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Life Insurance Basics

Term, whole life, and final expense without the jargon.

Why life insurance

  • About 51% of American adults own life insurance, yet 42% — roughly 102 million adults — say they need it or need more (LIMRA 2024 Insurance Barometer).
  • Life insurance is not about you — it’s about the situation you will leave your family and those you care about in.
  • When your income stops, your family must pay for your burial, pay off loans and bills, potentially remain in the house, and maintain their current lifestyle.
  • Children may need money to attend college or for a wedding they’ve dreamed of — that’s why you buy life insurance.

Buy while you’re healthy

  • Life insurance is underwritten — they look at your present health and health history to determine if you can get insurance and how expensive premiums will be.
  • A heart attack, stroke, or cancer may not kill you, but you’ll have trouble getting life insurance afterward.
  • Diabetes, angina, MS, fibromyalgia, or major back surgery won’t kill you, but you’ll have trouble getting life insurance.
  • Buy now while you can.

How much — and what kind

  • Method 1 — multiple of income (simple):
    • Age 35 & under: use 15 times annual income
    • Age 36–45: use 10 times annual income
    • Age 55 & older: use at least 5 times annual income
  • Method 2 — Life needs analysis (the “LIFE” method, preferred):
    • L — Loans: how much debt and loans (including mortgage) would your family be left with if you died right now?
    • I — Income: how much of your income does your family need replaced to continue their current lifestyle?
    • F — Funeral expenses: how much will it cost to bury you? Figure more than it costs today unless you really think you’ll die soon
    • E — Education: how much will your children need for the education you want for them?
    • Plus: did you wish to leave a legacy to any family member or charity?
    • If it all adds up to $0, will your family have access to funds to bury you — and who will end up paying that bill?
  • Term (temporary) life insurance:
    • In effect for a specific amount of time — typically 10, 20, or 30 years
    • Great for covering debt that will go away
    • Can be layered: one policy might expire when your mortgage is paid off; another might end when your youngest child turns 25 and no longer needs support and college money
  • Permanent (whole) life insurance:
    • Set up to last as long as you do
    • You should have enough whole life to cover your burial costs and any legacy money you wish to leave

Final expense

  • Final expense life insurance is designed to cover the final expenses that occur as a result of your death.
  • A funeral with a viewing and burial runs about $8,300 (NFDA, 2024) — and that figure does not include the cemetery plot or headstone.
  • Arrangements to pay for the funeral must be made within days of the person passing.
  • Expenses associated with death often run well over $8,000; without a policy, most families have a hard time coming up with these funds quickly.
  • Final expense insurance can save families from withdrawing from savings or selling precious assets to bury a loved one.
  • Term insurance is much lower cost, but if you don’t die during the term you’d face having no insurance to cover burial, or buying a final expense policy at an advanced age (very expensive).
  • It saves money to buy final expense insurance while you’re young — even paying every month until you die costs less than waiting and paying a much higher premium for a shorter time.
  • LifeHappens.org

Dying with no life insurance

  • Life insurance is something you buy for yourself, but to benefit your loved ones.
  • There’s little you can control after you pass, but whether you leave loved ones the provisions they need is something you can plan for while alive.
  • The average cost of a funeral and burial can be somewhere between $3,000 and $25,000 — and if you die without life insurance, someone else has to pay for it.
  • If nobody is able to pay for your funeral, the alternatives are grim:
    • Get a loan — survivors pay for the funeral plus interest, and it can damage their credit
    • Ask the funeral home for a payment plan — a long monthly obligation, but probably little effect on credit
    • Release the body to the County Coroner’s Office — the government buries or cremates the body; ashes may be retrievable (usually for a fee), otherwise they go to a common grave
    • Contact Social Security — if you collected Social Security, the SSA may offer some assistance
    • Contact a non-profit — some offer assistance depending on circumstances
    • Crowdfund — survivors may use GoFundMe to ask friends and family to contribute
  • Other expenses after you die:
    • Travel expenses — survivors may need flights and hotels; the body may need to travel for burial
    • Lost wages — a spouse or partner may take weeks or months to return to work, with only a few days of paid leave
    • Counseling — professional help often costs $100+ an hour and could run into the thousands
    • Taxes and/or debt — survivors may owe property taxes if they stay in your house; some debts (e.g., student loans) may continue after death
  • Using life insurance for estate planning is typically a wise choice.
  • Life insurance — particularly whole life or term life — requires medical qualification in most cases.

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