Thursday, October 30, 2008

Life Insurance

Perhaps this is a topic that newlywed couples are afraid to talk about. But I urge you to start the conversation today...

It can be awkward to talk about death, but I will do my best to explain life insurance in the most general terms.

If you have a life insurance policy in place when you die, the benefactor (spouse, children, parents, siblings - it's your choice) will receive a sum of money equal to that which was agreed upon when the policy was put into place.

Like any kind of insurance, the cost of this type of policy depends on some determining factors.

There are two basic kinds of life insurance. I will explain the first, Term Life Insurance, in more detail as it is the choice I highly recommend to anyone.

If I have a 20 year term life policy for $500,000, and I die within 20 years, my wife will receive a check for $500,000. The determining factors I mentioned are the length of the term (usually 15, 20, or 30 years) and the amount the policy pays out.

For a young couple with no kids, I recommend getting a policy that pays 5 to 10 times the annual salary for the breadwinner, and at least enough to cover funeral costs and grieving time for the other spouse. After kids enter the scene, especially if one spouse is at home, I would increase the breadwinner's policy to at least 10 times the salary. For the spouse at home, consider the costs of a nanny or not working for a few years.

Obviously, the younger and healthier you are, the cheaper it will be for you to obtain this kind of insurance. I should mention that at the end of the designated term, any money you paid in is gone. But this is no reason to be upset considering you are still alive and well.

There is a second type of life insurance category called Investment Policies (whole life, universal life, variable life) where you pay into it on the same regular basis, but the premium will be higher. The premiums are invested by the insurance company and you can even take out a loan against the cash value of the policy. People see this as an investment opportunity, but I disagree. The increased premiums are not worth the high-risk investment.

With Term Life the premiums are fixed (and cheaper) and you can invest the extra money you would have paid into an Investment Policy into something more stable.

No comments: