Probably a question that’s crossed your mind from time to time. While life insurance is a key consideration for any financial plan, it’s not usually something people like to think about (for obvious reasons). But let’s put all that morbidity aside and talk about why you might consider purchasing life insurance.
At its most basic, life insurance is there to provide your loved ones (called “beneficiaries”) with money after you die. Young people below retirement age typically buy life insurance to make up for income they would have made had they not passed away. Those over retirement age might carry it to provide a lump sum of money for their families after they die.
To answer the question of whether you need life insurance, you first must ask yourself why you’d want or need it. Are you young and single but want to provide money to your family if you died suddenly? Do you have a spouse or partner, and maybe kids, that you would want to provide for if you were gone? These are reasons you may want to consider life insurance in your financial plan. Some employers provide life insurance as a supplemental benefit for you, so something to consider if it’s available. Here are some common types of life insurance:
- Term life insurance – By far the most common life insurance. Term coverage provides your beneficiaries with a lump sum after you die. In exchange for this coverage, you make monthly payments called “premiums” for as long as you have the policy, which is usually up to 30 years. Term life is the cheapest form of life insurance because it only provides the lump sum payable to your beneficiaries upon death (which is referred to as the “death benefit”).
- Whole life insurance – Sometimes referred to as “permanent” life insurance because it covers you for your entire life. Whole life consists of two parts: (1) a death benefit just like term life and (2) an investment component. A portion of the premiums you pay each month goes to providing a lump sum, just like term life, but the rest is set aside as “cash value” and grows each year at a rate that’s guaranteed by the insurance company. When the policy matures, you receive the full cash value balance back to use as you please. Usually the policy matures when you’re older, making it a way to create an asset for your beneficiaries.
- Universal life insurance – Universal life is another type of permanent insurance that works just like whole life with two notable exceptions: it’s cheaper than whole life and the premiums are flexible. You can adjust the amount you pay in premiums to suit your financial condition, though this impacts the amount of the death benefit. There are two main types of universal life. Variable life is where you have full control of how the cash value is invested. Indexed life is where the cash value grows at the same rate as a specified index, like the S&P 500.
Here at Firreo, we do not recommend carrying whole life or universal life insurance. This is because the monthly premiums can be very expensive, much higher than simple term life policies. That said, if you are truly a hands-off type of investor, whole life policies are still an investment option to grow your money over time while not creating exposure to the ups and downs of the stock market.
Okay, no more sad morbid stuff. But this should give you some much-needed enlightenment on life insurance and why people usually have it.
For lots more on how to crush the personal finance game and find early retirement, make Firreo your financial advisor. We’ll help you out of your job and on your way to financial freedom!