Nuts and Bolts
Life Insurance Benefits & Costs
Benefits. Life insurance pays the “face value” of the policy should a breadwinner die. And the payment is free of taxes.
Costs. Life insurance is bought by paying monthly, quarterly, or annual premiums, with the premiums based on your risk of dying and the size of the “face value” amount.
- Premiums are lower if you are young and healthy, because your risk of dying is lower.
- Premiums rise with the “face value” amount, but it doesn’t cost twice as much for twice the “face value” amount.
- To avoid potential complications should you (or your spouse die), make sure you have a will.
- As more people get disabled than die prematurely, also Learn About Disability Insurance.
The Risk is Real
So Make Sure You Have a Plan
You’re not invincible. The typical American man has a one in six chance of dying during his prime working ages of 25 and 65. Women have better odds of surviving, but one out of five couples will lose at least one member by the age of 70.
The point is not to dwell on these numbers, but to make sure that your family is financially secure regardless of how fate plays out.
Odds of dying before 65 (retirement):
|30||1 in 6||1 in 9|
|50||1 in 7||1 in 12|
A Rule of Thumb
Which You Can Personalize
A basic Rule of Thumb says 40 year-old couples need a policy on the higher earner covering 6x family income and a policy on the lower earner covering 3x family income. You’ll need less if older, more if younger, and much more if you’re the sole provider.
Note: If you’re a single parent, your life insurance needs are too complicated for our simple program.
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Would the survivor have enough?
- From Social Security. The survivor in a married couple generally get the higher of the two spouses’ benefits – but that’s one benefit, not two, and almost always less than 70% of what you get as a couple.
- From Employer Pensions. If the surviving spouse earned the pension, the pension continues. If the spouse who died earned the pension, the survivor generally gets only half. In either case, pension benefits buy less over time if not increased in line with inflation.
- From Savings. Savings often decline to pay “last illness” expenses. But the savings that remain need to support one person, not two. So the more you have in savings, the more protected the surviving spouse.
Use Figure Out a Retirement Plan (for those over 50) see how your survivor might fare in retirement.
Types of Policies
Coverage for Life, or for a Set Period?
Term Life insurance, the most common type of life insurance, covers you for a specific period, like a one, five, or 10 year period. You typically have the option to renew for additional periods for a higher premium – as your risk of dying rises with age.
Whole Life policies cover you over your lifetime for fixed premium payments. Your risk of dying rises as you age. So the policy builds up cash value when you’re young and your risk of dying is low. That cash value is then used to supplement the fixed premium as you age, and your risk of dying rises.
- Whole life policies have “investment” features: the cash value earns investment income, which is exempt from taxes. You can also borrow against the cash value or take withdrawals. But be careful. Borrowing or withdrawing too much could reduce or eliminate the life insurance benefit and result in a tax bill from the IRS.
If you simply want to protect your family in case of an untimely death, experts generally recommend a Term Life policy that’s easy to understand. If you want to use a Whole Life policy to leave a bequest or to bolster your retirement savings, see a financial planner – these products can be hard to understand.
Disability insurance can keep you afloat if you’re unable to work.
Learn About Disability Insurance
Uninsured medical expenses can bankrupt you. So at least have insurance that covers very large bills.
Learn About Medical Insurance
To protect yourself you need a reserve, usually about 2-4 months’ pay.
Figure Out a Reserve for Unemployment
If you don’t have a will, the court will distribute your property according to state laws.