Ever since the Kardashian sisters' YOLO (you only live once) pact back in 2013, people have been focusing on checking big bold items off their "bucket lists." (For the uninitiated, a bucket list is a rolling inventory of things to do before you die.) And while climbing Mt. Everest — although maybe wait until it’s less crowded — and learning how to speak Italian are great life goals, we’d like to argue for a slightly more responsible addition: purchasing life insurance.
We know insurance isn’t as sexy as world travel or self-improvement. It is, however, the only way to ensure that, in the event of your passing, your estate, family, and even pets can be cared for. So, with that in mind, let’s look at some compelling reasons to purchase life insurance. We’ll also examine the different types of policies available.
Crucial reasons to purchase life insurance
- Settling Debts. Do you have a mortgage? Outstanding student loans? Credit card debt? Undelivered portions of freelance contracts? If you’ve answered yes to any of those questions, pay close attention: if you pass away before any of these debts are repaid, your next of kin could become responsible. That means anyone from your spouse to your parents or even your children could be stuck making payments for years to come. And that’s before you add in the cost of a funeral and burial — which will all become the financial responsibility of your loved ones after you’re gone. Unless, of course, you’ve purchased a life insurance policy.
- Protect Your People. Most families these days rely on two incomes. Think about this: what would happen to your partner or dependents in the event of your death? Could they still afford to keep up with daily expenses, or would life become far more difficult? By purchasing life insurance, you can guarantee your partner that your lost income won’t be the beginning of a spiral into financial hardship.
- Secure the future. Replacing lost income is one thing, but with a sufficient life insurance policy, you can actually make a difference for years to come. For many children who have lost a parent, college was only possible thanks to the life insurance left behind by their mother or father. If you have a vision of what your family’s life will look like down the road, purchasing insurance can help leave that picture unchanged, even in the wake of your loss.
What Kind of Policy Should I Purchase?
Now that you understand the importance of life insurance, it’s time to determine which policy type is best for you.
Whole life insurance policies will pay benefits to your heirs regardless of the age when you pass; even if you live to be 100, your heirs will collect benefits. Your annual premiums will never go up, even as you age, because part of your payments are invested in order to offset the annual increased risk to insurers. But, because you can collect this policy at any time, and because premiums stay the same for life, your annual expenses on this type of policy will always be higher than on a term policy.
As you may have already guessed, term life insurance expires after a set amount of time. So, if you buy a 25-year policy when you are 25 years old, you will no longer be covered by the time you turn 51. This kind of policy is more flexible, allowing you to select terms for as short as 1 year; they typically don’t extend past 30 years. With this flexibility, you can determine the extent of coverage you need: will your family be fine once the house is paid off? Once the children finish college? Examining your personal obligations will help determine the length of term you need to secure your individual financial obligations.
While whole policies have their place, and certainly provide peace of mind, for independent contractors looking to keep costs down, term insurance coverage is almost always sufficient. The only question that remains to be answered is: how large a policy should you purchase?
How much coverage do I need?
As with any type of insurance, every person’s requirements will be different when it comes to determining the right policy size. There are, however, a few rules you can use to determine the right policy for your needs.
First, you can multiply your average annual income by 10. That gets you to the most basic coverage you need to truly protect your family in the event of your sudden death. And, if that’s the level of coverage you can afford (monthly rates will be determined by the size of your policy), you can feel comfortable stopping at that size of policy.
If, however, you can afford to pay a little more, your next step would be to add $100,000, per child, to your 10x salary. This will help your partner or co-parent cover daily expenses and the rising cost of education in the event of your loss. Got a little more to spend? Examine your personal and familial debts, and add that cost to the total cash value of your policy.
Once you’ve got that number in your head, it’s time to figure out the length of your term policy. As we mentioned earlier, this number will likely be affected by your current age, and the number of years you can expect to have financial dependents. For example, if you are forty five and have two high-school aged children, you will need a shorter term policy than a 28-year old with a newborn and toddler.
So much about life insurance is personal — and that’s what makes it such an important part of your personal financial plan. Because, while other types of policies are all about you, life insurance is about protecting the people you love. And what could be a more important entry your bucket list than that?