Note from Amanda: This is a guest post from fellow FinCon group member, Chris Huntley . Chris Huntley is president of Huntley Wealth & Insurance Services in San Diego. He also owns eLifeTools, a site dedicated to online marketing for insurance agents. He can be reached on Twitter @mrchrishuntley.
If you want to protect your family’s financial future, there’s one piece to your financial plan that’s essential.
Life insurance is not a sexy topic, but it can be an inexpensive way to avoid leaving your family financially devastated if you were to pass away unexpectedly.
In this article, we’ll look at what life insurance is, why people need it, and types of coverage and estimated costs for each.
What is life insurance?
In a nutshell, a life insurance policy is a contract between you and the insurance company. You agree to pay a premium to the insurance company. In exchange, the company pays a death benefit to your designated beneficiaries if you pass away.
Life insurance policies provide financial relief to their beneficiaries. They can use the funds to pay for basic burial and final expenses, pay off debts, and even replace the deceased’s monthly income for a period.
Pretty simple, right? If only!
The life insurance industry offers a number of different types of policies, some that can get really complicated. To make thing simple, here are the main three types of life insurance you need to know:
- Your policy lasts for a specific term (e.g. 10, 20, 30 or even 40 years) and your premiums stay the same during that time.
- If you pass away while the policy is in effect, the insurance company pays out the death benefit.
- If not, the policy will typically move to an “annually renewable” structure, with your premiums increasing each year.
- If you cancel your policy, you get nothing in return. In this sense, it’s similar to renting vs. buying.
- This type of policy has no specified term; it’s for life. Your premiums typically stay the same the whole time.
- Part of the premium you pay is for the death benefit and and the other part goes into a cash value account, which grows at 2.6% per year on average.
- You can borrow against the cash value, but must pay it back with interest. And if you cancel the policy down the road, you receive the cash value balance, also called the cash surrender value.
- This kind of insurance is easily 10x more expensive than term, so it’s not for most people.
- Universal life is a form of permanent insurance, like whole life.
- The premiums can be more flexible than a whole life policy. You can even use your cash value to cover your premiums if you’re in a financial bind.
- If your cash value account performs poorly, the insurance company may increase your premiums. If you can’t afford the higher premiums, you could lose coverage.
- This kind of insurance can also be much more expensive than term insurance.
For most of the people reading this, term life insurance is your best option. It’s the cheapest of the three and, if you really need permanent insurance down the road, most term policies allow you to convert your policy to a permanent policy.
People usually choose to do that if they end up with health issues that keep them from re-qualifying when their term policy is up.
A family ravaged by death: The Hanna Boykin story
Losing a loved one can be devastating, but not having to worry about finances afterward can prevent even more havoc in your life.
Hanna Boykin, the recipient of our inaugural “Huntley Wealth Cares Scholarship,” lost both her parents in a 14-month span. With five other siblings also left behind, it was a devastating blow for the family.
Because her parents had no life insurance coverage, Hanna’s family didn’t have enough financial support to stay together.
…they were forced to split up, moving into different homes with different families.
A life insurance policy on her parents could have allowed her siblings to save their home, pay for necessities, and to go to college.
Even if you don’t have children, you may need life insurance. It all depends on the costs you may be leaving behind for a significant other or family members. Even basic burial costs can be covered by a small policy.
How much term life insurance costs
When it comes to life insurance, the younger and healthier you are, the better.
… and because women tend to live longer than men, they usually get lower premiums.
For example, say you’re a healthy 30-year old woman needing $250,000 of coverage for 20 years. You’d be looking at a premium of approximately $12 per month.
Compare that to a whole life policy for the same coverage amount, which would cost you about $207 per month.
Term life insurance also gets cheaper by the thousand the more you buy. For example, increase that coverage to $500,000 and the premium would be closer to $18 per month.
That’s double the coverage, but only a 50% cost increase. Not bad!
To get the best rates for your policy, I recommend comparing quotes from multiple companies to get their best offers.
How to get life insurance
If you’re interested in getting life insurance, you can easily get online quotes from multiple companies. Before you enter your personal information, though, make sure the website you’re using gives you access to your quotes immediately.
…otherwise, you may get inundated with calls and emails from insurance agents.
Some websites, like Huntley Wealth, give you quotes as soon as you submit your information. No hassle and no having to deal with multiple agents blowing up your phone.
Just about every life insurance company and agent want your business. But while it’s nice to feel wanted, there’s one problem.
…not all of them have your best interests in mind.
Some agents work for certain life insurance companies that allow them to sell policies only from that company. So, there’s no way to tell if you’re getting the best premiums or not.
It’s best to work with a knowledgeable, independent insurance agent or website that can give you the best offers on the market, period.