Reasons to buy insurance are different for everyone. But the decision to purchase insurance is, at its core, all about providing financial security for yourself and the ones you care about. Learn why life insurance is important, and who needs it. If you feel like life insurance is a luxury, it may surprise you to learn how affordable it can be. However, many people overestimate the cost, with almost half of millennials estimating that a $250,000 term life policy would cost over $1,000 per year, rather than its price tag of about $160, according to Bankrate.
Why is life insurance important?
Buying life insurance protects your spouse and children from the potentially devastating financial losses that could result if something happened to you. It provides financial security, helps to pay off debts, helps to pay living expenses, and helps to pay any medical or final expenses
Over more than 30 years as a State Farm insurance agent in Great Falls, Pam Hansen Alfred has spoken to many people about the myths and facts of life insurance policies. Here are a few reasons she offers for why life insurance is important.
1. It provides income for your family
The most obvious reason for investing in life insurance is that it can provide for your family if you die. The trick is to choose a policy that offers enough support.
“Let’s say your income is $100,000,” Alfred said. “Statistically, you should provide 7 to 10 years of income at minimum, so your family’s lifestyle isn’t devastated at your death.”
Both term and whole life insurance policies can provide $1,000,000 worth of coverage, but there is a distinction. Term life works similarly to other insurance coverage: You pay a set fee for the 10- to 30-year life of the policy. Whole life policies, on the other hand, have higher monthly premiums but last for your lifetime and have a cash value component.
2. It covers debts
Besides certain types of federal student loans, most debts will outlive you. Your heirs will then be on the hook for any outstanding mortgage payments, credit card debts, and estate taxes. Additionally, funeral costs average about $7,000 for embalming, services, and burial or cremation.
A life insurance policy can defray the costs of debts and a funeral, leaving a nest egg for your heirs.
3. It leaves an education fund for children
You can shore up a child or grandchild’s future by leaving an education fund to help pay for a degree that won’t cause a mountain of debt.
The average cost of tuition and fees in the U.S. is $10,740 per year at public colleges for residents and $38,070 per year at private colleges, according to collegedata.com. Multiply that by four years, and you can see how helpful it would be to your descendants to have financial help.
4. It creates a cash emergency fund
This is where a whole life insurance policy shines.
“Temporary or term life insurance is usually written for a specific time period,” Alfred said. “They buy it to cover that debt with 10, 20, or 30-year policies. Then that term goes away and there’s no living benefit to it.”
On the other hand, whole life insurance provides full coverage from the first day you pay your premium, and you can draw cash on the amount you’ve paid over time.
“You can either withdraw the money or take a loan against it,” Alfred said. “You can win if you live and when you die.”
5. It supplements retirement income
Even with retirement savings, unexpected bills hurt when you’re on a fixed income. Fortunately, you can withdraw from your life insurance policy. The key is to buy the policy while you’re young.
Life insurance premiums increase an average of 8% to 10% for every year of age, according to Investopedia. After buying a policy, term life insurance premiums stay the same price for the specified time period and, with State Farm, whole life remains level, too.