What You Need to Know about Life Insurance
By: Stacy Abbot, USU Extension Home Buyer Education Program Coordinator
April 14, 2022
When is life insurance needed?
Life insurance is a type of insurance policy that provides a payout to your beneficiaries in the event of your death. Many people use these policies to minimize financial devastation that could occur in the event of their death. In a lot of cases, dependent survivors, such as a spouse, or children, will need income to continue living their life as normally as possible.
Even if you do not have anyone who is dependent on your income, you may also consider purchasing a life insurance policy to cover funeral costs. The average funeral has a price tag of $7,000-$10,000. A minimal policy would allow your loved ones to bury you without a financial burden.
It is also important to consider purchasing an insurance policy to cover the death of a stay-at-home parent, spouse or partner. In the event of their death, income may not be lost, but their responsibilities would still need to be fulfilled. How would you pay for the services that they currently provide? Who would fulfill their responsibilities, such as cleaning, cooking and child care, and transporting children to and from activities? A life insurance policy for that person could help offset the cost of having to pay for childcare or a housekeeper, in the event of their death.
How is life insurance purchased?
Life insurance is sold by an insurance agent. A premium is paid either annually or semiannually for a lump sum of coverage. There are a variety of policy types and qualification guidelines. If you currently have another type of insurance (automobile, renters or home owners insurance), ask that insurance provider about the life insurance policies that they offer. Then compare their policy to at least 2 more companies to find the best product and rate.
How much is needed?
Some factors to consider when deciding the amount of life insurance to purchase include:
- Income replacement - What is your current income and what percentage of that income will need to be replaced?
- How long will this income be needed?
- Funeral expenses - How much will be needed for funeral services?
- Debts - are there debts such as a mortgage or car loan that you would like to have paid off in the event of your death?
- Other expenses- Are there other expenses that you would like to plan for such as college tuition, money for a readjustment period or day care costs?
- Other benefits and options - What other benefits or assets would offset the costs listed above? In a lot of cases, minor children are eligible for survivors benefits through social security. Assets and pre-planned savings and investment accounts could also offset the expenses.
Further Resources
Life Insurance Calculator https://www.bankrate.com/insurance/life-insurance/life-insurance-calculator/
Metzen, Edward J. (2000) https://extension.missouri.edu/publications/gh3422
Huddleston, Cameron, Metz, Jason (2022) https://www.forbes.com/advisor/life-insurance/best-tips-first-time-buyers/
References
Egan, John, Metz, Jason (2022) https://www.forbes.com/advisor/life-insurance/how-much-does-a-funeral-cost/