Protecting your family against financial catastrophe: it’s one of the most important things you can do. That’s why Protecting Yourself is a foundational component of Financially Fit Bootcamp. And having the right amount and the right kind of life insurance is place is key to safeguarding your family.
Why life insurance? Simply because you love your family. In the event of your death, you want them to be able to have the lifestyle you had planned to have before you died.
And you don’t want your loved ones to worry about money. Or to be forced in an emotional time to take on another job, downsize from your family home or be subjected to calls from creditors.
So, if you’ve been putting off this important purchase or don’t know where to start, we’ve got you covered. Here are the answers to the three biggest questions we get when it comes to choosing a life insurance policy.
Who Needs Life Insurance?
If you need it, not having a life insurance policy in place can be a colossal gamble. At the same time, some people who purchase this coverage truly don’t need it.
The basic rule of thumb is this: If someone depends upon your income or the valuable services you provide, you need life insurance. So, for example, you should have a life insurance policy in place if . . .
- You bring home a salary that’s necessary for paying your family’s expenses.
- You receive benefits (a pension, disability payments, etc.) that support your family and that will decrease or disappear in the event of your death.
- You’re a stay-at-home parent who performs essential tasks that have a monetary value. These activities may include child care, household maintenance, financial planning and more.
However, if no one depends on you financially, you probably don’t need a life insurance policy. So then, you can probably skip out on this coverage if . . .
- You’re a child.
- You’re single with no dependents.
- The necessary income you provide won’t stop if you pass away. (For instance, your business profits, investment dividends, pension benefits or Social Security checks will be paid in full to your spouse or dependents.)
How Much Life Insurance Should I Get?
When it comes to choosing a policy limit, some financial advisors offer overly general rules of thumb like buying 10 times your annual salary. But, depending on the circumstances and financial responsibilities of your life, you could find yourself paying for too much insurance . . . or being underinsured. So it’s essential that you analyze your particular needs in order to choose the right life insurance policy.
Punch your numbers into the Safety Net Calculator in Module Four of Financially Fit Bootcamp. You can also check out Forbes’ detailed questionnaire or access an online life insurance calculator to compute the right policy limit. Finally, if you have one, talk with your financial advisor about what your perfect policy looks like.
Keep in mind that your life insurance needs may change over time. If you purchase a 30-year term policy when you get married, consider the fact that your family’s expenses and future income may change if you plan to have children, buy a house, transition to a one-income household, etc.
What Type Of Policy Should I Choose?
Remember: If you are working toward Financial Freedom, life insurance should be a temporary need.
At some point in the future, you will likely find that you’re capable of being 100% self-insured. That is, your family would suffer no financial hardship in the event of your death.
For that reason, term policies—not whole life, universal life or other full-life policies—are usually the way to go. Term life insurance policies expire after a predetermined number of years. As a result, they’re the least expensive type of life insurance. And, in general, the younger you are when you purchase, the lower your annual premium will be.
Choosing a life insurance policy doesn’t have to be morbid or stressful. Approach the process as an informed consumer, and you’ll be empowered to purchase with confidence. And when you build a safety net that includes the right life insurance policy, you can feel sure you’ve protected your family’s future and given them a true gift of love.
Community Question: Have you been holding off on purchasing a life insurance policy that you need? What step will you commit to this week that will move you closer to getting one? Share with us in the Financial Foundations community!
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.