When you are young, your responsibilities in life can change quickly. Within a few years, you can go from single and dependent-free to married with children, a mortgage, and new savings goals. What are you doing about life insurance?
Because life changes so quickly, proper life insurance protection is the most important financial box to check for young families. If you are past this stage, do your young family members, friends, and associates a favor and share this article!
Why Do Young Families Need Protection?When you were young and single, you probably did not need life insurance because no one depended on you for financial support. Now, things have changed. Imagine if you died and your income stopped. Would your spouse be able to earn enough to financially support your children while paying the mortgage, making monthly student loan payments, saving for kids’ college, and accumulating for his/her own retirement? The answer is likely “no”. Life insurance is the best way to solve that problem. But you don’t have a lot of free cash flow from your budget, right? That’s okay. Life insurance is cheaper than you think! Let’s do a little education first.
Different Types of Life InsuranceFor simplicity purposes, there are two primary life insurance options: whole life and term. The nice thing about whole life insurance is that it is permanent. As long as you pay the premium, your family will receive a death benefit. However, whole life can be expensive, because your premiums are paying for insurance protection as well as building cash value that can be borrowed, used to pay premiums, or even withdrawn in the future. Whole life is sometimes sold as an investment vehicle combined with insurance protection.
Term insurance is less costly than whole life, but does not build cash value. It is simple and straightforward insurance protection. You pay an annual or monthly premium for a specific period of time, such as ten, twenty, or thirty years. Once the insurance time period has lapsed, your coverage ends as do your payments. You can terminate a term policy at any time and your life insurance protection goes away penalty-free. Some people ladder multiple term insurance coverages to terminate as their family insurance needs decrease (children are through college, mortgage paid off, sufficient assets accumulated, etc.).
What Type Should You Purchase?Everyone’s personal situation is unique, but typically term insurance is appropriate for young families, but many middle-age and older persons prefer this type for their situation as well. Again, it is low cost protection for a specific period of time with a coverage amount unique to your financial needs.
There are situations where a whole life insurance policy should be considered, such as when the need for coverage is permanent, your estate plan requires insurance to provide liquidity, or there is concern for future insurability.
What’s Your Need? Cost?You will take financial pressure off your family by purchasing enough life insurance to payoff family debt, fulfill savings goals, and provide a lifestyle that would not be attainable with one income.
To illustrate, let’s assume that today you have an outstanding mortgage of $250,000 plus a shortfall for your desired college savings of $100,000 and $150,000 for family needs. Given this situation, you will need a $500,000 life insurance policy. Let’s further assume you are a 30-year old male, 6 feet tall and 185 pounds, no serious health issues, and residing in Indiana. The cost for a $500,000 thirty-year term policy is around $34 per month or approximately $400 per year!
Any time during this thirty year period, if you died, this protection would provide a level of financial security for your family. If you survive, the policy terminates, but at that time you will be 60 years old, hopefully your mortgage paid off, kids through school, and you are nearing retirement. If you have saved appropriately during your working career, life insurance coverage would no longer be needed for your spouse’s benefit.
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We have helped our clients answer these questions and more. If you want a clear understanding of your financial future, and need help making changes to reach your goals, schedule a consultation and we can get started.
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