Today, across the Web, hundreds of bloggers are talking about the importance of life insurance.
By taking part of this “movement”, we can help raise awareness about this often overlooked piece of financial planning in a way that transcends the audience of any one blog or website.
And here’s the thing: life insurance isn’t usually on 20-somethings’ list of financial priorities.
And that’s okay. Maybe.
If you’re happily single and childless, you can probably skip this post (for now). But if marriage or a family is on the horizon, read on.
Although age may play a role in how much life insurance you need, the decision to buy life insurance has nothing to do with age. So when do you need life insurance? Here’s the simple rule:
You need to buy life insurance when somebody else depends on your income.
Here are some common examples:
- If you’re 25 with a wife who is staying home with a newborn, you DO need life insurance.
- If you’re 29 and single, you DO NOT need life insurance.
- If you’re 27, married, and both you and your spouse work, you might not need life insurance yet, but you may want to start thinking about it anyway.
Starting a family means buying life insurance!
In most cases, you need life insurance when you start a family. Because life insurance isn’t for you – it’s to provide for your family in the event you die and can no longer take care of them.
In addition, there may be special situations in which you don’t have a family of your own but may still want some life insurance protection. For example, if a parent has cosigned with you on large student loans or a mortgage, a modest life insurance policy could pay their share in the event something happens to you. *See footnote.
Most of us begin to think about life insurance when we have children. This is what my wife and I did. Shortly after our daughter was born, we both took out term life policies in amounts that would replace each of our individual income for 20 years and cover the expected cost of our daughter’s college tuition. Expecting a second child in December, we may look at increasing our total amount of life insurance sometime soon.
If you’re wise, you might start planning for your life insurance needs before your first child is born. For example, if you’re married, you and your spouse may want to take out life insurance for each other, even if you both work. Many couples rely on two incomes to pay monthly expenses, and if one spouse were to die, the other would have to cover those same expenses by him or herself.
Another advantage to buying life insurance sooner is that insurance gets more expensive as you age. And, if you develop a medical condition, you may not be able to get life insurance at all. So if you think you might need life insurance in the future, the best time to get it may be now while you’re young and healthy.
How to buy life insurance
When you decide you need to think about life insurance, determine how much life insurance you need:
- Multiply your annual income by the number of years you want the insurance to cover.
- Add any fixed expenses (like kids’ college tuition).
- Finally, subtract any non-retirement savings or investments you have that could cover some of these costs in lieu of an insurance benefit.
Next, talk to your local insurance agent or get free life insurance quotes online.
You should also take time to learn more about the differences between term life insurance and whole life insurance, which is sometimes sold as a combined insurance and investment product. Lauren and I stuck with simple term life insurance, and recommend you do, too.
*In this case, you wouldn’t need a ton of insurance, only enough to cover the outstanding balance on the loan. Although finance companies sell policies that will payoff a loan if you die, these policies don’t offer as much value as a traditional term life policy. For one, the benefit is limited to the balance of the loan at the time of death, not a fixed dollar amount. Also, it’s important to note that you do NOT need this kind of policy unless you have a cosigner who would still be legally responsible for the debt after your death.