Life Insurance Buyer’s Guide: What Type, How Much and Who Will Benefit
April 7, 2017
You’ve probably seen the life insurance commercials in which small children, all wide-eyed and adorable, ask questions like, “Hey, Dad, what’s life insurance?”
While these campaigns are supposed to put a small lump in your throat, most people don’t think about life insurance until they absolutely have to. That usually happens when their financial well-being becomes increasingly intertwined with someone else’s, which can come with getting married, buying a home or, the big one, bringing a child into the world.
Those happy events don’t make the task of buying life insurance any more pleasant — just more urgent.
So consider this a back-to-basics guide that will help sort out what you need as quickly and efficiently as possible. Buying insurance has a lot in common with ripping off a Band-Aid: You just need to do it and then get on with the business of living.
Below are answers to some of the most common questions that are likely to arise:
What type do I need? Most people are best served by a plain-vanilla term insurance policy. As the name suggests, these policies pay a set amount if the policy owner dies within the boundaries of the term, typically somewhere between 10 years and 30 years. Term insurance is simple, the policy features generally don’t vary greatly across providers (other than the cost), and it’s cheap compared with other types of insurance.
Permanent life insurance can, however, be the right choice for people who will always have a need for life insurance. They might include the parents of a child with special needs or a wealthy family who will owe estate taxes.
How much to buy? The rule of thumb tossed around most often is to buy coverage worth 10 times the policyholder’s salary. But each family’s needs will vary depending on what amount of income the family is seeking to replace and what other items family members may want, or need, to pay for.
Would you want to take time off from work if a spouse died? Pay off the mortgage (or just receive enough to continue making payments)? Pay for a portion or all of college? Are there any debts that would need to be repaid?
Working parents should buy enough insurance to replace their income for five to 20 years, depending on how old their children are and whether a spouse or partner could support the children on one income. For a stay-at-home parent, you should consider the cost of hiring someone else to perform all of your daily duties.
One policy or more? Families’ needs will probably change over time, so some individuals may consider buying policies with different expiration dates: maybe a $1 million policy with a 20-year term that gets the children through college and another $500,000 policy with a 30-year term that gets you to retirement.
Where to buy it? It pays to shop around to see which insurer offers the best price for specific circumstances. And instead of working with a broker exclusively affiliated with a single insurer, work with an independent agent who has access to the top term insurance providers.