Updated: November 2015
Q: I've heard life insurance is important, but I'm not sure if it's right for me. What do I need to know?
A: Matt Elwood, an Allstate Personal Financial Representative based in Port Angeles, Washington, says there are some common misconceptions about life insurance. For example, he says, "many people think that life insurance is too expensive or won't pay out." Elwood offers answers to frequently asked questions about life insurance.
There are two basic types of life insurance, term and permanent. Term life insurance is the simplest and can be the most affordable. It provides a death benefit for a set period of time, anywhere from 10 to 30 years. You choose the amount of policy coverage. Premiums are level for the length of the policy, which means they are guaranteed not to increase (and would only go down if you decrease the amount of insurance at some point). Your beneficiary receives a lump-sum payment if you pass away before the term is over and if the policy is in force.
Permanent life insurance is designed to last your entire lifetime, assuming all required payments are made. Premiums are typically higher than term insurance, but that is because you are also accumulating cash value in your policy. That cash value gives you options and may be available for financial emergencies. The cash value grows tax-deferred and can be accessed through loans or withdrawals, subject to policy terms. Loans and withdrawals will reduce the cash value and death benefit.
"People often compare the two to renting versus owning a home," Elwood says. "Most term policies have a feature that allows you to convert to permanent insurance within a certain time period without another medical exam."
Life insurance can help protect your family members when they suffer the loss of a breadwinner or stay-at-home parent. Life insurance allows the family to help maintain its standard of living by providing income-tax-free money to help pay for funeral expenses, pay off the mortgage, set aside college tuition for the kids and help provide financial peace of mind after the loss of a loved one.
"The majority of the people I help with life insurance are moms and dads who want to make sure their family is taken care of should something happen to them," Elwood says.
"It absolutely can," according to Elwood. "The misconception about the price of life insurance is the main reason many people opt out." Consumers think life insurance costs nearly three times the actual price, according to a report by the nonprofit Life Happens.
But Elwood says term life insurance premiums can be as low as $15 per month. Premiums depend on many factors, including your age and health, so he recommends looking into life insurance now rather than waiting until you are older.
"Also, I advise my customers that something is better than nothing. You can start with a policy that fits your budget now and look at possibly adding more coverage later, assuming you can still qualify," Elwood says. "If you're in your early 30s and starting a family, life insurance should be one of your top priorities. Premiums only go up as you age, so it's better to lock in a policy now, while you're still young and healthy."
With the average cost to raise a child well over $200,000, Elwood says taking steps now to help secure your family's financial future may give you confidence knowing your family will have a financial cushion if you are no longer there.
You can always change your life insurance plan. You can add more to your plan or scale back based on your needs. This is why Elwood recommends an annual review, where you sit down with your agent to be sure your current plan still fits your needs. There may be details in your life that have changed, which may make you want to reevaluate your life insurance coverage or beneficiaries.
Some life changes include having children or change in marital status. It's easier to scale back than to increase your plan, but both are possible. An increase may require a medical exam, Elwood says.
"Some will say that you should purchase 10 times your income, but in my opinion, it's based on a needs analysis," Elwood says.
"The main question you need to answer is, if you were to die, how much of your mortgage, kids' college tuition and replacement of your income would you like to provide to your family and for how long? Sit down with an agent to talk about your specific household needs and find a plan that fits your current budget and needs."