Episode 16 That Budget

Today, we'll ask the question, Do I need to buy life insurance? We'll answer the questions: Do I need it? Do I already have some? Is it enough? What kind do I need or want? What will it cost? And we'll talk about some timing for insurance.

Do I need to buy life insurance? First what is the purpose of the insurance. If you're young and on your own, you might not need life insurance. But if you have a spouse, young children, a family member with special needs or parents that are counting on your income, you should consider life insurance to take care of them.

How much insurance do you need? Consider covering your end of life costs at a minimum. The average cost of a funeral and burial can be around $10,000 to $12,000. Your debts and final bills will have to be paid off and your assets and belongings distributed according to your will or state law. This process is called probate and there are court costs, filing fees, and attorneys fees. In most states, if it’s just your car and some personal belongings there's a simplified process, which is quicker and cheaper. Otherwise, estimate 3% to 7% of your assets, or around $20,000 on average. Consider carrying insurance to pay off your debts, like your home mortgage, your car, and any credit card debt. Insurance is paid directly to your beneficiary, usually within days.

The next think about is providing regular income to the people that depend on you.. A typical rule of thumb is to have 10 times your yearly salary in life insurance to care for your loved ones. But if you're a fairly young family with children 20 times your annual salary would probably be even more appropriate. This can seem like a crazy amount of life. But remember, you and your family were counting on your future earnings to live on, to save for retirement, pay for the children's education, and pay off the home you live in. Fortunately, insurance is relatively cheap when you're young. Over time as you crossed these milestones, your insurance needs will be less and less.

If you're single and don't have anyone depending on you, a very small policy to cover your funeral and burial and legal fees may be quite adequate, and could be as low as $20,000. If it's just you and your spouse, no children and you both work, 10 times your annual income may be adequate.

Next, Do I have that much insurance already? If you're working you probably already have employer provided life insurance called Group Life Insurance. For active duty military there’s Service Members Group Life Insurance (SGL I). For federal employees, you're automatically enrolled in Federal Employee Group Life Insurance (FEGLI). The one downside - you lose your job, you lose your insurance.

If your group life isn’t enough, what kind of insurance do you need? For most people, term life insurance will cover your needs for the best value. It's called term because you buy it for a certain amount of time, typically 10, 20, or 30, years. For those number of years, your yearly premium will stay the same. When you reach the end of the term, the insurance ends. You just match how much insurance you need, and for how long to the policy. Usually Term Life is renewable, which means you can add another set number of years to your existing policy just before it ends. Your premium will be higher for the new term, but you normally don't need to undergo a physical.

There are other types of insurance as well, such as whole life, universal life, and variable life to name a few. These policies are designed to stay in force for your entire life. They are much more expensive. And if your insurance needs decrease over time as is typically the case, you're paying a lot of money for insurance, you don't really need later in life.

If you have any questions or you'd like to get a second opinion on your ins