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Who needs life insurance and how much?

Thinking about life insurance — Why do I need it? And, how much do I need?— isn’t how most of us want to spend our days off. But since death is on the horizon for all of us, this uncomfortable subject is worth examining, especially if you have children or a spouse who depends on you to pay rent and other bills.

So let’s take a look at the basics of life insurance, including why you might need it, what types of life insurance there are, and other important basics of understanding how life insurance works.

Do I need life insurance and why? 

If you are married

If you’re married or in a domestic partnership, your significant other may depend on you to help pay the rent or mortgage, credit card bills, auto loans, and other shared expenses. 

A policy will make sure that your family is financially protected in the event of your death. It will help cover things like child care expenses and funeral costs and so the people you love aren’t worrying about the basics while grieving the loss of you.

If you have children

Raising a child averages a whopping $233,610 to get them to eighteen, and that doesn’t include the cost of college tuition! 

Your children rely on you for food, clothing, housing, and more. Life insurance will make sure that the worst thing that happens to them, losing you, won’t be made that much worse by having to worry about who’s going to pay the rent and college tuition.

If you’re single

Being single doesn’t necessarily mean you should skip insurance. If you have large credit card debt, outstanding student loans, or own your own business, all of that debt can become your family’s debt if you die.

Even if you don’t have a lot of debt, a small policy that will help cover funeral costs that average around $10,000 can really help your family.

What are the different types of life insurance policies?

1. Term

Term life insurance covers you for a predetermined number of years, usually 10, 15, 20, 25, and 30 years. Once the policy term is over, the coverage ends, and you no longer pay premiums.

If you outlive the term, then no benefits will be paid. If you die during the policy, your beneficiaries will receive death benefits. Term life insurance is typically more affordable than other types of life insurance.

2. Permanent

As the name suggests, permanent life insurance is for your whole life, and upon your death, your beneficiaries will receive a death benefit. Another key feature of permanent is that it can often function not just as insurance, but as an investment vehicle.

There are a variety of permanent life insurance policies, and many of them include a cash value component. This means your premium goes toward insuring your life and building up a cash value, kind of like a savings account.

Your policy essentially earns interest that you can tap into, use as collateral for a loan. In some cases, the policy even pays you dividends. 

Roost Tip! The cash value portion of your policy accrues tax-deferred interest, which means it grows faster and you don’t pay taxes until you use it. 

Here are some of the different types of permanent life insurance:

  1. Whole life insurance: is the most popular form of permanent life insurance. In this policy, the cash value grows at a fixed interest rate which the insurer determines.
  2. Variable life insurance: has fixed premiums and you choose how you want to invest your policy’s cash value. If your investments don’t grow beyond the original value of the death benefit, then the benefit level will stay the same as well.
  3. Universal life insurance: The policy’s cash value is tied to a stock index determined by the insurer. If the cash value decreases due to the market underperforming, you may pay higher premiums to adjust for those losses.
  4. Variable universal life insurance: uses the diversified assets of the variable life insurance and pairs them with the adjustable premiums of universal life insurance. In this scenario, if the market does well, you may see decreased premiums, and if the market does poorly, your premiums may go up.

Life insurance riders

Like any type of insurance, riders are usually available (not the horse kind—riders are add-ons to standard insurance policies). 

Common riders include a term conversion rider, which allows you to convert a term policy into a permanent policy, and an accelerated death benefit rider, which allows you to get your death benefit early in the event of a terminal illness or critical injury.

What type of life insurance do I need?

Term policies are generally less expensive than permanent policies for the same amount of coverage. This is why they are great for younger people trying to establish themselves financially and protect their loved ones if they exit sooner than planned.

Let’s say you’re newly divorced with a child and in a state like Oregon, which requires you to get a life insurance policy as a part of your divorce decree. Oregon’s requirement is a minimum of $250,000, which would go towards helping the surviving parent pay for the child’s upbringing and college tuition. 

Term life is perfect for this kind of situation because it is affordable and meets the requirements of your divorce decree. You can get a policy that ends after your child is finished with college. 

You can also extend the life of term policies or switch them to permanent policies when you feel the time is right.

How much life insurance do I need?

Debt, income, health care costs, and family responsibilities should all go into determining how much coverage you should buy.

The DIRE method

This is a basic way to add up how much life insurance you should buy. The DIRE method is based on Roost’s adaptation of what is called the DIME method — which stands for Debt, Income, Mortgage, Education. 

Switch out your rent payments for mortgage, and you have DIRE, plus it sounds way direr. (Sorry, couldn’t stop ourselves from a bit of dark humor.)

DIRE example

DAdd up all of your outstanding debts (credit card, student loan…)$40,000
IMultiply your income by the number of years your loved ones will depend on it (for example, if you have an 11-year-old child, you want to calculate out at least 8 to 12 years)$480,000
RThe amount of your rent extended out to at least 10 years$240,000
EThe cost of your children’s education$300,000
Total benefit amount needed$1,060,000

List of other considerations when trying to calculate how much life insurance you need

The DIRE method is a great jumping-off point for determining how much you need to take care of expenses and loved ones. Some other things you might want to include when determining the total benefit amount are:

  • Your health and age
  • End of life expenses
  • How much can you afford?
  • Dependents (number and their ages)
  • College tuition (how many kids do you have)

How much does life insurance cost?

Life insurance quotes will depend on many things such as your gender, age, smoker, non-smoker, the benefit amount, etc.

A 25-year-old male with a $500,000 20-year term policy will see an average premium of $27 a month, while the same coverage for a 25-year old female runs around $21 a month.

Some companies, such as Bestow, have rates that start at just $10 a month with coverage of $50,000 to $1.5 million dollar policies. So if you can’t afford a lot, at least you know your family can pay your funeral cost and pay off debts.

Roost Tip! Life insurance is easier to get and cheaper the younger and healthier you are. Don’t wait if you’re thinking about getting a policy.

Is there an age limit for life insurance?

Many companies do have age limits for people who can buy their policies. Although some companies will offer coverage to people in their seventies and beyond, many companies require applicants to be under a certain age. 

Bestow, for example, offers coverage to people between the ages of 18 and 60.

Do life insurance companies require medical exams?

Many companies do require medical exams to qualify for a policy. This usually consists of a qualified medical nurse coming to your home to do an assessment and usually doesn’t take more than 30 minutes. 

They will take your blood pressure, temperature, weight, height, draw blood, and ask you some questions about your lifestyle.

Some companies do not require medical exams but will instead verify your health status through other methods such as:

  • Identity verification
  • Ask you detailed questions about your lifestyle
  • Prior attempts at getting a policy
  • Pull any available data they can find about you, such as prescription history
  • Driving record

Death is not the end

To quote Bob Dylan, death is not the end. If something happens to you, your loved ones and family will make the painful transition in their lives to move forward without you. Even if you don’t know exactly how much life insurance to get, a small policy to cover funeral expenses goes a long way to making this transition a little easier.

A quick note! Our goal is to gather and share info that’s up-to-date and helps you make great decisions as a renter. That said, the information you get directly from a provider could be a little different. Make sure to review their terms and conditions directly; and, if you see anything here that needs to be updated, please let us know! Advertising disclosure