Term Life Insurance
Term insurance is like an apartment lease. You are “renting” insurance. With term insurance, you pay a set premium on a regular basis, and your loved ones are guaranteed a set amount upon your death during that term for which you are covered, say 10 years. If you do not die during that term, the coverage and the premiums go away at the end of the term.
Buyers of term life insurance typically are interested in covering the following after death:
- Loss of income to the family
- Short-term debts or needs
- Money for raising and educating children
- Paying for a mortgage or college expenses
- Funeral and final medical expenses for the deceased family member
Cash-Value Life Insurance
Cash-value life insurance includes whole life, universal life and variable life insurance. These policies provide a benefit upon death, along with a savings component.
Part of the premium covers the death benefit and another part goes to savings (the cash value), where earnings accumulate tax-deferred. You can access the cash value during your lifetime, but that may affect the death benefit.
Buyers of cash-value policies are interested in permanent life insurance protection. Expenses and fees heavily reduce the savings component, however, especially in the early years of the policy.
How Much Life Insurance Do You Need?
When buying life insurance, consider these guidelines:
- You will need enough insurance to cover what your household spends (on average) each month. Use the SAM's Budget Worksheet to track your monthly expenses. Don’t guess — make sure your dependents can live comfortably each month.
- Calculate how much of your family’s spending comes from your income, when you think you will retire and how much your loved ones might expect as a return of the insurance payout to be able to make up for your yearly lost income.
- Include what you normally save each month. If you don’t currently save on a regular basis, determine an amount that your family might need in savings.
- Consider funds your family might need for future purchases and expenses such as cars, college or retirement.
If possible, it is wise to seek professional advice from a financial planner when calculating how much life insurance you and your family might need. You also should consider inflation because the value of the dollar will erode and affect what the insurance payout can buy in the future.