Answering Your Questions About Life Insurance
Life insurance can be a confusing topic—but it’s an important one. Our tips for NEA members may help you determine the right coverage for you and your family.
Thinking about life insurance can be overwhelming—there are a lot of coverage options, and it’s never fun to contemplate tragic events. But if you or a family member were to pass away, life insurance could help your loved ones pay bills, cover funeral costs, settle outstanding debt and maintain their financial footing. Above all, the right life insurance policy could provide peace of mind for you and your family. Our answers to common life insurance questions may help you figure out what your needs are and how to meet them.
Do I need life insurance?
If someone depends on you financially, the answer is yes. If you’re unmarried with no dependents and little to no debt, you might not need a life insurance policy right now—but you may need one later if your circumstances change.
When should I get life insurance?
Consider purchasing a life insurance policy—or reevaluating your current policy—when you:
- Get married. Couples often depend on dual incomes to pay the bills and cover daily living expenses, so the sudden loss of one income could put a significant financial strain on the other spouse.
- Become a parent. Life insurance can help a widowed parent provide for their children’s daily expenses, college education and more. It’s a must for single parents, whose children rely on them for everything.
- Buy a home. Life insurance can help reduce or eliminate the burden of paying off a mortgage if one income isn’t enough to cover the costs of owning a home.
- Change jobs. A new job often comes with a higher salary—and a more expensive lifestyle. Updating a life insurance policy can help ensure the improved lifestyle is maintained in the event that the policyholder passes away.
- Retire or plan for retirement. Life insurance can help retirees avoid drastic lifestyle changes if their partner passes away.
What type of life insurance do I need?
There are two primary types of life insurance, each with multiple variations. It is critical to determine the right type of life insurance for you and your family before purchasing a policy.
Term Life Insurance
This type of life insurance pays benefits only if you pass away while the policy is in effect—not if you live past the policy term. You’ll pay a fixed premium toward a set payoff amount over the policy period. Term policies typically offer the greatest amount of coverage for the lowest premium, making them a good choice for younger families with smaller budgets. There are two different options for term insurance polices:
- Level term policies have a death benefit that remains the same for the policy duration.
- Decreasing term policies have a death benefit that steadily decreases over the course of the policy term.
Permanent Cash-Value Life Insurance
This type of life insurance doesn’t end after a specified period of time. Permanent life insurance policies are typically 10 times more expensive than term insurance policies for the same pay out, but they offer several benefits, including potential tax advantages, stable premiums and guaranteed coverage no matter how long you live. There are three major types of permanent insurance:
- Traditional whole life policies have a fixed premium and death benefit throughout the policy duration, which means that premiums may be higher in earlier years in order to help offset higher insurance costs later in life.
- Universal life policies are typically more flexible than traditional policies. A portion of each premium payment—what’s left after deducting the cost of the life insurance—accumulates and earns interest. With sufficient cash value in the account, you can sometimes use it to reduce the premium amount.
- Variable life policies carry the most risk. Death protection benefits are combined with a savings account that can be invested in stocks, bonds and mutual funds. As with any investment, your policy value and death benefit can increase or decrease based on the market’s performance—which is why it’s best to look for a policy that guarantees that your death benefit will not fall below a certain amount.
How much life insurance do I need?
Even if you’re an NEA member who receives life insurance from your school district, you may not have sufficient coverage. Some financial experts recommend carrying 10 to 12 times your income in life insurance.1 To estimate your optimal coverage amount, calculate what your family members would need to meet immediate, ongoing and future financial obligations while maintaining their current standard of living.
- Immediate expenses include funeral costs, medical bills and credit card debt.
- Ongoing expenses include food, housing, transportation, utilities, health care and other basic needs.
- Future expenses include college educations for your children or retirement for your spouse.
Once you have an estimate of your financial obligations, subtract the sum of additional financial resources available to your family members, such as additional income sources, investment accounts and accumulated savings.2 Bring this estimate with you when meeting with an insurance professional. He or she can work with you to determine the type and amount of life insurance needed to support your loved ones.
The potential downside of not having enough life insurance may be significant—in fact, it can take years to recover financially from a spouse’s death if you aren’t properly insured.3 Make sure you and your family are prepared in the event of a tragedy. You can start by learning about a range of affordable insurance options available to NEA members.
1. Forbes. 7 Myths About Life Insurance. http://www.forbes.com/sites/financialfinesse/2014/06/06/7-myths-about-life-insurance/
2. Life Happens. What You Need to Know About Life Insurance. http://www.lifehappens.org/wp-content/uploads/2013/10/Brochure_WhatYouNeedtoKnowAboutLifeInsurance_2014_Consumer.pdf
3. Life Happens. The Need and Value of Life Insurance. http://www.lifehappens.org/wp-content/uploads/2013/10/Brochure_WhatYouNeedtoKnowAboutLifeInsurance_2014_Consumer.pdf