Life Insurance Explained

What To Insure: Life Insurance Replaces Income

But, there’s more than one kind of income. To decide whether you need life insurance, think about what needs to be replaced if you or your spouse dies. The easiest answer is a paycheck, the money you and/or your partner earn working outside the home, but there’s more to it than that.

Dual Income Couples

If you both make about the same amount of money and you don’t have kids, then the only lifestyle that insurance would protect is your own.  After that, it gets more complicated. 

Single Income Families

If only one partner is working, then replacing the income of the working person is fairly easy to calculate. But what if the spouse who works in the home dies? Childcare, home cleaning and repair, and the laundry all still need to be done, and these services bring an ongoing cost. Insuring the stay-at-home spouse insures your family’s lifestyle.

Dual Income Families

Resist the urge to fall into the “my spouse has a great job” trap. All those childcare and home maintenance costs count in this situation too.  Plus, odds are, you counted on both incomes to make your monthly mortgage payment, heat the place, and turn on the lights every night.

How To Insure It: Term Insurance

Term life insurance runs for a set period of time, such as, until your youngest child is 21 years old. It’s inexpensive, and offers the greatest amount of coverage for least amount of dollars. Premiums stay the same for the term of the policy. At the end of the term, if you need to buy another policy, the premiums will go up. No benefits are paid unless the person insured dies during the term of the policy.

How To Insure It:Permanent or Cash Value Insurance

The essential difference between term insurance and cash value insurance is that cash value insurance is usually designed to stay in force permanently (until you're 95 or 100 years old), typically for your whole life. The premiums are set when you buy the product, and they don't change.  The industry uses lots of names for cash value policies: Whole Life, Universal Life, and Variable Life. 
Cash value policies are typically more expensive than term, but that’s because, if they're properly designed, they can do more for you than just provide a death benefit. Cash value policies can be used as:

• A Retirement Supplement
• To Pay Business Debits
• To Pay Off Your Mortgage
• As An Education Fund