Matching Your Life Insurance to Your Phase of Life
As your life evolves, so do your life insurance needs. There’s no one “right” kind of life insurance to buy at a certain age; we can’t tell you what kind of death benefit you “should” choose at a given phase of life. Like all the decisions you make around financial planning, your life insurance decisions are highly personal. Consider all your options and stay open to making adjustments as necessary.
You May Have Different Life Insurance Needs at Different Stages of Life
Everyone’s unique. Your life insurance needs will largely depend on your specific life circumstances, and they might change over time; it’s common to have different insurance needs at different stages of life. Consult your financial planner, but consider factors including:
- Whether or not you have children. The birth of a child is often the event that inspires people to buy life insurance for the first time. Parents who have young children may want to buy substantial life insurance in case they die while their kids are still young enough to need full-time care. When their kids reach adulthood, parents may want to pull back on life insurance. You may still want to be able to provide a death benefit for your kids, but there’s less pressure to provide for day-to-day expenses once they’re adults.
- Your age. Someone in their early 20s can generally afford to have less life insurance than someone in their 30s, 40s or 50s might need. By the time you approach retirement, you may need even less life insurance, especially if you already have a plan to pay for funeral and/or death-related expenses.
- Your financial picture. Your overall financial health will always affect your insurance needs at different stages of life. Are you carrying debt? How much do you have saved? What do your family’s expenses look like? What kind of investments and retirement plans do you have in place? Do you have a long-term care plan? Your current financial picture affects how much you can afford to pay in premiums and how much support your loved ones may need if you die.
- Your marital status and family obligations. If you’re married, does your spouse also have a life insurance policy? Do you provide financial support for family members other than your children? You’ll want to consider all your family ties when deciding how much life insurance to buy.
These are just general starting points. Determining how much life insurance and what kind of policy you need should be part of a larger conversation with your financial planner.
Comparing Your Life Insurance Options
Life insurance is available in a variety of policy types. Most life insurance policies fall under one of two umbrellas: term life or permanent life.
Term life insurance provides coverage for a predetermined number of years. If you die while your term life policy is in place, your beneficiaries get a death benefit. The size of your premium payments is determined by how much of a payout you want, how long you want/need the policy to last and your health status. You’re not guaranteed any payout from a term life insurance policy. It functions a bit like car insurance in this way; you’ll get a benefit if something happens while you’re covered, but aren’t entitled to anything once the term ends.
Permanent life insurance covers you for your entire lifetime. Whole life is a popular kind of permanent life insurance. Premiums are fixed, so you’ll pay the same amount each year. Like term life insurance, whole life insurance provides a death benefit to whomever you specify as a beneficiary. Unlike term life policies, whole life policies also have cash value. Some of the money that you pay in premiums is set aside and steadily grows over the life of your policy. It may be possible to withdraw or borrow against that money if necessary, or even put it toward your premiums.
Variable universal life is another kind of permanent life insurance. It varies from whole life insurance in one key way. A variable universal life policy provides a death benefit and has the cash value feature, but also has an investment component. Your cash value is tied to sub-accounts, which invest in stocks and bonds like a mutual fund would. You get to make some decisions about how to allocate your cash value. If the investments don’t perform well, you may need to pay higher premiums to make up for the lost assets—but when the investments do well, your cash value grows (up to a maximum cap). This may allow you to afford a larger death benefit for your heirs, and/or give you access to more cash if you need to borrow against your policy.
While there are many options when it comes to life insurance, and we can’t touch on them all here, one other worth noting is universal life insurance. It is a common option that many people choose when completing their estate planning because it’s similar to term life insurance, in that it provides a death benefit as long as you maintain the policy, but there is no term limit. It does not have the investment component of variable universal life insurance.
Choosing the Right Life Insurance for You
So which life insurance product is right for you? Again, you have different insurance needs at different stages of life, so this might change over time. Term life tends to be favored by younger people, especially new parents, because it can be fairly cheap and will provide coverage while the children are young.
Whole life insurance and variable universal life are generally favored by people who are a little further along in life. These kinds of policies may be a good fit if you’ve maxed out your other retirement accounts and want to combine life insurance with another tax-advantaged way to grow your money. Variable universal life has the added benefit of flexible premiums, which allows your coverage to grow with you as your needs change.
Having the right amount of life insurance lets you protect your loved ones and maximize your money, instead of spending too much on premiums for more insurance than you really need. It’s a critical part of creating a holistic financial plan that works for every part of your life. The good news is, you don’t have to figure this out on your own. Don’t worry too much about dollar amounts just yet. Through discussion with your financial planner, you’ll be able to identify the appropriate policy for your current phase of life. Sachetta Callahan has a commission-free relationship with an insurance company we trust called DPL. That means there’s no financial incentive for anyone to push you into one product or another.
Joseph Sachetta, CFP®, CPA/PFS, MBA, MST, For over 40 years, Joe has worked in finance and accounting. He is a Certified Financial Planner, and a Certified Public Accountant. Joe’s passion lies with helping his clients strike a balance between living for today and saving for tomorrow.