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In the AMC show “Breaking Bad”, Walter White is a high school chemistry teacher who struggles to support his family. When he is diagnosed with advanced cancer, he starts making crystal meth so that he can leave money for his family. A less dramatic possible scenario: sufficient life insurance prior to his diagnosis. In this post, you will learn about term life insurance, and how you can provide for your loved ones (without resorting to organic chemistry and crime).
The Basics of Life Insurance
The main goal of life insurance is to replace your income should you pass away, so that the financial impact on your family is minimal. There are two types of life insurance. Term life provides a death benefit for a defined period of time over the insured’s life, for example 20 years. This is the least expensive form of coverage, and is the most common type recommended by financial planners. Permanent life (which includes whole life) covers the insured throughout his/her life, and also has a cash value. The premiums for this type of insurance are more expensive and the illustrations (financial projections) can be impenetrable. Permanent life has its uses, to be discussed in a later post.
Do You Need Life Insurance?
If you are single, like myself, with no dependents you probably don’t need life insurance. Couples (married or living together) should consider life insurance, depending on the relative incomes of each and their lifestyle. With the birth of a child, life insurance becomes especially important. You will want to ensure that major expenses including mortgage payments and college tuition are covered in case of the death of one of the parents. If one of the parents is the caregiver and stays at home with the children, it is worth considering life insurance for him/her (in addition to the income-earning parent). The death of the caregiver parent would pose a financial hardship on the surviving parent in terms of arranging for child care.
What if You Have Life Insurance through Work?
You may have some life insurance as an employee benefit. However, it may not be sufficient to cover your needs if you have dependents. In addition, that coverage is contingent on you remaining employed with your company. An advantage of group term life (your life insurance through your job) is that there is no underwriting requirement (discussed below).
How Much Coverage Do You Need?
A rule of thumb is that an individual needs coverage equal to 8-10 times his or her salary (depending on number of dependents, other financial resources, lifestyle).
Cost of Term Life Insurance
How much you pay in premiums depends on a couple of factors including the death benefit (amount of money to be paid to your beneficiaries) and the statistical likelihood of your death during the period of insurance. This probability is determined by underwriting, a part of the application process in which the insurance company will look at your lifestyle (smoking, drinking, etc.), family medical history and results of a medical exam. Remember Walter White, the high school chemistry teacher? It would have been difficult for him to get affordable coverage after his cancer diagnosis.
To give you a specific example of the cost of term life, a 40 year old woman in good health will pay about $115/month for 20 year term life insurance with a $1 million death benefit.
- Review your life insurance policy through work.
- Work with an insurance broker or a trusted life insurance agent if you feel that you need additional coverage.
- Make sure your insurance company is in good financial standing, by looking at its rating on the A.M. Best website.