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By Nicole Spector
‚ÄúShould I get life insurance?‚ÄĚ
This isn‚Äôt a question I asked myself until quite recently, when my husband and I started discussing how to best prepare for having kids, and what sort of financial goals we want to set for ourselves now that we‚Äôre really ready to do the family thing.
Naturally, I googled ‚Äúlife insurance‚ÄĚ. The wealth of information (crowded with mysterious money jargon) that poured out at me resulted in an instant headache. ‚ÄúI‚Äôll just come back to this some other time,‚ÄĚ I told myself.
Just a week later, that time, I‚Äôm declaring, is now, because I‚Äôm very good at procrastinating important financial decisions and, as my paltry retirement fund reveals, delaying these decisions hasn‚Äôt worked in my favor.
I turned to financial planning experts to learn the basics of life insurance, how it works and when it‚Äôs a wise investment.
‚ÄúThere are two basic kinds, term and permanent,‚ÄĚ says Sean Scaturro, director of life and health insurance advice at United Services Automobile Association (USAA).
‚ÄúTerm insurance is great for paying for the things you need to have paid for if you were to die during the next 20 to 30 years (the term of the policy),‚ÄĚ he says. ‚ÄúPermanent insurance, like whole life or universal life, will pay for the things you want to have taken care of when you die, like funeral costs or leaving an inheritance. Permanent insurance will also gain cash value, similar to equity in a home that you can access over time.‚ÄĚ
‚ÄúTerm policies are cost effective and can be specifically tailored to when you need the coverage,‚ÄĚ says Brad Goldsberry, insurance solution finder at Farmers Insurance. ‚Äú[They] give you the ability to ladder your coverage for when you need it the most. For instance, the coverage you have to send your kids to college doesn‚Äôt need to be in place forever. This allows you to only pay for the coverage you need at a certain time. This idea can be applied to everything, how long is your mortgage? When do you plan on retiring? How many years of income need to be replaced?‚ÄĚ
The biggest downside to term policies, Goldsberry highlights, is that they are not in place forever.
‚ÄúIf the insured gets sick and becomes no longer insurable, they will not be able to add additional coverage,‚ÄĚ he says. ‚ÄúAlso, the cost of term policies only get more expensive as we age. A common mistake we see is people waiting until the end of their term policy to get another one. Instead of taking out a new policy as early as they can, they wait and end up paying more for the same amount of coverage down the line.‚ÄĚ
Another downer about term policies, is that if you go to renew after the term, the premium will shoot up.
‚ÄúFor term policies you buy a set number of years, say 10. In year 11, the premium goes up to reflect the true cost,‚ÄĚ says Mike D‚ÄôAndrea, founder at D‚ÄôAndrea Financial. This increase can be 2-3x the original premium you were paying over the 10 year level period.‚ÄĚ
Permanent policies are, as the name indicates, permanent, meaning they span your whole life.
‚ÄúA huge plus to these permanent policies is that they have cash value, they grow tax free and that money can be borrowed from the policy tax free after a certain number of years,‚ÄĚ says Goldsberry. ‚ÄúFor higher-income earners, this can be an effective way to have tax-free income in retirement and provide them with great tax diversification. Another plus to these policies is that they can be used to pass down an inheritance essentially tax-free. When someone passes away, they might have to pay some kind of estate tax on their assets, setting up a permanent policy to relieve this burden is an effective way to pass down what you have worked so hard for.‚ÄĚ
It sounds like permanent insurance is the best way to go, but of course, this is the more expensive option.
‚ÄúThe downside is that they are not cheap,‚ÄĚ notes Goldsberry. ‚ÄúThey are in place forever and will eventually payout while a term policy has the chance of never paying out. The returns in a life insurance policy are highly debated in the industry, some financial planners swear by the tax advantages while many say, ‚Äėbuy a term and invest the rest.‚Äô There is no right answer and everyone‚Äôs situation is different.‚ÄĚ
We all should begin the process of choosing life insurance by assessing our own needs, which can be done by doing a DIMEF analysis.
‚ÄúWhen deciding how much life insurance one needs, they should fill out a DIMEF analysis with their agent,‚ÄĚ says Goldsberry, breaking down the acronym:
‚ÄúYou should carry at least five times your annual income and enough to pay for 100 percent of debts,‚ÄĚ Scaturro says. ‚ÄúA more comprehensive way to figure out your needs is to use the following approach:
‚ÄúThe cost of life varies based on multiple factors including age, health, lifestyle, gender, type of insurance and amount of coverage,‚ÄĚ says Bryan Bibbo, accredited investment fiduciary with The JL Smith Group. ‚ÄúA policy can be as little as a couple hundred dollars a year to thousands of dollars a year. It depends on each individual‚Äôs situation and what they are looking for.‚ÄĚ
Skip Johnson, founder of Great Waters Financial, provides a helpful example of what term life insurance costs can look like:
‚ÄúA recent search I did showed a healthy 25 year-old female looking for $250,000 of 20-year term life insurance would pay under $12/month. In a similar example, 65 year-old female that is in standard health looking for the same 20-year $250,000 term insurance would pay almost $250/month. A 33 year old male in good health can get $500,000 of term coverage that lasts for 20 years for $20.82 a month,‚ÄĚ he says. ‚ÄúIt is all based on life expectancy.‚ÄĚ
I‚Äôm young-ish (35) and in pretty good health, but I do have mental health maladies, gastrointestinal illness, and other fun stuff you‚Äôd see if you went through my health insurance documents. Additionally, some cancers run in my family.
Do my medical issues and potentially cancer-prone genetics mean my deductible will go up?
‚ÄúLife insurance companies have the ability to discriminate on one thing and that is your health. Whether diseases run in your family, your currently sick, or you‚Äôre in the best of health,‚ÄĚ says Bibbo. ‚ÄúAll of these considerations determine the cost of the life insurance.
‚ÄúThe older and less healthy you are, the shorter your life expectancy is and the more expensive a policy will be,‚ÄĚ adds Johnson. ‚ÄúThe longer period of time you want to cover, the more likely you will pass away and the policy has to pay out thus resulting in a more expensive policy. To find out officially what costs are, you must go through underwriting. Sometimes insurance companies can pull medical records, otherwise, they might need to order a full physical [though this is not always required].‚ÄĚ
Bibbo adds that if you take prescription medications, the likelihood of a paying a higher premium also increases.
That poor health, age, medication needs and genetics can inflate costs is a definite bummer, there‚Äôs really no case against having life insurance if you have relied-upon income, and want some financial safety net for your loved ones should you die.
The younger you get life insurance, the lower your premium will likely be, yet this once standard investment isn‚Äôt being embraced by millennials the way it was by previous generations.
‚ÄúNearly 60 percent of millennials are not carrying any life insurance, but they should be considering it,‚ÄĚ says Scaturro. ‚ÄúThere is a big cost for waiting.‚ÄĚ
If you‚Äôre considering buying life insurance, you will need to consult with an agent, but in the mean time, take advantage of the many online calculators at your disposal.
‚ÄúUSAA has a life insurance needs calculator that can analyze your situation and give you a recommendation for coverage,‚ÄĚ says Scaturro. ‚ÄúIt‚Äôs available for members and the general public.‚ÄĚ