Life Insurance: How Much and What Type?

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Have you recently been considering life insurance? Or, maybe you already have life insurance, but you’re thinking about increasing your amount of coverage? Within this post, I’ll discuss what type of life insurance is right for you, as well as how much coverage you should have.

Term Life Insurance vs. Whole Life Insurance

Before I get started, I want to tell you how impressed I am of you for even reading this far. Insurance has to be the most dull topic on the earth. The paperwork is boring, there termonology is a yawner, and the whole idea of life insurance is just a downer in general. But, you chose to read this post because you realize that insurance is extremely important, especially when we’re talking about Life Insurance.

Term Life Insurance

Term insurance is exactly what it says it is: it’s insurance on your life for a certain term, or period of time. The most common terms are the 10 year and the 20 year.

If you decide that the 10 year term insurance is right for you, then here are your potential scenarios:

  1. You pass away within the 10 year term, and your beneficiary receives the cash payment from the insurance company.
  2. You live beyond the 10 year term and receive nothing from your monthly payments (that you’ve been making every month for the past 10 years).

Whole Life Insurance

Whole life can often be a bit more tricky. Since the general idea of this policy has been deemed “a waste of money” and a “terrible purchase for the buyer”, there are now many variations of whole life. Each of which try to sweeten the pot for the purchaser.

Whole life insurance is often more complex than term life insurance, mainly because it allows you to carry the policy for the rest of your life. As you probably recall, term insurance only allows you to carry the policy for a certain period of time.

Here are the main benefits for Whole Life Insurance:

  • dividend payments
  • a portion of your money going into investments (with Variable Life)
  • the monthly payments typically do not increase with inflation
  • the guaranteed payment to the beneficiary upon your death

Which Policy is Right For You?

If you are still young (less than 40 years old), you shouldn’t even think about Whole Life coverage. Here’s how the wise insure their lives:

At a young age, the couple should purchase a term life insurance policy for each of them and insure themselves for 20 years. Because of their health in their young age and their likelihood to live for many years, their payments each month would total about $20 (for both of them combined!). Keep in mind that whole life insurance would cost about 10 times that!

While they are under their term life “umbrella”, the young couple focuses on getting rid of their debts and building their wealth. After 20 years, they have already built their net worth to $1 million, and have no need for life insurance any longer. Their payments stop in their 20th year and they continue through life, not having to worry about money ever again.

You may think this is a fairy tale, but there are plenty of people that have used this method, and they are incredibly wealthy today!

If you were to invest in whole life, you monthly payments might increase as you get older, and if you decide to cancel your coverage, you will be left with nothing (except maybe your investment account of a few thousand bucks if that’s part of your policy).

What If You’re Older?

If you’re over 40 years old, term insurance is most likely getting costly, but in all honesty, so is whole life. At this point, it may be a toss-up, and ultimately, it’s going to depend on price. Once you find out how much whole life will cost you, decide if you could earn the policy amount by investing instead. If you think you can, then try to get term life insurance for the short term, while investing your remaining money for the long term.

Get a Quote

Be sure to check out these rates for yourself. Get a life insurance quote today! You’ll see how much cheaper the term life insurance policy is, and don’t worry about that fact that you may receive nothing from this plan. At $10 a month, it’s a cheap price to pay for peace of mind.

Do you have life insurance yet? If not, what are you waiting for?

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

8 Comments

  1. I have 20 year term and hope to be in a position in the next 10 years such that I no longer need life or disability insurance.
    cashflowmantra recently posted..Emergency Fund FAIL!

  2. I think most people are better off with term life coverage. That said, there is room for whole life policies in the context of tax avoidance.

    A wealthy couple who cannot make use of a ROTH account due to income restrictions can use a whole-life policy for 1) tax-free asset growth/accumulation 2) tax-free “withdrawals” in the form of loans against the accrued value. Whole-life makes a lot of sense…for .1% of the population. 😛
    JT recently posted..Trouncing the S&P, but When Do I Take Profits?

    • I agree with you JT, most people should purchase term and then invest the rest of their money for their future retirement.

  3. I just get the largest cover that I can afford really. Just want to make sure that it covers my family if I pass.

    • While I commend your willingness to have your family covered, I think that there is such as thing as too much life insurance. If your family could live their current lifestyle for 10 years after your passing, then you have enough insurance. You really don’t need more than that, especially if you are pinching your pennies already!


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