need a $250,000 policy. Use your individual needs as a baseline for what you want the payout to be. For instance, do you only need enough to cover funeral expenses? Do you need to provide a source of income to your family? Do you want to go above and beyond by covering them for many years to come, or only a few months?
Use your life, future, and expectations to determine the right amount for your family.
More on HerMoney:
- What Kind of Life Insurance Do You Need?
- Why Don’t Women Who Need Life Insurance Have It?
- 5 Must-Dos to Put on Your Estate Planning Checklist
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