Life insurance isn't really a topic we've touched too often here on Don't Quit Your Day Job, but since the majority of our readership has at least considered the various forms of life insurance on their quest for financial independence (or at least financial sanity?), let's dedicate some digital ink to the topic, shall we, and help you decide the best type of life insurance for you?
The Main Types of Life Insurance
Life insurance generally breaks down into two categories (names donated by Wikipedia on this one, folks)... Protection policies and Investment policies. In essence, the first type pays out in reaction to an event (in a weird case of Orwellian doublespeak, the loss of life) while the second type is a guaranteed policy that has some sort of an investment rider attached. The second category breaks down further into such policy types as Whole Life (covering the whole life of the insured), Universal Life (similar to an escrow account on a mortgage, payments are made from the fund and the excess has an investment policy) and Variable Life (the policy accrues a cash value). Those types of policies usually have some sort of tax benefit built into their structure; your mileage may vary.
The Terms of Term Life Insurance...
Let's go back to the first policy type, if you don't mind. While I'm sympathetic to the argument that life insurance can be superfluous, when it comes to people in one specific demographic you should calculate it out. Many of you in DQYDJ's readership, according to the demographic breakdown I've seen, are young homeowners under the age of 35 (many recently married). Here's where things get interesting... If you fit this profile:
- Homeowner with years to go on a mortgage
- Married
- Potentially with kid(s)
- Either you or your spouse earn more and it would be difficult to manage the mortgage on the income of the other spouse
... keep reading. If not? Read anyway, I promise to be interesting regardless.
Just bought one of these? Congrats! That probably changes the type of life insurance you want. (However, Neo-Eclectic? Seriously?)
Consider this argument (consult with your financial adviser obviously, but read first!): get enough life insurance to cover the loss of the higher earning spouse, at least to the point where the remaining spouse can keep the house until he or she can decide what to do with it. Deduct any cash savings that could go into the house, and take out a term policy which would pay off the remaining mortgage (or take out more to replace a portion of income... again, discuss the details with an adviser). Revisit that decision as the term expires, assuming it expires before the person insured.
Alternatively, a similar form of insurance is known as mortgage insurance - which ties itself to the principal payoff amount on a mortgage. It's possible that the odds of a payout on term insurance are as low as 1, 2, or 3% - but the low payout actually sort of works in your favor by allowing much larger face values for the same amount of benefit as the 'Investment' types of insurance. Check out calculators on the subject for a quick, back of the envelope look at what you can expect to pay for that sort of coverage.
I get the arguments against many types of insurance, but avail yourself of this note: term insurance's face value for a reasonable price is generally a lot higher than the resources you can amass yourself at a young age. Sure, the math changes if you are older with a paid off home and grown up kids off the dole - but for many in our readership, life insurance (and especially term life insurance) is an interesting weapon in your financial arsenal.
What Type of Life Insurance Did I Pick?
For me, what type of life insurance is best? Term insurance, through work. I've also enrolled in some interesting policies on the accidental death and dismemberment - just reading the descriptions is enough to turn a nice day sour! However, it's cheap enough to be a no-brainer on my part.
Do you have term life insurance, or some sort of investment policy? How do you feel about your decision? What do you think the ideal amount of insurance coverage is? What is the best type of life insurance?
