By Erin McHugh
Life insurance: It can be a daunting topic. Most people don’t particularly enjoy thinking about the worst-case scenarios where life insurance can really shine, but for a lot of folks — especially younger generations — the subject is also intimidating because it brings up a lot of questions.
So, let’s review the basics: What is life insurance and why do we need it?
Ultimately, life insurance is the foundation of financial security because it allows you to ensure that the people you care most about will be taken care of, no matter what happens. Life insurance helps protect your family by providing cash to reduce financial anxiety during a time when they will likely be more preoccupied with grief. This cash can be used to replace, pay for college educations or ensure taxes aren’t inherited along with an estate you plan on passing down.
There are two broad categories of life insurance: term and permanent. Term life insurance provides coverage for a specific period of time — otherwise known as a term (hence the name). Term life insurance is generally best for young families, thanks to how affordable it can be.
Permanent life insurance — also known as whole life, variable universal life or universal life —provides coverage for the rest of your life, assuming premiums are paid.
Permanent life insurance is more expensive, but offers additional features, such as building cash value, that makes it a great part of your overall estate planning.
When asked about the difference between the two types of insurance, USAA Advice Director Sean Scaturro summed it up this way: “Permanent life insurance is great to help cover your wants. Term life insurance helps cover your needs.”
Talk to an advisor. If you’re young and can’t afford a lot of life insurance, get term life insurance. Once you’re financially stable, you can explore permanent life insurance. Everyone’s situation is different, so consult a financial advisor or contact USAA Life Insurance Company to help determine what your needs are.
As soon as you can – your premium is likely to be lower when you’re young and healthy, and will go up as you age. According to Scaturro, life insurance is simply forward thinking.
“Don’t avoid taking action because you’re confused by it or because it’s overwhelming,” he says, recommending that you treat life insurance like building blocks when first starting out. “It’s important to review it annually and increase your coverage as your financial needs call for it.”
Certain life events should prompt you to review what you have and make necessary adjustments to your plan: marriage or a divorce, the birth of a child or transitioning into retirement. When you have children, you’ll want to make sure you have the right amount of coverage in place for yourself, but you’ll also want to consider getting coverage for them.
There are so many different “rules of thumb” to answer this question (such as seven to 10 times your income, for example), but USAA recommends using the acronym L.I.F.E needs (Liabilities & debts, Income to be replaced, Final Expenses, Education or Extra Goals to be paid for) as a starting point. Then, compare that to your current net worth – including cash savings and investments, current life insurance coverage or surviving spouse pay – and subtract that from your total for an accurate estimate. A good starting point is having enough life insurance to fully pay off all debts that you have and replace your earnings for 5 years.
Want to double-check your estimate? For help calculating that net amount¹, or to get a quote, explore more USAA life insurance tips and tools.
¹This calculator is a self help tool. You should enter figures that reflect your individual situation. This information is provided for illustrative purposes only. The above life insurance needs estimate is based in part on the age and information you entered and results may vary depending on your individual circumstances.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe, and the applicable tax law of your state may differ from federal tax law. Therefore, you should consult your tax and legal advisors regarding your specific situation.