Regularly reviewing your life insurance coverage should be an integral part of your overall financial planning process.
In fact, when you initially purchase a life insurance policy, you are not yet finished with this component of your financial plan, but rather, you’re just beginning – especially as you experience major life-changing events throughout the years.
As you progress through life, many changes will likely take place – and with these changes, your needs for life insurance will usually also be altered.
In some instances, it may mean that you should raise or lower the amount of death benefit that you carry, and in others, it could signify that you revise the type of policy that you own.
What Are Life Changing Events?
Throughout life, you will experience various milestones. These could include graduation from college and obtaining your first real job, getting married, and starting a family. Unfortunately, there are some other events in life that are not as positive such as job loss, divorce, or death of a spouse or loved one.
In any of these cases, though, it is essential to ensure that your financial goals remain on track with the events that have taken place. And typically, this means determining whether or not the amount of life insurance coverage that you are carrying is enough given your new situation in life.
As a newly married couple, there are bound to be many changes in your life. Starting out on your journey together, there will be lots of planning to do – not just about the wedding itself, but also with long-term decisions regarding where to live, when to start a family, and where to eventually retire and grow old.
Once you are married, nearly all of your decisions will be made together as a shared venture – buying a new car, qualifying for a home mortgage, and possibly even opening a new business.
With that in mind, if one partner were to suddenly no longer be there, what would happen financially to the other? Would they be able to go on, or would that change everything?
Certainly, a common thread that surrounds many of the plans that you make is the financial aspect of how they will be accomplished. For instance, it is likely that some of your larger goals like purchasing a new home will require a significant amount of saving prior to moving forward.
Many young couples purchase a first home based on both spouses’ incomes. In this scenario, though, the sudden death of one spouse could cause the other to lose not just a partner, but also their home, without the income replacement that a life insurance policy could provide.
Yet, even the best-laid plans can be changed unexpectedly – and if the unthinkable were to occur, isn’t it better to be prepared?
What Type of Life Insurance is Best for Young Married Couples?
While your budget may already be stretched, there is a way to secure the life insurance protection that you need at a very reasonable premium cost. In most cases, the best type of life insurance coverage for young married couples is term.
This type of life insurance coverage provides a death benefit that lasts for a set period of time – or “term” – such as 10 or 15 years, provided that premiums are paid. For an insured who is young and healthy at the time of application, term life insurance can provide a substantial amount of coverage for a very reasonable premium cost.
The low premiums on term life insurance can make it easy to budget for, while still allowing you to factor in other expenses through the economic ups and downs of a new couple’s lifecycle. Many term life insurance plans will also allow you to convert to a permanent life insurance policy over time if you decide to keep the coverage in the future.
Kids, Family and Future Plans
Starting and raising a family can also bring about many life-changing events that can cause the need to alter or enhance life insurance coverage – even if you already have a plan in place. For example, each time a couple experiences the birth of a child, they are likely to incur additional expenses for food and clothing, as well as future expenses for education.
The loss of one or the other parent could signal a significant financial disaster without some type of life insurance coverage in place. Losing the income of a wage earner can affect a family’s lifestyle in obvious ways. Yet, replacing all of the duties of a stay-at-home parent can also be very costly, so coverage truly is essential on both.
When you’re young and single, the need for life insurance coverage may never have entered your mind. Yet, as you move into a new stage of your life and you begin to start a family, your financial situation will be changing in some very significant ways.
In addition to taking on a parental role, your financial responsibility – both short and long-term, will also need to adapt. And this should include planning ahead for any unforeseen circumstances – just in case.
What About a Stay-at-Home Parent?
While there are some cases where both of a child’s parents work, there are others where one is the primary income earner while the other stays home and takes care of the majority of the care giving duties such as cooking, cleaning, transportation, and other important household tasks.
While many have the misconceived notion that life insurance is only needed for the parent who earns the income, this is actually not the case at all. In fact, if you really sit down and add up what it would cost to replace all of the tasks that are done by a stay-at-home parent, the figure would be astounding – especially if these services were needed to care for young children over a period of many years.
With this in mind, it is important to cover both an income earning parent, as well as a stay-at-home parent with an appropriate amount of life insurance coverage.
What If You’re a Single Parent?
If you’re a single parent, your need for life insurance is actually multiplied. This is because you are likely to have taken on the role of both the income earner, as well as the caregiver to your children. With so much responsibility, a good life insurance policy should be a part of your overall plan to ensure that your children are well taken care of, even if the unthinkable should occur.
One of the biggest life changes that people go through in life is when they leave the world of employment and step into retirement. Even though most people dream of the day that they can relax on the beach, when the employer’s paycheck stops, it is essential to know that income will still be arriving on a regular basis. Life insurance can help to ensure this in several ways.
In fact, life insurance proceeds are often used as income replacement for a surviving spouse in retirement. This is especially the case if the income stream from a company pension will cease upon the death of one individual, leaving the other spouse without a significant portion of their incoming cash flow to pay for everyday living expenses.
