Did you know that September is Life Insurance Awareness Month? It is according to the National Association of Insurance and Financial Advisors (NAIFA).
You are probably thinking, “That’s great, but ummm, isn’t this the last day of November?!?!” That’s a great question. I wrote this article back in September, but a series of unfortunate events brings me to publishing it today.
It’s one thing to procrastinate in publishing a life insurance article. It’s quite another when it comes to buying life insurance.
Let’s get back to NAIFA. They have a scary message for America:
1 in 3 households would have immediate trouble paying living expenses if the primary wage earner died, according to the 2016 Insurance Barometer Study by Life Happens and LIMRA. And the study also found that 40% haven’t bought life insurance or more of it because they’re unsure of how much or what type to buy.”
I take away two main thoughts from that:
As they used to say at my college, “Look to the left of you and look to the right of you. One of you isn’t to graduate in this major.” With life insurance, it’s look to the left and look to the right. One of you isn’t prepared if an unexpected death were to happen.
We need to talk more about what types of life insurance is available. Personal finance bloggers (starting with me!) need to do a better job.
I’m going to set aside the question of how much life insurance to buy for another article in the next couple of days or weeks. For now, let’s cover the two main types of life insurance to buy.
What are Term and Permanent Life Insurance?
Term life insurance is what you might expect… insurance for a term (number of years) of your life. Your coverage lasts for your policy’s particular term, like 10, 20, or even 30 years. At the end of the term, the level premium expires.
Permanent life insurance is also what you might expect… a permanent insurance policy designed to last your entire lifetime. As long as you keep paying the required premium, your beneficiary will receive the death benefit payout when you die.
Pros and Cons of Term and Permanent Life Insurance
The main pro for permanent life insurance is that as long as your policy is in good standing, your beneficiary will get the payout of the money no matter when you pass away. The con is that you may have to pay the premiums for your entire life. Let’s say you buy it at age 30. The price might seem inexpensive
cheap, but if you are lucky you’ll be paying for it for more than 50 years. That’s a long time to be paying money, month after month.
The main pro for term insurance is that it is less expensive. You and the life insurance company have a shared interest in you living past that term. You want to life past the term, because living is kind of the main goal in life. The insurance company wants you to live past the term, because then they don’t have to pay out the death benefit to your beneficiary. That’s the main con, you might spend money on your premiums, and if you live past your term, your beneficiaries don’t get a death benefit if the policy is not renewed.
At first glance term life insurance might not sound attractive. In the best case scenario, you are paying an ongoing premium to the insurance company. However, we are talking about insurance and a basic principle of that is paying money in hopes that something doesn’t happen. You might have fire insurance on your house. You aren’t looking for a fire to happen. You simply want to know that if it does happen, the money you receive will get you through the disaster. And if you’re lucky, and your house never burns down, you don’t get the money you spent on fire insurance back. You just chalk it up to the price of financial protection.
So how should you use term life insurance? Here’s an example from my own life. When my wife was pregnant with our first son, I bought a 20-year term life insurance policy. I’m not looking to die in the next 20 years, but if the Land Shark appears at my door tomorrow, my wife will receive enough money to ease the burden of raising the kids. That’s true even though I’m a stay-at-home dad. I still greatly prefer Plan A: living, but I can sleep well at night knowing that either way the kids will be cared for. We have similar term insurance for my wife… I’ve read that the Land Shark prefers females.
By going with term insurance, we were able to pay a lower, affordable premium. You might ask what happens after 20 years. The hope is that the kids can fend for themselves by that time. If not, we still have numerous other investments in retirement accounts and real estate. With 20 years of investment growth, the surviving spouse could use some of that money to give a little helping hand without the insurance money.
As usual, you need to consider what’s best for you. I think it’s always smart to consult your financial professional when making financial decisions like these. That qualified person will be able to explain the pros and cons of various life insurances better than I can in this space.
The above article is sponsored by Midland National. However, these are my own words and thoughts.