Life insurance is usually a downer of a subject, so I'm going to try to avoid that here. Today is the kickoff of the Life Insurance Movement, with the goal of bringing more awareness to this financial issue that people shouldn't neglect. Plus, life insurance is such a difficult financial product to purchase because it is typically sold by salesmen who earn huge commissions by putting you into products that you may not need.
But like the title says, young families need life insurance more than anyone else, and here's why, along with a few things to remember!
Life Insurance for Young Families
Life insurance is probably the most valuable financial product that a young family can buy. Why? Because life insurance is designed to provide financially should something happen to you or your spouse.
For example, if the husband works and makes $75,000 per year, and the wife stays at home, what happens to the wife and children if the husband dies unexpectedly? Who is going to pay the bills? What about time to grieve? All of these things need to be planned for, and unless you have a gigantic emergency fund, life insurance is probably a good option.
And it is much more important when you're young for several reasons:
- This is usually your asset accumulation phase in life, and an unexpected death can really damage this.
- This is also the period of time when debts are highest (mortgage, student loans, etc.) and the bills will keep coming no matter what.
- Children are expensive! And education continues to get more and more expensive over time.
Plus, insurance is also usually cheaper to get when you're young, because you are healthier and will live longer!
What Type of Life Insurance to Get
If you have a young family, I'm a strong believer in getting a simple level term life insurance policy. This is one of the simplest forms of life insurance: you just pick a length of time, a death benefit, and the premium is level through the policy. This is a great option for young families because:
- You can pick a time duration that meets you needs (i.e. when you plan to retire or when your kids are done with college)
- You can choose a death benefit that meets your needs
- The level term premium is usually pretty cheap
When deciding on what term length to consider, think about how long you'll need coverage. You usually just need to get through the accumulation phase in life, and make sure that your children get through school. For most people, this is usually around 50-55, but it could be later. If you're a young family, this typically means a 20 or 30 year life insurance policy, which is pretty standard.
Next comes the death benefit, or the payout amount if you die. This is a little harder to figure out, but I like to use this reasoning: 10 times your annual salary plus the value of any debts you have. Going back to the original example, this would equate to $750,000 + debts (say $250,000 for a home mortgage), which would be a $1,000,000 policy. This tends to work because you can make sure that your family can live debt free, and then live off the income from investing the remaining proceeds from the insurance. It is also important to remember that this is the total amount of insurance to get, and many people get insurance through their employer, which may offset this amount. However, don't solely depend on your employer for insurance in case you lose your job.
Don't forget though, that life insurance purchases should come after having health insurance. You need to take care of your needs today before you plan for the future.
What are your thoughts on life insurance?