Why You Need Life Insurance Now More Than Ever
Today, many families with children – both young and older – are depending on two incomes in order to make ends meet. Yet, if something were to happen to one of the breadwinners, what would happen to the family’s standard of living?
In your case, would you be able to stay in the same house? Drive the same cars? Go to the same entertainment events? And would the kids be able to attend the same schools? If not, then it is likely that there is a real need for life insurance.
But these are just your immediate financial needs. What about plans for the future? If you wouldn’t be able to meet today’s expenses without one parent’s income, what would happen to that college savings fund? Or the money that could potentially help to pay for a child’s future wedding?
Any or all of these situations could easily be paid for with the proceeds from a life insurance policy.
Life Insurance is a Financial Tool
While most people tend to think about life insurance as only paying for funeral costs, the truth is that this coverage can do so much more. In fact, life insurance is actually a financial tool that can be designed to do a number of things – including keeping your life in check after the loss of a loved one.
Proceeds from a life insurance policy can be set up so that those you love don’t have to move out of the house that they call home, so that they don’t have to leave the school or the neighborhood where they feel comfortable because they can no longer afford to live there, and so that they can go on paying the bills during an already emotional time – and thereafter.
Essentially, life insurance is a tool that can ensure that you’re able to keep taking care of your children, even if you are no longer there to do so. In that regard, life insurance helps you to keep your promises.
How Much Coverage Do You (Really) Need?
Although there are many “rules of thumb” for determining how much life insurance coverage you need, the actual amount will vary depending on a couple’s specific situation and budget.
For example, there may be a large difference between the amount of income that each of the partners earns. While one may be considered the “breadwinner” and the other the stay-at-home spouse, each should be insured accordingly.
Likewise, the amount of debt and regular living expenses should also be factored into the equation – especially if the life insurance will be used as a means of income replacement for the surviving spouse.
Consider These 4 Things When Adding Life Insurance to Your Monthly Budget
More young people are planning their future than you may think. According to the Insurance Information Institute, “Life insurance ownership jumps dramatically as young consumers advance in their careers, with over half of consumers aged 25 to 34 owning policies, compared with 18 percent of those under 25.”
It’s time to buckle up those big kid pants and start considering your future. That includes life insurance. It’s true, the possibility of your own mortality may not be at the front of your mind – especially if you’re young and in good health. If you’re crunching the numbers and just can’t find a place – or a reason – for life insurance, you’re not alone. Most people would prefer to avoid talking about death and money, let alone planning for them.
If you’re splitting hairs on your monthly budget to make room for life insurance, the time to buy is now. Read on to learn exactly why life insurance is important and what to consider when adding it to your monthly budget.
1. Your Monthly Spending
If you’re crunching the numbers for life insurance, start with your monthly spending habits. You must first know not only all of your expenditures but the ones that can be cut as well. The Economic Policy Institute (EPI) has done the heavy lifting on what the average American’s monthly budget looks like.
According to EPI, a monthly budget for a young, two-parent and one-child family should include the following:
Housing – the amount paid for rent or mortgage.
Food – money spent on monthly groceries and dining out.
Childcare – the monthly price of daycare cost.
Transportation – the amount spent on gas and related maintenance.
Health care – the cost of health insurance and remedial purchases.
Other necessities – the amount spent on clothes and other items.
Taxes – the amount owed toward state, federal, and social security tax.
EPI offers a standard planning tool that guesses your budget based on where you live. However, if you want a true picture of your monthly expense and where you can stand to spare, utilize a budget calculator.
If you’re looking for places to trim the excess, begin by drilling down to only the necessary items. Consider life insurance a budget essential.
2. Your Monthly Saving
For families who can afford it, leaving enough room for monthly savings is an important part of budgeting. You may worry that adding an extra expense could detract from your allotted monthly savings. First, consider this: your family could actually lose their savings in the event of your unexpected death.
Funeral expenses, medical bills, credit card debt, and mortgage are all a significant part of final expenses. Even if you do save monthly, it may not be enough. Huffington Post reports, “More than three-fourths of Americans don’t have enough money saved to pay their bills for six months.” This shocking statistic doesn’t even begin to capture the burden of final expenses, plus the need for the surviving spouse and family to compensate for missing income in cases of death.
If you have no monthly savings, and your family lives pay check to pay check, then the peace of mind that life insurance offers should be a no-brainer.
3. Your Debt
If you hold joint debt with your spouse (such as a mortgage), or other family members (such as a co-signed car loan), then your family may be fully responsible for this debt if you pass away. Of course, your total debt should be considered a part of your monthly budget, but make sure you’re looking at the complete picture. What you and your spouse pay together today may be the sole responsibility of the other in the future.
Take time to consider what your budget would look like if you or your spouse were no longer contributing. The EPI tool comes in handy here. Create a hypothetical family budget with the bills listed, plus any joint debts added. What does it look like? Still can’t fit life insurance into your budget?
4. Your Family
Your family is the best reason for considering adding life insurance to your budget. Forbes notes, “The main reason to own life insurance is to provide your loved ones financial protection in the event of your premature death. And as time goes by, the needs of what the insurance will provide typically evolve as well.
