We (obviously) all love talking about investing at HerMoney! And while investing in the stock market is an enormous part of how we secure our financial futures and build wealth, there are many other ways we can — and should — do that.
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That’s why we wanted to put together a primer on all things life insurance. We know that many women are chronically underinsured. Only 47% of the 131 million adult women in the US have life insurance compared with 58% of men, according to LIMRA, and 56 million of them acknowledge they need more. Are you one of them? Here’s a breakdown.
The Different Types Of Life Insurance
First, the basics: There are two types of life insurance you can buy: Term and permanent. Term insurance is essentially just a death benefit. It has a fixed price for a certain period of time, or “term,” and then it expires. (If you’re offered insurance through your employer it’s probably term. It’s probably also a good way to start with insurance because group policies tend to be less pricey. But it may not provide as much as you need in total.) Permanent insurance, on the other hand, can last a lifetime, as long as you keep your policy current. Under the umbrella of permanent life insurance there are three main types: whole life, variable life, and universal life. Besides a death benefit, permanent insurance has an investment component that enables you to accumulate cash value.
But how does that work, exactly? With a whole life policy, the insurance company professionally manages the investments for policy holders; these policies are typically invested conservatively and pay a dividend. Meanwhile, variable policies offer market participation — policyholders can choose from a list of investment options, much like you would with a 401(k). Lastly, universal life policies can be: fixed (like whole life, where the money is managed for you) indexed (tied to the S&P 500, for example) or variable (where you can choose your own adventure.) Note: Variable policies provide a death benefit and cash value that rises and falls with the performance of underlying investments, and may be best suited for those who don’t mind taking a little risk!
Tax Advantages With Life Insurance
Whole life insurance policies are known for their tax advantages, because the cash value of your whole life insurance policy will not be taxed while it’s growing. This tax deferral allows the money to grow faster, like money in your 401(k).
Also, many permanent life insurance policies allow you to tap into the cash value of your policy. This means that you could opt to use some or all of the cash value you’ve accumulated in your policy while you’re still alive. When you pass, the policy would pay a tax-free death benefit to your heirs.
There are literally thousands of life insurance policies and products on the market, and each one has a different set of rules and stipulations — it’s so important to understand exactly what your investment choices are and what your policy offers before signing on the dotted line. Unlike a stock you can trade quickly, a life insurance policy is meant to be a long-term investment.
So, What Kind Of Life Insurance Do I Really Need?
Everyone’s situation is different — and your insurance needs are likely to change over time. Before you have others depending on your income (kids, spouses, or in some cases older parents) you don’t need it at all. Once you have dependents — you may start with a young family and budget constraints — a term policy may be the best option for you, because it’s the most affordable option.
Often, the strategy is to cover your needs with term insurance until you’ve raised your family and socked away enough in savings and investments to provide for the surviving spouse. At that point (generally at retirement) you can drop it or let it lapse.
But as you build a family and your earning power increases, you may decide you want insurance that stays with you for life — this is particularly important if you have special needs children, or have other dependents you’ll be responsible for even as your earning power lapses. That’s a reason to look into permanent insurance. And as you near retirement, you may decide you want a hybrid life insurance policy that allows you to dip into it to cover long term care costs. The point is that as your life changes, your insurance needs probably will, too.
Before you purchase a life insurance policy, you should talk to a trusted advisor — ideally your financial planner — about what’s best for you.
How Much Life Insurance Do I Really Need?
Typically, the amount of insurance coverage people consider is a range between “capital need” and “human life value,” explained the insurance team at Klatz, Rounick and Associates, an Ameriprise office based in Conshohocken, Pennsylvania.
“Capital need” is essentially how much capital your family needs to pay the bills in the near future — enough to get you through until another wage earner in your family can make up the difference. And while you can get an insurance policy that would cover only this amount, many professionals recommend getting enough life insurance so that you could also pay off your debt, fund a child’s college education, or pay off a mortgage.
Meanwhile, “human life value” is the top end of the insurance coverage spectrum — it takes into account the full amount of economic value you expect to provide to your family — this is typically calculated by multiplying your income by the number of years you expect to work. While more advanced calculations would factor in future raises, etc. the basic human life value calculation for someone earning $100,000 annually with 10 more years to work would yield a need for a $1 million policy.
How Much Should I Spend On Life Insurance — And When Should I Buy?
While there isn’t a set formula for how much you “should” spend, you don’t want to be insurance rich and cash poor — but you also don’t want to leave your family unprotected. You’ll spend much more for permanent life insurance than you will for term life insurance. The important thing is that you work within your budget to the right amount of coverage, and talk to an advisor you trust who can guide you on the best protection for your family.
And in terms of the age at which you buy your policy, the time to buy is when you need it — and again, that’s when you have someone else in the picture depending on your income. (It’s generally a person, but could also be a small business that couldn’t function without you.) But know that all life insurance gets more expensive as you get older. Additionally, there are some health conditions that will increase your rates tremendously (or sometimes prevent you from qualifying). So, shopping when you’re relatively healthy is key.
Stay-at-Home Parents Need Life Insurance, Too
Finally, just a reminder that although life insurance is often thought of as income insurance — and therefore only purchased for earners (that’s why more men historically had it than women) — you also need it to fund gaps in the services you provide for your family that would cost money to replace if you were gone. The average cost of childcare in 2023 is close to $15,000, and it’s much more in some areas. Figure out what it would cost you, and tack on the cost of the other services a stay-at-home parent provides ($5,000 – $10,000 for housekeeping, perhaps?). You’d be wise to buy a term policy that would at least cover that amount for the number of years until your children are grown and flown.
More on HerMoney:
- What Kind of Life Insurance Do You Need?
- Why Don’t Women Who Need Life Insurance Have It?
- 5 Must-Dos to Put on Your Estate Planning Checklist
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