Life insurance is not for us. It is for the person who needs to take care of things after there is no more us. Continuing with the benefits-related month, today, I would like to touch on two things related to life insurance. As you are thinking about your life insurance needs, here are two things to consider.
Do I get term life insurance or a permanent (also known as whole life) policy? Here is how it works. In a term life policy, you are buying insurance for a specific number of years, let’s say 20 or 30. All these years, you pay for your premiums and if you end up alive at the end, well, that’s it. No one gets anything. It is no different than your car insurance. You pay your premiums every month and hope not to have an accident. In the case of life insurance, you pay your premiums every month and hope not to die. But, if you do have an accident (or die) someone gets paid.
By comparison, a whole life policy is permanent insurance, which means that it will pay out one day because eventually, we all die. It sounds much better because you don’t “throw” money in the wind for 30 years only to end up with nothing. But you are paying a price for it. You are paying lots of money for this “sure to pay you back one day” deal. For example, for someone in their 30s, a $300k term life policy may be $40 per month while a permanent policy is $400 per month. Big difference in price tag.
I normally shy away from a permanent policy when working with my clients because most people cannot afford it. If you have 2 small kids, a $500k mortgage in Los Angeles and are the sole breadwinner in the family, you need way more than $300k of life insurance to take care of the family in case something happens to you. A $300k policy will not do much for you. But a $3 million dollar policy will cost you more than your actual paycheck. So despite how good a permanent policy sounds, in most cases, it is too expensive for most people. You do not want to end up underinsured at a period in your life where your life insurance needs are hig. There is a time and a place for a permanent policy but it is not in the above example.
I signed up for life insurance at work. Is that a good idea? Well, it depends on how young and healthy you are. Normally, I try to avoid getting life insurance though work because you are getting a term life policy that is tied to a job. The bad thing about it is that as you get older, the premiums increase and if you quit your job, your life insurance is gone. Yes, you can convert it to another policy but it is very expensive. If you are young and healthy, getting a policy outside your work is usually the winner. You will end up with lower premiums and you will lock in those low premiums for the next 10, 20 or 30 years. What happens if in 10 years you have cancer and quit your job? Well, now you cannot get yourself insurance outside of your work at reasonable prices. What happens in the same situation if you have a 30 year policy? Nothing! You still have that policy until the 30 years is up.
My personal recommendation, as you are deciding on life insurance is to try figure out how much money you would need to get your family though the next few years (and few is relative, it depends on your situation and family) in case something happened to you. Assuming you will pass underwriting (you do not have any diseases that would disqualify you), then get a broker to shop for a few quotes. Try to get the longest amount of time (usually 30 years) you can afford. Most likely, you will need to go through a medical exam. Some exceptions exist, for example, some companies will underwrite you with a short interview up to $300k. Regardless of what you do outside of work, do sign up for basic coverage and whatever you might qualify for without a medical exam at work but be prepared to shop outside of it as well.
Do you have other tips to add to this, other questions related to life insurance? Feel free to comment and add them here.