Friday, August 17, 2012

Do You Need Life Insurance?

Before I became an agent with Aflac, my instinctual answer to "Do you need life insurance?" would have been...of course, everyone does. 

Now, I would depends. 

First, why do you think you need life insurance? Second, what kind of life insurance policy do you think you need? Third, how much do you need?

In my opinion, almost everyone should have at least enough money when they die to pay for a funeral. The average funeral cost is around $6,000 and it has been rising every year since 1960. Of course, if yours will be an extravagant party you might want to plan for more.

Other than for funeral expenses, people typically need life insurance to cover the expenses left behind for their loved ones.

If you own a home and have a family, you need to have enough life insurance to cover those expenses. Some people also want to have enough to cover college expenses if they die while their kids are young.

My own father had enough life insurance that my mom was able to move us closer to our family, buy a new home, and a new van. It really took the financial burden off of her, allowing her to make decisions that benefited our family. 

If you're 65 with no kids at home and you own your own home you probably don't need a large life policy. I don't think it's a good idea to have a large life insurance policy as a means of inheritance for your family. 

Thankfully, Aflac only sells two types so I don't have to know about all the different kinds of policies out there. I get to focus on Whole and Term. Even then, I find there are many people who don't know the difference between the two.

My co-worker Rachel has a great analogy.

Whole life insurance is like owning a home. It's "yours" as long as you live (and you make your payments/property taxes, etc) and traditionally builds in equity. It's an investment for most people. One of the benefits, like home ownership, is that you can borrow against a whole life policy's cash value once it has built up enough. Whole life is always more expensive than Term policies.

Term life is like renting a home. It's only yours for a set period of time...after which your landlord (or insurance company) will likely raise your rates if you want to keep your policy. Most younger couples with kids pick a 20 or 30 year term policy because it is much less expensive than a whole life policy. After those 20/30 years, they may not need to cover the same liabilities. Their kids should be moved out, through college, and they may even own their home with no mortgage payments. 

Once that Term is can elect to renew at a higher rate or stop your policy.

There are other kinds of life policies (i.e. Universal) but I don't know a lot about those. 

This is obviously going to vary based on your needs as identified above. I personally have enough so that if I were to pass my husband would be able to take time away from work to figure out what he's going to do...and for him to pay for a full time nanny, which he would need if he remained in his current career (which has required night and shift work). He needs much more coverage though because if he passed away I'd be in big trouble as he is the primary earner in our family. 
"insurance is intended to provide the income you are not able to provide due to an early death; it is payable only if you die. A separate savings element, possibly in the form of the accumulated cash values in the insurance policy, is needed to cover such expenses if you’re alive. People with children should have a minimum of $200,000 per child in life coverage in addition to their other needs."
Life insurance shouldn't (in my opinion) be treated as an investment...ESPECIALLY a term policy. You can only cash in if you DIE! It's just one aspect of your financial planning for your future.

This article is also great as a resource.

* I am NOT a financial advisor. I do sell life insurance policies through Aflac and am able to consult intelligently about those particular policies. =)

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