When it comes to preparing for the future, you might think you’ve got everything handled with your company-paid life insurance policy and your will. That’s all you need to make sure your family is secure, right? Wrong. A simple will is not the only way or the best way to protect your assets. Having mortgage life insurance, in addition to your life insurance offered through your employer, is another way to be sure your loved ones are not left worrying about paying for the family home.
Preparing for the future is not always fun. You have to take stock of your assets, your liabilities and you really get a sense of what you have accomplished. You will either feel secure and satisfied with what you are leaving behind or you may feel as though there are still many things left to do.
Why Have Life Insurance?
The obvious reason that most everyone knows is the life insurance can be used to pay the funeral expenses. However, there are several other areas where the life insurance benefit can be spent.
Protecting your home is a very important, and often overlooked, reason to have life insurance. You can get mortgage life insurance that matches the number of years left on your mortgage and some policies offer a decreasing benefit where the death benefit goes down with the mortgage balance. However, a term or whole life insurance policy can also be used to pay off the balance of the mortgage. It is best to analyze your personal situation to decide which option is best for you and your family.
In addition to ensuring that your loved ones are not left homeless, your life insurance policy can also replace the income that is lost when you die. Most households today are two-income households. Therefore, if one of you passes away, the household suffers a loss of that additional income.
In addition, life insurance money can be used to fund your children’s college education or pay outstanding debts. Basically, whatever type of life insurance policy you purchase should protect your family financially in every way in your absence.
What are the Different Types of Life Insurance?
The three most common types of life insurance are “term”, “whole life” and “universal life.”
Term life insurance has a set premium based on a predefined time period or “term.” For example, a term life insurance policy of 20 years will have a regular monthly premium for the term of the policy. There will be no cash value at the end of the term so if you’re still alive; you’ve just paid to protect your family the past 20 years just in case you died. If you die the day after the policy expires, your family will receive nothing. You do have the option to renew the term but the premium becomes more expensive the older you get.
A whole life insurance policy does have a cash value and provides coverage for your entire life. You pay a set premium and your policy continues to grow in value. The policy continues to grow in value and many companies will make guarantees of such growth. You can cash it out at any time or even draw loans against the value of the policy.
A universal life insurance policy also grows in value but the monthly payment can vary. You must be vigilant in keeping this type of policy current for in order to avoid any lapse in coverage. And there is risk involved with a universal life insurance policy.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.