It’s another edition of Molly’s Money! This is a series I have been writing on this blog for almost TWO years where I talk about all things personal finance. Check out my previous posts in the series here.
Before you click out of this post, let me assure you, I will promise to TRY and make this as quick and painless as possible. I know when you read the title of “Life Insurance” you’re immediately like, “Ughhh snoreeee.” . Let me get this out right now: If you are over the age of 18, you really, really, REALLY need to consider reading this post.
As I always say, I am NOT an expert and I am not a professional in this area. I just have A LOT of personal, life experience when it comes to this stuff AND I’m married to a professional financial planner and insurance guy… soooo, I know enough. 🙂 I also will say that this post is only scratching the surface on life insurance and is NO WAY the end-all be-all of insurance posts. I’m really going to try and simplify this as much as possible because it’s a super complex topic. The information I’m covering is really the basic information that I wish I’d had known when I was first learning about this stuff. SO, do some of your own research before making a firm decision!
Why would you even NEED or want to get life insurance? It’s about protecting and taking care of your family and loved ones in the case of you passing unexpectedly. That’s the basic bottom line of it all. If you were to die tomorrow (God forbid), would your family be taken care of? Would they be okay financially? Would they suffer financially because of your passing?
Now, the other question that I always get asked: What is the difference between Whole Life insurance and Term Life insurance?
-Whole life insurance is basically what it sounds like… it covers you for your WHOLE life. From the time you sign up until the time you die, you are covered under this particular policy. This can also be known as “cash value” life insurance. You pay in a particular amount of money (often a pretty hefty amount) and after a certain period of time, that insurance policy has a “cash value” associated with it.
-Term life insurance also is what it sounds like… it covers you for a particular TERM of life. So, say you get a 20-year TERM life policy, you are covered under that policy for twenty years. It’s insurance at it’s purest form.
Now, a cash value / whole life insurance policy SOUNDS awesome on the surface (and is pretty much the most common type of insurance people buy today, sadly), but it’s actually a policy that you’re totally losing money on. Many whole life insurance salesmen will try and tell you that a particular return on your investment is guaranteed and you’ll make all this money and it’s THE BEST and… it is, in fact, NOT. They’ll tell you that over time your payment is an investment and your money will grow and yada yada yada… it’s just not true.
Let’s say you get a $100,000 whole life policy… if you die, your beneficiary gets $100K. BUT, it also has a “cash value” that you can borrow against, etc… basically like an investment. Because of this, whole life insurance costs significantly MORE than term life. The average rate of return on a whole life policy is around 2% – and that’s over a period of many, MANY, many, many years. You can get a MUCH better rate of return by smartly investing your money elsewhere…
Plus, you’re more than likely going to be “over-spending” your days. In 20 or 30 years, you more than likely would NOT need the whole life insurance policy, and so therefore, you’ve wasted a lot of money over the years paying into something that just isn’t going to give you what you could have gotten in the end.
Why you should get TERM insurance…
Just to show you… my husband and I have a 20-year TERM level life insurance policy. Our insurance policy is for $500,000 on each of us. So, in that 20 year time period, if my husband dies (God forbid), I would get $500,000 to be able to pay off our house, pay for college for our kids, cover funeral expenses, and cover overall life expenses with the loss of my husband’s income. On the flip side, if I were to die (God forbid) within the 20 year term, my husband would get $500,000 to cover child care, pay off the house, funeral expenses, etc. etc. etc. to cover the loss of me.
Now, if my husband and I were to BOTH die in the 20 year term (again, God forbid), the beneficiaries that we have named to take care of Lilly, if she’s still under 18 at the time, (and other future children if applicable) would get $1 million to cover BOTH of us (since there’s a $500K policy on each of us).
Ultimately, TERM life insurance is just that, it’s INSURANCE for a period of time, or a term. The assumption is that you basically pay a lower monthly premium for term life insurance and by the end of the term, you’ve either got enough saved for retirement or saved to take care of loved ones in case something happens to you.
If within the next 20 years something were to happen to my husband or me, we’d most likely NOT be in a financial situation to be able to take care of our family after we’ve passed. The cost of funerals, the cost of living, the cost of COLLEGE for our kids, etc. – we would not be able to do that without term life insurance.
But, if after the 20 year term is over, if we plan right, invest correctly, and think about our financial future NOW (which we are), then we would be able to take care of our families after our passing outside of the term.
Does that make sense?
Term life insurance is also, BY FAR, the most affordable life insurance there is. A healthy 20-something can get term life insurance for less than $20 a month. My husband and I pay around $43 a month for our life insurance for the BOTH of us.
How much insurance should you get? About 10x your income is pretty much the standard rule of thumb. So, if you make $50,000, you should get a $500,000 policy.
So, in short, that’s the BASICS of whole vs. term life insurance. I know that I have TOTALLY over-simplified this, and that was honestly my goal. I want to just cover the basics to get you guys thinking about these things… because as morbid as this sounds, we really, REALLY need to be thinking about our families. God forbid something happen to us, we want our families and loved ones to be taken care of.
So often I hear of young parents who DO NOT have life insurance and that makes me cringe! Even young, single people… if you don’t have life insurance and something happens to you, think about the financial burden you are placing on your family to cover funeral expenses, paying off bills, etc. It’s a HUGE deal.
So, if you’re over 18… get life insurance. Seriously. Just do it.
If you have questions, more specifically about this PLEASE leave them in the comments below and I’ll be HAPPY to help answer them as best as I can.
What about you? Do you have life insurance? What questions did you have when you were first considering getting insurance?