Guide to Getting Life Insurance at Each Stage of Life

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Getting life insurance is an essential part of every family’s financial plan, but people often underestimate the amount of coverage they need and may pay too much for what they get. What’s more, your needs may change as you age: The policy you bought when your kids were born may not have the right amount of coverage when they are about to go to college. And when you retire, you may be able to drop coverage altogether, unless you have a cash-value policy you plan to tap for income or include in your estate plan.

Life insurance can be a lot less complicated than you think. The key is to reassess your coverage when your family reaches certain milestones. This guide will help you break down getting life insurance at each stage in your life.

Choosing Your First Life Insurance Policy

You need life insurance when someone depends on you financially. If you’re married without children, you may need coverage if your spouse relies on your income to help pay the mortgage and other bills. But when you have kids, you really need life insurance.

When you’re young, your life insurance needs may be greatest because you’re supporting a young family. Your life insurance must help your family cover their expenses, including the mortgage and other bills, and enable them to save for college and retirement without your income.

But worrying about precision tends to intimidate people into procrastinating. Keep it simple. Consider buying a policy worth at least seven to 10 times your gross income (or more, if you plan to have more kids and your income and expenses are on the rise). Avoid aiming low on this. Round up, and be generous. To help you figure out the amount of coverage that’s right for you, try this helpful life insurance calculator.

What kind of insurance should you buy? At this stage of your life, you should consider buying term life insurance. Term is simple and has no investment or savings component.

A parent who doesn’t earn an income needs life insurance, too. If he or she dies, their spouse will have to cover childcare expenses. Consider a death benefit large enough that you can cover the annual income you need by withdrawing 4 percent of the money each year. For example, if you expect to need $20,000 a year for more than 20 years, buy a policy with a $500,000 death benefit.

After deciding how much coverage you need, figure out how long you need it. If you plan to have more kids or to keep working for several decades, you might need a 30-year policy, even though it costs a lot more than 20-year coverage.

If you can’t afford a 30-year policy, it’s better to “ladder” coverage than to skimp on the insurance amount. Consider getting a 30-year policy for half or two-thirds of the amount you need, and a 20-year policy for the other part. You can add more coverage as your kids get older and your income increases.

Updating Your Life Insurance Coverage

If your income and expenses increase as your children get older, you may need more life insurance coverage than when you were starting out. It is recommended you review your life insurance needs every five years and whenever you experience a major change, such as having another child, starting a new job, taking out a bigger mortgage or getting divorced. The annual premiums will be higher because you’re older, but if you’re in good health, they’ll still be reasonable. And you may need the extra coverage only for another 10 or 15 years if your kids are teenagers (especially if you already have other coverage that will last longer).

This is also a good time to think about what to do if your policy is set to expire before your need for coverage is up. Options include buying extra insurance for a longer term, converting your current coverage to a permanent policy or buying some permanent insurance.

If you’ve already maxed out your IRA and 401(k) and are looking for other tax-advantaged investments, you could buy a whole life insurance policy, which builds cash value based on the performance of the insurer’s investments. Premiums are expensive, but the insurer promises to increase your cash value by at least a minimum amount every year, and the policy may pay dividends.

Later, you can withdraw the cash value tax-free up to the amount you paid in premiums over the years. Withdrawals above that level are taxed in your top tax bracket. Or you can borrow the cash value; the loan will not be taxed as a withdrawal as long as you keep the policy for the rest of your life. (Withdrawals and loans reduce your death benefit.) For an added premium that boosts the cost by about 10 percent a year, you can attach a rider to some permanent policies that let you tap the death benefit for long-term care expenses.

Life Insurance for Empty Nesters

Your need for life insurance typically begins high and stays there until your kids go to college, then it drops. Nevertheless, getting rid of your life insurance entirely after your kids leave could be a mistake.

Even after your kids are on their own, it may be a good idea to keep some insurance as long as you’re working to help your spouse pay the bills and save for retirement if you die. At this point, most people can finally afford to boost their retirement savings contributions.

Decisions for Retirees

The need for life insurance ends at retirement if you’ve done your financial planning. You have built up enough assets so you have enough to live on in retirement. If you have a term insurance policy, you can just keep the policy until the term ends, as long as you have enough cash to pay the premiums, or let it drop and use the money for a more pressing need, such as paying for long-term care coverage.

But there are exceptions. You may need a policy that lasts for your lifetime if you and your spouse rely on a pension that does not have a death benefit for the survivor, or if your heirs will need cash to buy a stake in a business, or if you’re supporting a special-needs child. Some retirees maintain coverage to provide a legacy for children or charities.

One option is a term policy with a conversion feature. Or if you bought a permanent policy that has built up cash value, such as a whole life policy, you can withdraw some of the money for income in retirement.

As you can see, life insurance needs vary greatly depending on where you are in life. See if your current life insurance plan lines up with your goals. Getting life insurance should be a key part of your financial plan, and understanding how your needs change in each stage of life will help you determine what you should have. If you’re ready to take the next step, find an advisor to get started.

Copyright 2015 The Kiplinger Washington Editors, Inc.

Life insurance and annuities are underwritten by United of Omaha Life Insurance Company, 3300 Mutual of Omaha Plaza, Omaha, NE 68175. United of Omaha Life Insurance Company is licensed nationwide except in New York and does not solicit business in New York. In New York, Companion Life Insurance Company, Hauppauge, NY 11788-2934 underwrites life insurance and annuities. Coverage may not be available in all states and may vary by state. Each company is responsible for its own financial and contractual obligations.

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