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Buying The Right Life Insurance For Your Family

By on Mar 4, 2013 in Insurance | 7 comments

life insurance

Do you have the right life insurance for your family?

How much life insurance to buy? After getting married and having children responsibilities start to set in. You’re putting a little bit into your 401(k), you’re reading about the benefits of a Roth IRA, and you know that you need to buy life insurance.

Although life insurance should be simple many times people are overwhelmed with all of the different options. How much life insurance should you buy? Should you buy term or permanent life insurance? What if your employer offers life insurance, should you buy it through them? Let’s tackle these questions and see what makes the most sense for you and make sure you don’t make any mistakes in buying life insurance.

It’s All About the Family

When it comes to buying life insurance to protect your family there really isn’t a right answer. Sure there are some general rules of thumb out there that you could follow. For example, purchasing a face amount 10 times your current salary is one you here often. But there are many factors at play if this makes send for you. Some of these include:

1. How much can you currently afford on your life insurance premium?

You don’t want to be life insurance poor, so you want to be careful and not pay too much for life insurance.

2. How long do you need it for?

Is this just to cover your mortgage or do you need it more for a long term income replacement need.

The fact of the matter remains though it is important to have some life insurance to make sure that your family has protection.

If the cost of life insurance is a non-issue, then typically I always suggest that a young family purchase 20 times their current salary and not 10. Why you ask? Because as you age you should be making more money getting career advances and pay raises along the way to where 10 years from now the income replacement need is much higher.

Compound that with the fact that you’ll be getting older and you never know what health conditions may arise. Locking in a low premium when you’re much younger and much healthier is the equivalent of locking in a 30 year mortgage at a 3% interest rate. Lock it in while it’s cheap!

For me personally I took out a $250,000 30 year term policy when my wife and I first married. I thought that was plenty until we had our first child. I then realized that we didn’t have nearly enough.

Upon the birth of our first child I immediately added a $500,000 30 year term policy and kept the original $250,000 policy. Hindsight being 20/20 I would have bought more life insurance when I was younger but luckily my health was still intact, so it was relatively a non-issue. I was lucky. Many aren’t.

Should You Buy Term or Permanent Insurance?

I have to be upfront when I say that I’m not a big fan of whole life insurance. I’m sure there are situations where it could make sense, but most of the time that I see it used with a young family they’re paying much more for life insurance coverage with a much smaller death benefit. Pinyo from Mooloanomy.com had the same revelation that he wrote about his post “Should I buy whole life insurance?“. The post does a great job of analyzing why it didn’t make sense for him. What’s amazing about the post is in the comments section where (greedy) life insurance agents attack him for making a decision that was best for him and his family.

Without question term life insurance is cheap. A healthy 30-year-old male can get $250,000 of coverage for 20 years for as little as $150 a year. Compare that to whole life insurance and you may be paying closer to $300 a month for far less coverage.

Should You Buy Life Insurance Through Your Employer?

This is a common question that I get from many individuals that feel that buying life insurance through their employer is so much more convenient. While yes I totally agree that it’s super easy to buy it through your job, but consider this; what happens when you leave your job?

I’ve heard of instances where an individual was leaving their job where they were covered under a group life insurance plan, but with their new job there was no life insurance coverage offered. Now if they wanted to buy life insurance they have to go to a third party and get a medical exam.

For a healthy individual that wouldn’t matter as much, but what if you had a high risk condition such as high cholesterol, high blood pressure, diabetes. These type of conditions make purchasing life insurance that much more expensive. Often times I suggest that people buy life insurance through a third party, i.e. independent life insurance agent, and lock it in for 20 to 30 years. That way if they ever leave their job they don’t have to worry about trying to get new life insurance coverage.

As far as the cost of buying life insurance through a third party versus buying it through your work when you’re young the cost is almost identical. If you want to do a cost comparison of what you’re paying through your job through getting life insurance through a third party you can get a free term life insurance quote online here. When shopping for life insurance I cannot stress enough to go through an independent agent that has the ability to use multiple carriers.

Every life insurance company is structured differently and your age, your geographic location, and health history will all factor in determining the price of your life insurance policy. Having an independent agent that can use multiple carriers and shop around for you will help keep more money in your savings account than going through the life insurance company.

Jeff Rose is a certified financial planner and an Iraqi combat veteran. He runs the blogs GoodFinancialCents.com and LifeInsurancebyJeff.com.

    7 Comments

  1. Great information! Our jobs in the funeral industry have really driven home the importance of life insurance. Families who do not have any insurance are left with huge funeral bills and other costs. Buying life insurance is an important part of protecting your family.

    Holly@ClubThrifty

    March 4, 2013

  2. Great tips! I worked in the life insurance industry for five years and really learned the importance of being properly insured, especially when you have a family. I love being able to buy insurance through an employer, because it’s generally cheap, but I never counted it towards my overall coverage that way I was not counting on it.

    John S @ Frugal Rules

    March 4, 2013

  3. I agree. Many of my friends are over-leveraged and underinsured. I’m afraid of what will happen during an emergency.
    We’ve each got a little over 10 years worth of insurance, but once we have children we’re thinking of going for 20 years. Being young, non-smokers really helps us keep the rates down.

    Justin@TheFrugalPath

    March 4, 2013

  4. Good information. Many people that take out life insurance policies end up taking too little (like you did initially) thinking that it is more than enough.

    I agree that term life insurance is best. Many insurance agents will sell you on the investment side of whole life, but it’s not an investment, it’s insurance! It’s just frustrating when their are agents out their that say they are looking out for you, but really only look out for themselves.

    Jon @ MoneySmartGuides

    March 5, 2013

  5. I increased my life insurance this year and I think it should at minimum allow the deceased spouse enough so they are out of debt and do not have to work for at least a few years, if not longer. That may be more than most people will say to get, but I think it’s important.

    DC @ Young Adult Money

    March 5, 2013

  6. Great post. Interesting pros/cons discussion regarding insurance through employer. Thanks!

    Tony@WeOnlyDoThisOnce

    March 8, 2013

  7. Group policies are very cheap compared to individual policies, and many are convertible when employees leave. Most don’t take advantage of the conversion because the adverse selection make the rates extra high.

    Group term life policies can give people a false sense of security. Often people get disabled, lose their jobs, and their group coverage. Because they have a health issue that can’t find an individual policy, and are stuck with the high cost conversion – if the group plan has one.

Trackbacks/Pingbacks

  1. Be Aware of Life Insurance Exclusions - […] are circumstances that life insurance companies use to get out of paying benefits upon the death of the policy …

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