By Damon Poeter
Doesn’t it seem there’s no limit to the financial decisions you constantly make as a parent?
From figuring out how much you can afford to spend on birthday parties, to which cell phone carrier to pick, to what sort of health care plan to get – it’s enough to make you want to throw your hands up.
Consider this: if making all those family financial decisions on a limited budget seems difficult now, imagine how much tougher it will be for your spouse or partner if you die unexpectedly, says Sean Scaturro, director of life and health insurance advice at USAA and a CERTIFIED FINANCIAL PLANNER™ practitioner.
Life insurance can seem just as confusing as any other financial choice you have to make for your family. Do you buy a “term” or a “perm” policy? What’s the difference? How much life insurance do you really need, anyway?
As with any other family budgeting decision, life insurance comes with a trade-off. If you don’t purchase it, money is freed up for other things. If you do get it, you’ll have to cut your expenses in another area.
If you’re young and can’t afford much of an extra hit to your family’s monthly spending budget, a basic term life insurance plan might be your best option.
Term policies usually cost considerably less per month in premiums for younger policyholders initially than permanent, or whole, life insurance. A term policy covers you for a set period, like five, 10 or 20 years. Once that term is up, your premium is no longer fixed or your coverage may expire. You don’t get anything back if you outlive the policy’s term.
A whole, or permanent, life insurance policy typically has higher monthly premiums for younger policyholders than a term life policy. However, a whole life policy covers you for your entire life and can cost you less overall than taking out successive term life insurance policies over the course of your life, especially if you lock in lower monthly rates when you’re young and healthy. Whole life insurance also accrues a cash value over time that you can draw on while you’re alive.
To give you an idea of what a life insurance policy might cost, the national average premium for a $250,000 term policy for a healthy 30-year-old is $160 per year.1 Term insurance typically is more affordable than permanent insurance. The same amount of coverage in a whole life or universal life policy would cost more per year but the coverage would last your entire lifetime.
When it comes to cost, choose coverage that meets your needs and is affordable for your budget.
At a minimum, you’d like your life insurance policy to cover “five times your annual income and 100 percent of your debt,” Scaturro says. The life insurance proceeds wouldn’t ease your family’s emotional pain, but it would make the financial implications of losing you easier to handle.
You may not have the flexibility in your family budget to afford the monthly premiums required to purchase such a policy. That’s OK, but don’t let it stop you from buying any life insurance at all.
“A basic term life insurance policy can be perfectly fine for a young person,” Scaturro says. “There’s nothing wrong with starting with a small policy. As you get older, things will change, hopefully for the better. You need to review your life insurance on an annual basis and upgrade it when you can.”
Some employers offer what’s called a basic group life insurance plan, which is a life insurance policy the employer pays for, that offers death benefits of anywhere from $25,000 to one or two years of your annual income. You definitely should sign up for an employer-backed life insurance plan, if it’s offered. Keep in mind that if you change jobs, you might not be covered unless you have a personal life insurance policy, Scaturro says.
It’s great to be insured against the misfortunes that can happen in life, but if you’re spending too much on insurance at the expense of things like saving and paying down debt, that could be a problem, Scaturro says.
Being “insurance poor” is a condition that afflicts people who buy more insurance or a more expensive product than makes financial sense. Such people may be well-protected financially against bad things happening, but they may not be positioning themselves well enough to take advantage of good things, like raising a family and living a long life.
“Let’s say you want a life insurance policy to replace your income for 20 years. If you make a good income, maybe you get a recommendation for a coverage amount you can’t afford,” Scaturro says. “It would be best to get an affordable policy in place that has an adequate coverage amount and direct your extra cash towards increasing savings for emergencies and paying down debts.”
Ultimately, you’ll have to decide how much money you’re able to direct each month toward a financial backup plan for your family.
If you’re one of the many Americans without any life insurance, getting a basic term life insurance policy with low monthly rates may be the best option for you now. Something is better than nothing, and it may give you better peace of mind about living up to your responsibilities as a parent.
Sean Scaturro is a CERTIFIED FINANCIAL PLANNER™ practitioner and serves as USAA’s director of life and health insurance advice. He joined USAA in 2006 and has served members previously as a wealth manager and a practice management consultant. Prior to joining USAA, Sean worked in commercial insurance focusing on workers’ compensation, group health insurance and other financial services.
Military Protection Plus is level term life insurance with Military Severe Injury Benefit Rider and Military Future Insurability Rider. Initial life insurance coverage limited by rank and occupation. Level Term V: Coverage is level for the duration of the policy. Premiums remain level for the duration of the Initial Benefit Period, then increase annually while benefits remain the same. Term Policy Form LLT98952ST 05-18 (may vary by state); in New York, New York Term Series V: Form NLT45861NY 01-04. Military Severe Injury Benefit Rider provides $25,000 to help with the expenses in the event of certain injuries while performing eligible military duties. Rider Form LBR67140ST 05-07 (may vary by state). Military Severe Injury Benefit Rider not available in New York. Military Future Insurability Rider provides an option to increase coverage upon separation from the military. Availability of increased life insurance coverage subject to rider terms and conditions and depends on characterization of military separation. Increases in coverage require payment of additional premium. Rider Form LBR57939ST 05-06 and ICC1497953 03-14 (may vary by state); in New York, Form NBR97955NY 03-14.
Life insurance and annuities provided by USAA Life Insurance Company, San Antonio, TX and in New York by USAA Life Insurance Company of New York, Highland Falls, NY. All insurance products are subject to state availability, issue limitations and contractual terms and conditions. Each company has sole financial responsibility for its own products.
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