Your life insurance needs change over time. Here’s what you need to know about life insurance depending on your stage of life.
Life insurance is one of those things that most people should have. While we don’t like thinking about it, no one knows when their number is going to get called. And if you have a family that depends on your income, having a life insurance policy isn’t something you should go without.
The life insurance policy you need as a newlywed, when you start a family, and when you near or enter into retirement is different. With so many different life insurance brokers and plans available to choose from, where should you start?
Here’s a quick guide to buying and updating your coverage throughout your lifetime. As complicated as insurance can be sometimes, this article will help break life insurance needs down for you so you can work with your financial professional to select the right policy for you and your loved ones.
Generation 1: Young Adult – Newly Married
Once someone depends on your income, you should start carrying life insurance. If your husband or wife would not be able to afford the mortgage or rent payments without your income, a life insurance policy will enable them to pay the bills in the event of your untimely passing. Also, life insurance premiums are the cheapest when you are young and healthy. You can benefit greatly from good insurance premium rates when you get life insurance in your 20s and 30s.
Generation 2: Family with Small Children
Maybe you’ve procrastinated and you didn’t open a life insurance policy when you were newly married. If you have small children now, you absolutely need life insurance – arguably more than any other generation we’ll cover in this article.
And if you already have a life insurance policy (good job!), now is the time to update your policy. With a family, your life insurance coverage goes beyond being able to help your family pay the monthly bills should something happen to you.
Your life insurance will help your spouse continue to save towards all the financial goals you set together. From retirement planning, education planning, and future healthcare costs. When a spouse dies suddenly, their death is devastating to the entire family. By having adequate life insurance, at least your family’s finances are not devastated as well. You can ensure that your surviving spouse can pay off the house and cover any other expenses your income would have helped satisfy over your lifetime.
Generation 3: Middle Aged
When you are in your 40s and 50s, your life insurance needs can change a bit. You likely still have dependent children, but they may be preparing to fly the nest soon. You are also much closer to retirement and your policy you opened when you were in your 20s or 30s may be set to expire soon.
At this stage of life, your finances may be a bit more complicated than they were in previous decades. Your goals and lifestyle in retirement are also likely to be much clearer now. It will be a good idea to discuss your current needs with your financial advisor to assess what coverage will be best to keep your loved ones on track financially if they were to lose your income today.
Generation 4: Empty-Nesters & Pre-Retirees
After your children are gone, your life insurance needs are not as great as they once were. But that doesn’t necessarily mean you should go without life insurance. At this stage, you revert back to a similar situation you were in when you were newlyweds. The life insurance you have helps to cover your spouse and is mostly focused on reaching the retirement goals you and your spouse have spent a lifetime working towards.
Generation 5: Retirees
Do you need life insurance after you retire? If you’ve spent your life saving up for retirement and are financially set, the answer is no. At this point, you have secured future financial needs with your retirement nest egg, your children don’t depend on your financial support, and life insurance is no longer a necessity.
There may be a handful of unique circumstances where a life insurance policy may still be beneficial to your situation. However, there are likely other financial tools available to help secure a family financial need beyond your death at this stage of your life, and so it is highly encouraged that you work with your financial advisor to determine the right course of action.
How much is enough?
While there are calculators out there that can help you get a precise value for your life insurance policy, it’s never a bad idea to be generous when it comes to your policy amount. When in doubt, don’t hesitate to speak with your financial professional (ideally a fee-only fiduciary who doesn’t have a conflict of interest) about what amount will be adequate for your family.
Typically, the amount of your life insurance policy should increase as your income and expenses increase during the years you should have it the most: 30 to 60. You also must take into account the number of years your family would still rely on your income. To be sure your policy is enough, make it easy and just take your gross income and times it by 10. This is a good starting point if you are younger with young children or plan to have children.
Term Life Insurance vs Permanent Life Insurance?
In most circumstances, term life insurance is the only type of life insurance you will ever need. It is the least expensive and will provide the death benefit to your dependents. You simply select the term coverage – amount of years: 10, 20 or 30 and the death benefit you want your family to be entitled to if you were to die prematurely.
Permanent forms of life insurance, like whole life insurance, aren’t necessary if you are proactively planning for your financial future. Whole life insurance is significantly more expensive than term life insurance and provides lifelong coverage, which you likely won’t need. Whole life insurance also includes an investment-related component, which is unnecessary. You don’t need to use your life insurance as a means to invest. Life insurance where the value of your death benefit to your loved ones is based on the performance of investments that comprise your policy is not ideal.