If you have financial obligations (a mortgage, bills, support for children, education payments, etc.) that would continue if you were gone, you most likely need life insurance.
From assessing ongoing cash flow needs, we can determine the amount of insurance required, the type of insurance needed, and for how long it will be needed. There are, of course, other reasons to purchase Life insurance including:
- to settle a large outstanding tax bill on an estate after death
- to donate a tax deductible amount to a charitable or religious institution
- to provide some income in retirement
There are two main types of Life insurance: Term and Permanent.
Term insurance could also be described as temporary insurance –it is purchased for specific lengths of time such as ten or twenty years. At the end of each term you can choose to renew if you need to and the insurance costs will change to reflect the new age of the insured and the increased risk. As insurance costs increase with age, the insured is faced with significant increases in their premiums with each renewal. The best time to get insurance is before you need it as the rates are very affordable when you are young and healthy. For example, a 35-year-old male non-smoker would pay about $40/month for $500,000 20-year term policy (smoker rate about $100/month). A 50-year-old male, non-smoker, would pay about $155/month for the same coverage.
Permanent insurance lasts for the rest of your life and has more flexibility in terms of cost and can offer an investment component. The cost is often fixed throughout the life of the insurance policy. For anyone considering life insurance for longer than 25 years (for estate planning purposes, for example), it is wise to give serious consideration to permanent insurance. Although more expensive than term insurance initially, over the long term, permanent insurance becomes very cost effective. For example, the 35-year-old male non-smoker could pay between $115-$190/month for a $250,000 life insurance policy that would never expire or increase in cost (but may increase in benefit as well as accessible cash value).