\This is an excerpt from Matthew Brandeburg’s new book: Financial Planning For Your First Job.
Purchasing life insurance without a clear need for coverage is a common mistake a lot of first-time employees make. In general, you only need life insurance if someone else is dependent on your income, you have a specific goal you want to fund at death, or you want to provide enough money to cover your burial costs.
CALCULATING YOUR NEED FOR LIFE INSURANCE
1. Add together your estimated burial costs and any outstanding debts you owe.
2. Multiply the annual amount of income your spouse and dependents will need by the number of years they will need the income. For example, if you want to provide your survivors with $20,000 per year for ten years, you would multiply these numbers together to get $200,000.
3. Add the values from step one and step two.
4. Subtract your current resources, including other life insurance that can quickly be converted to cash to help meet your survivors’ income need. (Don’t include your car, home, or similar assets if your survivors will need them after you die.) The result represents the amount of life insurance you should consider buying. Review this calculation with your insurance agent to determine which type of policy is best for you.
The two most common types of life insurance policies are whole life and term insurance.
WHOLE LIFE VS TERM INSURANCE
If you purchase a whole life insurance policy, it will remain in effect for your whole life as long as you pay the annual premium. When you die, your policy’s death benefit will be paid tax-free to your named beneficiary.
Term insurance, on the other hand, means your policy will remain in force for only a specific term of years. Term policies are often issued for periods of five, ten, fifteen, or twenty years. Your beneficiary will only receive the death benefit if you die during the term of your policy. Term insurance is usually less expensive than whole life insurance for individuals in their twenties and thirties.
EMPLOYER PROVIDED LIFE INSURANCE
For employer provided life insurance, a medical exam is usually not required. If you’re unable to purchase life insurance on your own, an employer provided policy might be necessary. The most common type of employer provided life insurance is group term insurance. “Group” means the amount of insurance provided to each employee must be calculated using a formula that applies to an entire group of employees. This reduces the chance for discrimination. “Term” means the coverage will last for the term of years you remain employed at your company. If you leave your company, you’ll usually have the option to convert your group term policy to an individual policy. The conversion should not require a medical exam, either.
Matthew Brandeburg, CFP® is the author of the book Financial Planning For Your First Job, available at www.amazon.com. His book teaches young adults how to manage their money and take charge of their financial lives. He has seven years of financial planning experience and runs his own business, Bridgeway Financial Group, LLC, based in Columbus, Ohio.