What is Life Insurance and What Does It Do?
Many people think life insurance is way more complicated than it actually is, but life insurance is really nothing more than a contract between you, the buyer (aka the insured), and an insurance company. If you qualify, you apply for the coverage, and if the policy is issued, you pay your premiums according to the terms of your policy. Assuming the benefit is payable, upon your death, the insurance company pays the agreed upon amount (death benefit) to the person you chose as your beneficiary. Depending on the type of policy you buy, it may have added features; for example, some policies accrue cash value that can be borrowed against. When it comes right down to it, the basic concept of life insurance is pretty simple: Life insurance exists as a way to help protect our loved ones from the financial devastation that can occur upon the death of an income earner. It can also be considered an important part of a long-term financial plan.
It’s probably safe to say that buying life insurance may not even be a blip on the financial radar of most young people … or it’s way, way down at the bottom of their priorities list. Life insurance is one of those things people may not think about until they reach a major milestone in life, such as getting married, buying a home, having a child, or starting a business. When you’re young, single, and carry no debt, the need for life insurance may seem a long way off.
Life Insurance — Why Do I Need It?
How many people do you know these days who actually made it through college without dragging a substantial amount of debt with them? Two-thirds (69 percent) of Bachelor’s degree recipients in the class of 2019 graduated with federal and private student loans, an average of $29,900 per borrower.1 For those who went on to earn a Master’s degree, that figure jumps to 47 percent of students and an average of $44,900.1 Of those making payments, the typical required monthly payment was between $200-$299 per month.2 If you co-signed a student loan with your parents, you may want to think about getting a life insurance policy because you have a financial obligation that could impact your parents.
By the time you get married, you may be bringing additional debt with you.
Did you buy a car?
The average price of a new car is more than $36,000, and a used car costs more than $20,000 on average.3 The price of the car doesn’t necessarily tell the whole story either. Most people take out a loan to buy a car, so the interest rate on the auto loan drives the final cost of the car up.3 The average monthly payment for a new car is $550; average monthly payment for a used car is $393.4
Do you have credit card debt?
You may be one of the 47 percent of Americans with credit card debt.5 The average American holds four credit cards with a total balance of $6,200.6 Of those carrying credit card balances, as many as 40 percent can’t afford to pay any more than the minimum payment.5 Almost one-quarter of card holders say they have added to their balance as a result of the COVID-19 pandemic.5 The number one reason people are carrying a credit card balance? Groceries.6
Are you a homeowner?
The median price for a home in 2020 is $274,600.7 Home prices vary widely depending on where you live, and financing rates vary depending on the market and your credit history. Housing continues to be most Americans’ greatest monthly expense.
You may have brought additional debt into your marriage; for example, medical bills, business or personal loans. Of course, this is in addition to any debt your spouse brought into the marriage as well as debt you may have accrued jointly. We haven’t even discussed if there are kids in the mix.
When Is the Best Time to Buy Life Insurance?
A natural reaction might be to want to wait until you pay some bills down before you put another monthly expense on your plate. Think about it; that would be like waiting until you get better to visit the doctor! The two factors having the most influence on the cost of life insurance are your age and your health. None of us are getting any younger and our health in the future is not guaranteed. Life insurance is to help protect people whose financial security would be affected if your income were out of the picture. Could your spouse afford to shoulder all the bills plus the day-to-day living expenses, and maintain the family’s home and lifestyle?
If others depend on you financially and/or if they would be responsible for your financial affairs when you die, buying life insurance now is the responsible thing to do.
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CNBC make it, Average Student Loan Debt at Graduation, (July 16, 2020)
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Federal Reserve, Report on the Economic Well-Being of U.S. Households in 2019, (July 16, 2020)
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U.S. News, Average Auto Loan Rates in July 2020 (July 17, 2020)
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Lending Tree, Auto Loan Statistics 2020 (July 17, 2020)
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CNBC, Almost half of America is now carrying credit card debt, and more of it (July 17, 2020)
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USA Today, Here's a top reason Americans are carrying an average credit card balance of over $6,200 (July 17, 2020)
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USA Today, Despite coronavirus, low supply and high demand buoyed first-quarter home prices (July 17, 2020)
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Motley Fool, 8 Expenses That Account for 87% of the Average Household Budget (July 17, 2020)
Categories: Insurance, Life Insurance, Term Life Insurance