We are a couple in our late 20s and are just starting a family. I’m looking into life insurance and it seems pretty complicated. How much insurance should we purchase, and how do we determine which type of policy will best meet our needs?
Purchasing life insurance is a little like undergoing a root canal. We don’t like it, but we know it’s something we need to deal with. While Scripture doesn’t specifically address life insurance, it does tell us about our responsibility to provide for our family. In 1 Timothy 5:8 we read: “If anyone does not provide for his own relatives and especially for members of his immediate family, he has denied the faith; he is worse than an unbeliever.” Insurance is a tool to help us meet this need.
Before you can make an informed purchase, it’s important for you to understand the different policy types and why you are buying insurance in the first place. In addition to offering basic life insurance, the industry has evolved to offer products geared to investors and estate planners, making decisions for the consumer much more complicated.
Life insurance comes in two basic forms: term and cash-value. Term insurance is basic insurance for the sole purpose of providing a fixed benefit in the event of the death of the insured. Cash-value (included in this category are whole life, adjustable life, universal life and variable life) combines insurance, investment and, sometimes, estate-planning objectives.
Since most families are concerned with having insurance coverage during the childrearing years, term insurance ends up being the preferred option because of its relative affordability. If you want to use insurance as a method of investment, or think you have a need for insurance coverage during your retirement years and want to consider a cash-value policy, it would be a good idea to visit with your insurance agent and your financial planner.
Another key question is determining how much insurance you need. Some people recommend nine times your level of annual gross earnings. Yet no one answer fits every situation. You’ll want to take into account your ongoing expenses and future major expenditures, such as debt repayment, college tuition or the purchase of a new car. Then compare the earnings that can be generated from the amount of insurance purchased to your annual expenses.
For example, $1 million in insurance at a conservative 5% return would yield $50,000 per year, without having to dip into the principal balance. By comparing the return on your invested insurance proceeds with your anticipated expenses, you can better understand how much insurance is right for you.
Remember that there are scores of companies selling life insurance. While price is certainly important, you’ll also want to consider the financial strength of the company you are dealing with. Look for a rating of A or better from A.M. Best, a company that rates the financial strength of insurance companies. As with any purchase, comparison shopping results in great savings. It would be a good idea to obtain a number of quotes before making a decision.
God love you!
Phil Lenahan is director
of finance at Catholic Answers in El Cajon, California.