Life Insurance 101: How to Keep Your Family Covered in Uncertain Times

Life Insurance Could you use one less thing to worry about? Finding the right life insurance plan can help. 

Remember when meeting your work deadlines, fixing dinner for the kids, and squeezing a workout into your day were top-of-mind? If you’re like most parents, you’d give anything to return to those simpler times. Was it only just a few weeks ago that the world turned upside down?

The coronavirus pandemic makes us all aware of just how fragile life is. It also illuminates, in the starkest of terms, how we need to protect the people we love most. Don’t be surprised if you can’t help but return again and again to the question, “What would happen to my kids if I weren’t around to take care of them?” You’re not alone.

You’re also not alone if you’re facing new financial pressures. Now is a time for re-evaluation on many fronts. And right at the intersection of “protecting my kids” and “my financial future” is where you’ll find life insurance. So let’s learn a little about it.

Is life insurance a good investment?

If you have dependent children—and by that we mean young children, children in college, or disabled children of any age who may never be able to support themselves—then insuring yourself could be a vital investment. If making sure your kids are financially secure is your foremost concern, there’s no safer way to spend your money than to spend it on life insurance.

How do I make a life insurance plan for my family?

The best life insurance plan for your family depends on various considerations, including your age, your health, your expenses, your income and earning potential, and more. Factor those factors by two if you are married. If you’re a stay-at-home mom who doesn’t draw a salary (or your husband is a stay-at-home dad), don’t neglect to factor in the financial value an at-home parent contributes when you purchase life insurance. A common mistake when purchasing life insurance is to focus exclusively on the family “breadwinner.” But the services stay-at-home parents provide come at a steep cost when you have to buy them on the open market.

You can figure out how much life insurance to carry a number of ways. The long way is to look carefully at all your current and anticipated expenses—don’t forget college tuition—then purchase a policy large enough to satisfy those obligations.  That will give you a good idea of how much protection to buy. The short way, often employed by life insurance salespeople, is to multiply your current salary the number of years before your children will be independent to come up with a figure.

What kind of life insurance do I need?

There are five basic categories of life insurance. The first, which is often recommended for younger families who don’t have a lot of disposable income, is term life insurance.  Like auto insurance, term life covers you for a specific length of time—the period when you are paying your premiums. Coverage ends when you stop paying, and the insurance has no permanent value at that point. Term life insurance pays out a specified amount of money when you die. That amount is called your policy benefit.

If you make your children the beneficiaries of your life insurance policy, the policy payout goes directly to them. Since children can’t be expected to manage large sums of money, you’ll likely choose another parent or trusted guardian as the beneficiary of your policy. Naming a policy beneficiary is a serious decision you should make very carefully. Divorced parents may find this a difficult subject to discuss, but it’s important that you do. Bygones will definitely be bygones when it comes to the security and well being of your children.

Whole life insurance is a different proposition entirely. As its name implies, it’s designed to be something you carry for a lifetime. You choose a permanent death benefit amount when you take out the policy. Your premium is also fixed. But whole life policies also accrue cash value as you pay into them. You can borrow against the value of your policy, too, but if you don’t pay back what you borrow, the outstanding amount may be deducted from the death benefit your policy eventually pays. The cash value of your policy naturally goes down, too. Whole life insurance is often marketed as an investment vehicle, but policies increase in value more slowly than other investments you can make. Bear in mind, too, that whole life insurance premiums can be ten or more times as high as term life premiums. That puts whole life insurance out of reach for many families.

Universal life insurance is similar to whole life insurance but allows you to adjust your premiums and your death benefit as your needs change. When you pay lower premiums, the cash value of your policy goes down but your death benefit remains the same.  Usually, universal life insurance is less expensive than whole life insurance.

Variable universal life insurance also allows you to adjust your premiums. But it also offers the option of directing how your policy’s accrued value is invested. That proposition involves more risk, since the accrued value of your policy may go down if your investment vehicles don’t perform well.

Indexed variable life insurance ties policy value to such financial indexes as NASDAQ and S&P. The value of an indexed life policy fluctuates along with those indexes. These policies are somewhat less risky than universal policies because policy value is not determined by a few individual investments but rather by overall market performance.

How should I shop for life insurance?

The most important thing to look for in any policy is the strength of the company behind it. Measures of financial stability, including a company’s Moody’s, Standard and Poor’s, and A.M. Best ratings can be helpful in evaluating an insurer’s long-term viability. You can research them online for free.

Various life insurance marketplace sites allow you to conduct side-by-side comparisons of multiple policies and quotes with no obligation to buy. Do take advantage of that opportunity before choosing a policy. But check the privacy policy of any site you visit before entering any personal information. Make sure you’re not agreeing to the company selling your information to companies outside of the life insurance industry or you will be inundated with email and phone calls. You can expect an uptick in those anyway but you can limit your exposure by avoiding any site that asks for blanket approval to sell your information.

While you’re shopping, check your eligibility for the various discounts insurers offer. You can sometimes bring your premiums down if you don’t smoke, exercise regularly, or otherwise lead a healthy lifestyle. Some companies extend discounts to military personnel, educators, and members of other professions. You can also earn a discount by “bundling” your life insurance policy with your home or auto policy. Many insurers offer all three kinds of insurance under one roof.

Most importantly—and this rule applies no matter which type of insurance you choose—read the fine print. You may even want to consult with a financial advisor to walk you through the pros and cons of your insurance plan before signing on the dotted line.

These are unsettling times, but with the right plan in place, life insurance can have a huge impact on your peace of mind. If you haven’t already, consider putting a plan in place now, for while we are all hopeful for a quick and safe end to the current coronovirus pandemic, if we’ve learned nothing from this experience its that the unexpected can happen at any time. Protect your family’s future now and you’ll have one less thing to worry about in the days to come.

 

Content for this article was provided by Money, a magazine and online resource for personal finance topics ranging from investing, saving, retirement and taxes to family finance issues like paying for college, credit, career and home improvement.