A few weeks ago I was flying from DC to California, and during that long flight I started thinking what would happen if I were to die…? No one wants to think about this but it’s something we should be talking about because it can happen at any time.
Are your affairs in order? What would happen to your children if you were to die tomorrow? Would your partner, friend or family member know how you want your children to be raised? Would they have enough money to raise your children? Could you raise your children on your own if your spouse were to die?
I thought long and hard about these questions and I realized that people would have to scramble to figure out what to do with my kids if something were to happen to me. I also realized we simply don’t have enough money in our savings to raise our children without my husband’s income and that is scary.
During that flight I made the decision that I would look into life insurance and stop worrying about all the “what ifs”. Since I am not an expert on this field, I asked Dave Hanley, Founder and CEO of Tomorrow (an app that helps you create a will – it’s pretty cool so check it out!), to share with us valuable information so you can figure out if your family needs life insurance.
My first daughter was born when I was still a student finishing up my MBA at Stanford. Mia was beautiful, so beautiful that I knew she wouldn’t be the last child I had. It dawned on me that I had at least 20 years of care for her, including protecting her if something were to happen to me.
Every new parent has the same train of thought I did. “Wow, this little human is now relying on ME?!” I wanted to make sure I had all my ducks in a row. I wanted to guarantee I could support her, her mother, and any future kids as well. I had dreams for her — wanting to give her the same opportunities I had — like traveling or being a parent. To secure this future, my most immediate need was a life insurance policy.
Do I Need Life Insurance?
Most people would benefit from having life insurance, but whether everyone needs it is an important question. The point of getting life insurance is to be able to provide for your dependents if something happens to you. Your policy should be able to pay off your credit cards, mortgage, and loans. It should also pay for your children’s education, and ensure that your spouse is financially secure going forward.
So, when is the right time to buy your own individual policy?
For most people, the answer is as soon as possible. There are some advantages to buying life insurance while you are still young. For one, you lock in a lower premium if you start younger.
Life insurance gets more expensive the older you get. The reason is simple—you are statistically less likely to pass away when you are young, and more likely to pass away when you are old.
Because most people do not like yearly price increases, insurance companies offer level term policies with a locked-in rate. Because the rate does not change, but the risk of passing away increases over time, the rate they charge is essentially averaging out the premiums over the term.
Whole life policies, which are more expensive than term life policies, also tend to keep the same rate throughout your life. With whole life, you also pay less when you are young because it is likely that you will be paying premiums for longer if you buy the policy when you are younger.
The Health Factor
There’s another element that must be considered when you are thinking of buying an individual life insurance policy. For many insurance policies, the insurance companies rely on a thorough medical exam to set your policy premium and assess their risk (I remember my blood tests very well.) While some policies don’t require a medical exam (these policies are called simplified issue), the coverage amounts available tend to be much lower.
Although some folks stay healthy throughout their life, health issues tend to increase as we age. There are some conditions that will increase your life insurance premiums—high blood pressure, high cholesterol, weight problems, asthma, type 2 diabetes, cancer, sleep apnea, heart disease, and depression are a few. Even if you’re healthy, if a sibling or parent has any of these issues it may impact your premium.
The health exam is a one-time thing—it’s only done to decide whether you qualify for life insurance and how much you should pay if you do.
What About Employer-Sponsored Life Insurance?
For many people, employer-sponsored life insurance serves as an introduction to the concept of life insurance in general. Companies small and large offer free/low-cost life insurance to employees as a benefit, which is often welcomed by those who are not particularly well-versed in the finer points of life insurance. It can offer peace of mind and seem attractive to young, healthy professionals.
But is employer-sponsored life insurance really enough for those who are looking to protect their families?
Short answer? No. Employer-sponsored plans often use the employee’s salary as a baseline for determining coverage. Those who make $60,000 annually, for example, can usually expect matched ($60,000) or doubled ($120,000) coverage, which can seem like quite a bit of money for young professionals.
This being said, a premature passing that affects your spouse/children can be far more costly than a year’s wages. In an ideal situation, a life insurance policy should be between 5-10 times one’s annual salary to sufficiently cover family expenses. You can find more information about employer-sponsored plans here.
When I was in the market for life insurance, I was told to buy a $2 million policy. I remember thinking that might be too large. Flash forward 15 years later — with now 4 kids, I’m glad I bought the bigger policy!
As a father, protecting Mia and the rest of my family was my first priority. The insurance process may seem daunting, but is so necessary for the safety and security of your kids.
How Much Insurance Do I Need?
This one is difficult to answer, as everyone’s lifestyle is different. Your income, dependents, debt, and more determine how much coverage you need. A general guideline: a life insurance policy should be between 5-10 times one’s annual salary to sufficiently cover family expenses.
If you want a more tailored answer, I advise speaking with a financial professional. There are various plans to choose from, including whole, term, and universal.