Life insurance: Everything you need to know about taking care of what matters most

Life Insurance
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Most of us don’t like talking about life insurance too much, because when we talk about life insurance we inevitably have to talk about death. Life insurance covers the financial needs of those left behind after we’ve gone.

But just because we don’t like talking about it doesn’t mean we shouldn’t. It’s generally recognised that most American households should have life insurance cover, even if many don’t.

In fact, one recent study found that that while 80% of Americans say that most people need life insurance, only 68% say they personally need it and only 59% own some form of it. 

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In addition, a study by employee benefits provider Unum found that 40% of the 1,000 adults it surveyed in the United States said they don’t have or don’t know if they have a life insurance policy to financially protect their loved ones.

While some of us don’t have any life insurance cover at all, others are critically underinsured, meaning the amount paid to our loved ones in the event of our deaths won’t be enough to cover their expenses or perhaps even pay off all of our debts. 

Life insurance industry group LIMRA has calculated that nearly half of U.S. households are underinsured, with an average coverage gap of $200,000. The group recommends individuals have between seven and ten times their salary in life insurance cover.

Why are so many of us so casual about a subject that is so important? The Unum study draws the obvious conclusion. Around 35% of respondents said thinking about what would happen to their family should they die unexpectedly was a top cause of anxiety; only going to the dentist rated higher. When we are uncomfortable with something, we often ignore it.

We really shouldn’t. Here are two good reasons to think seriously about life insurance.

Think of your dependents

None of us like thinking about life carrying on without us, but if you have anyone who depends on you financially you have to, no ifs or buts. For those of us with a spouse of dependent children, taking out life insurance is pretty much a no brainer. If you’re not convinced, think about what the lives of your loved ones would be like without your financial support. 

Who doesn’t need life insurance? If you can honestly say that nobody would suffer financially after you’ve passed away, you don’t need life insurance.

Life insurance provides peace of mind for both the policy holder and those who would benefit from the policy should the holder pass away. It can be a great psychological comfort, and if the worst were to happen it would mean grieving family would have one less thing to worry about at their most difficult time. With a good policy, they would know that funeral expenses, mortgage payments and lost income are all covered. Remember, funeral costs alone can top $11,000 on average.

So how much life insurance should you get?

This will depend to a large extent on your life and personal situation. A rule of thumb many financial advisors use is to buy enough cover so that your family can live off the interest, thus guaranteeing an income for as long as they need it. You will probably want to add in debts and mortgage payments, and ensure that any payout can cover those as well, along with a sum to pay for your children’s college fees.

Of course, it also depends on what you can afford. It’s worth noting here that term life plans - policies that cover you for a specified number of years - are considerably cheaper than whole life plans that cover you for the span of your life. If you can’t afford the latter, the former is still a very good idea. In fact, even if you can afford whole life insurance, term life may well be a better option. Simply be prepared to buy another policy when a term life plan runs out.

Whole life is useful for a different reason though. It is often marketed as an investment, because it has a cash value and with many policies you can draw out of it or borrow against the amount when you are still alive. However, don’t choose a policy solely on this: there are generally more lucrative ways for most people to invest money.

When should you get life insurance?

You don’t need to take out life insurance when you’re young and healthy, right? 

Actually, you should, if only because premiums are a lot cheaper in your 30s than in your 40s and 50s. People in their 40s can expect a rate increase of 5-8% for every year they wait to get insurance. People in their 50s can expect to see a 12% increase every year. The sooner you get life insurance, the better. 

You probably can afford life insurance

Despite that, you probably can afford life insurance, whatever your age. It might be term life rather than whole life, but you might be surprised at how affordable it is. While it’s true that taking debts, mortgage payments, lost income and children’s education fees into account ends up in a very big number, premiums can still be entirely manageable. In fact, industry group LIMRA reckons that 80% of people overestimate the cost of term life insurance. Millennials, in particular, overestimate the cost by a whopping 213%.

Find out what it doesn't cover

A final consideration before you buy life insurance is what it doesn’t cover. Not every provider will be crystal clear about this, so always ask. Common reasons for not paying out on a policy are death by suicide or death from dangerous activities. The latter can include riding a motorbike, so if you’re a biker make sure you get the cover you need. 

So now you know all you need to about life insurance, head over to our buyer’s guide {{LINK}} and provider reviews {{LINK}} for an in depth view of who is offering what... 

Hugh Wilson

Hugh Wilson writes about business and the interface of business and technology for a range of titles including The Guardian, Telegraph, Independent, The Times, BBC and MSN. He has written a large number of articles for Top Ten Reviews about insurance matters, accounting, and some business-to-business software and appliances.