Life Insurance Basics

Car insurance is mandatory by law, and not having health insurance can result in a fine. But what about life insurance, which is purely optional? Is it an essential expense or just an extra?

Do You Need It?

Life insurance is made for people with dependents, as its purpose is to cover a family's expenses if one passes away. A better name for life insurance is income insurance, since it replaces the income of the person who passed away. If someone has no dependents, they don’t need life insurance. For example, if someone is single, has no children, or has children who are financially independent, it’s not necessary. However, for someone with dependents, life insurance often means the difference between needing to live off charity and managing financially.

Waste of Money?

People tend to balk at spending money on life insurance, since the chances of needing it are often quite small. In truth, life insurance, and all insurance for that matter, is a vital piece of one’s financial plan. You never want to need it, but it's important to have it in case. Keep in mind that life insurance also protects savings and investments, since without it, those accounts will need to be liquidated-often with steep fines-just to cover the bills.

There's a concept when it comes to investing that I'd like to apply here: it doesn't matter how often you're right or wrong; it matters how much you'll make when right and how much you'll lose when wrong. When it comes to insurance, you'll likely lose money, but if you can’t afford the consequences of not having it, then you need to get it.

TERM OR PERMANENT:

There are two types of policies:

Term: This policy is purchased for a period of time (a “term”) such as 10, 20, or 30 years. It's usually cheap and is strictly insurance coverage without any investment benefits. You can think of it like car insurance.

Permanent: This is usually purchased for the duration of ones’ life and is far more expensive. The most common type of permanent is whole. It's often used for high-net-worth individuals with advanced investing or tax planning needs, or those with lifelong dependents such as children with special needs. Most people don't need such expensive coverage, but if you think it may be helpful to you, speak to a financial advisor or life insurance agent you trust.

How Much Coverage?

It's hard to know exactly how much coverage to get, but here are some rules of thumb.

Dave Ramsey suggests 10 times one's salary or 12 times if they're sending someone to college. So if someone makes $100,000 a year, they would take out either a $1 million or $1.2 million policy. For frum families with seminary tuition, weddings, and support, the numbers are certainly higher.

Some suggest putting the money into a high-yield savings account so the dependents can live off the returns. In such a case, one would need around 20 times one's yearly income.

There are also many online calculators that are can be used for estimates.

However, before purchasing any policy, a person should run the numbers themselves or with a professional to estimate how much money their family would need, based on their socioeconomic bracket.

Keep in mind that a person can take out as many policies as they'd like. If you're afraid your coverage is too low, you can always take out another policy. Also, if you’ll still need coverage after your term ends, you can either purchase another policy or often can convert it to permanent.

Using an Agent:

Generally, using an agent doesn't cost more than going directly to the company, since they get paid by the insurer. An agent can also shop around to find you the best policy. Another benefit is having advice and guidance from a knowledgeable professional. However, keep in mind that an agent makes a commission, often the first year’s premiums, so they're motivated to sell you a more expensive policy. Make sure your agent is someone you can trust.

There are plenty of online calculators, such as PolicyGenius or TermForSale.com, that can help you estimate the cost of premiums. Use them so you can be an educated consumer and know the ballpark figures when speaking to an agent.

There can be Halachik considerations regarding life insurance and one should consult their Rabbi.