In their early 20s and 30s, most individuals purchase life insurance to cover items such as housing, raising children and future income potential. As people move into their 40s, 50s, and 60s, their focus also includes supplementing retirement, estate planning and leaving a legacy.”
In fact, all of the other budgeting considerations revolve around family. That’s because life insurance is the ultimate selfless act. It’s money spent toward a value that you’ll never take advantage of. You may just consider it another bill, but to the loved ones you leave behind, it’s a meaningful parting gift that allows them worry-free grieving.
18 Other Ways To Save
“The vast majority of individuals should buy term life coverage anyways, despite what some sales agents say,” Stauffer says, adding that commissions are much higher on permanent life insurance policies. “Unfortunately, this can lead to unethical sales agents pushing them when term is all that is needed,” he says.
The price differences are staggering, he says. Stauffer found price quotes from State Farm for a 30-year-old man in excellent health in California who can get a $500,000 policy at $350 Annually for term for 20 years, or $5,285 for whole.
“If you are planning on getting married or having kids in the future, life insurance is a must,” Stauffer says. “Spend some time getting healthy, as this has the potential to put you in a higher tier when it comes to life insurance. Policy premiums are determined using a lot of metrics, with health being a big one.”
People who use tobacco are more likely to die at a younger age, Stauffer says. Smoking can lead to much higher insurance premiums, easily double what a nonsmoker would pay.
No expensive riders
Some insurance plans have optional benefits that can be added to a policy. They’re expensive and rarely used, Stauffer says. “Cut the excess fat from the policy and stick to the core — insuring your life for your loved ones,” he says.
Save money and invest
Building your assets up to a sizable amount over time can mean forgoing life insurance in later years, Stauffer says. Families with enough money to cover daily living expenses have less of a need for life insurance, he says.
Improve your driving record
Getting lots of tickets shows reckless behavior, “which means that you would take more risks in everyday living and increase the probability of accidents, illness, or death and cause you to look riskier to insurance providers,” says Susan Manwaring, a life insurance agent at The Bright Insurance Agency in Boca Raton, Fla.
Avoid risky behaviors
“That increased probability can also result in a special rider on your policy to exclude benefits when you participate in a risky activity or hobby,” she says.
Get to the right weight for your height
Insurance companies look to your height and weight for an indication of the probability of future or current accidents, illness or death, Manwaring says. Before you get a policy, make sure you’re at the healthy weight for your height. A BMI calculator can help.
Review needs for the term of your policy
If you have insurance for a specific purpose such as for your children, that’s a finite need that will depend on the age of your children and a finite need is best served by term life insurance, says Tony Steuer, an author and insurance literacy advocate. If you have a 20-year need, you need coverage for 20 years.
Modify payment mode
How often you pay premiums can affect your insurance rate, Steuer says. Insurance companies have service charges for modes other than monthly, says Steuer, who has a calculator on his website to help policy owners determine their savings by paying annually.
Paying annually is usually the cheapest method, giving the insurance company the premium dollars for the full year. Quarterly payments, for example, can lead to paying an extra 4% to 20%, and monthly premium payments can lead to paying an extra 3.92% to 8%, according to Steuer.
Look around at different companies, especially if you have a health condition, Steuer says. Rates for specific health conditions will vary significantly from company to company, so use an online term life quote service.
Don’t drink to excess
Having two or more drinks a day can increase the cost of insurance by roughly 50%, and in some cases insurance companies may decline you, says Patrick Bet-David, CEO of People Helping People, a firm that offers insurance and financial services.
Buy an insurance policy at a young age will save you money over waiting years. Every year you wait, your insurance costs rise, Bet-David says.
Don’t cancel the policy you buy
Canceling a policy, and then buying another one later, can get expensive.
“One of the things most people don’t know about is that if every life insurance policy holder kept their policies until the end, the companies wouldn’t do as well as they do,” Bet-David says. “Insurance companies make money because they know most people will not keep their policies until the end.”
Don’t buy more insurance than you need
Agents get paid based on selling bigger policies, Bet-David says. Avoid that by using a life insurance needs estimator to determine how much life insurance you need.
Review your existing policy
Life circumstances change, and reviewing your existing life insurance policy can lower your premium if your situation has improved, Bet-David says.
If your health has improved since you got your current policy, you may qualify for a lower rate. The same goes if you quit smoking, your cholesterol has decreased, or you lost weight.
If your responsibilities have changed financially, such as being an empty nester or paying off debt, you could decrease your death benefit by 25% and decrease the monthly premium.
Ask for price breaks
In many cases a $500,000 policy is cheaper than a $480,000 policy because the price break is at $500,000, Bet-David says.
Lower the death benefit
The total amount of the death benefit helps determine the premium, says Allen Sarafyan, a State Farm Insurance agent in Studio City, Calif. However, do this carefully, Sarafyan says.
“Not having enough coverage can negatively impact the beneficiaries or having too much can result in higher premiums,” he says.
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