My wife and I recently celebrated our fifth wedding anniversary, and our tenth year together! Currently in the midst of a long-distance chapter while we both chase our dreams, we long for a future chapter when we once again live in the same city.
And as much as we look forward to the future, we understand it is important that we also plan for other eventualities. Life is precious, and we’re reminded of that every day. We aren’t guaranteed tomorrow, and in the event tragedy strikes too soon, there are details worth thinking about in advance.
While it may feel cold to do so, it is important to critically review your family situation with a data-driven perspective. If you lost your spouse, and their income tomorrow, would you still be able to pay your bills? What lifestyle changes would be required of you so that you could afford to live on your own? How long would it take you to implement those changes?
In what was quite possibly the most morbid couples activity we have ever worked on together, my wife and I took out life insurance policies on one another a few years ago. The process was relatively painless: After completing an application, a nurse came to our home, took our vitals, and drew some blood. That was it! We now make small monthly premium payments (no more expensive than a dinner out), and have peace of mind for the future.
In the event one of us passes away earlier than expected, the list of heartaches and challenges will be overwhelming. But it gives me comfort to know that if I die, my wife will not be spending any time worrying about how to pay the rent while she recovers.
You may find that you have the opportunity to purchase life insurance through your employer. If this is the case, you will likely receive a nominal amount (i.e., one year’s salary) for free and without qualification. But in addition, you will have the opportunity to qualify for and purchase additional coverage. I don’t recommend this, and here’s why:
In theory, you’re healthy and young when considering this 30 year life insurance plan, so your premium will be low and the plan will last long enough for you to become self-insured. By obtaining this through a third party provider, you will secure and maintain that rate for the full 30 years.
Instead, let us pretend that you qualify for and obtain the additional coverage with your employer. Three years from now, you are diagnosed with a new health condition. Five years later, you find an incredible new job opportunity and leave your employer (and therefore your coverage) behind. In attempting to qualify for the same level of life insurance under your new circumstances, you will likely be charged much more for the same coverage, or worse, you may not qualify for coverage at all. This circumstance could place you in golden handcuffs at your current job, and prevent you from progressing or staying happy for the rest of your career.
Term Life or Whole Life
There are two types of life insurance policies you can purchase: Term life or whole life. In a term life plan, you are setting a duration on your insurance policy from day one; anywhere between ten and thirty years from now. Once your policy expires, you need to reapply for the life insurance and your premiums will be raised. Whole life insurance on the other hand covers you for your entire life, and never expires. Because the insurance company won’t have the opportunity to ever raise your premium rate, you pay a higher premium than you would with a term life plan.
So how do you choose between term life and whole life coverage? My recommendation is clear: Do not, I REPEAT, do NOT, purchase a whole life insurance plan.
Life insurance is not a get rich quick lottery; it is also not a retirement strategy. Think of it like this: If you’re skydiving, are you going to rent the parachute and instructor for the duration of the risk (the period of time where if you don’t have it, things could be bad), or for the rest of your life? You don’t need a skydiving instructor and a heavy backpack while you’re shopping for groceries.
Life insurance is the same way: You need it during the time in your life when there is a high risk that not having it would completely derail your plans in life. By selecting a term life insurance plan that covers you between now, and when you expect to be financially stable, with investments and assets that would sustain your dependents/spouse after your passing, you will pay lower premiums and further entice yourself to be aggressive and focused when it comes to saving for your future.
The Role of a Credit Card
Of course, we couldn’t get through a blog post here without talking about credit cards, but what do credit cards have to do with your life insurance plans? Well, in the event that you have life insurance protecting you and your spouse, and your spouse passes away unexpectedly, you should not expect to receive the payout from the life insurance policy immediately.
Time will pass as you file your claim and your provider reviews the details. Expenses on the other hand, will start to accrue immediately. The survivor will find themselves responsible for associated travel expenses, funeral expenses, and other miscellaneous logistics; all of which will require payment.
If you don’t have the cash in an emergency savings account (you should!) to cover this unexpected burden, you may decide to use your credit card to make these payments. Call your bank! Explain the situation, and ask if a promotional 0% APR rate can be applied towards your purchases for the next three months. They may or may not help you. If they don’t, there are several cards on the market that offer a promotional 0% APR rate for 6, 12, and even 18 months! These cards could be a huge asset to you as you incur expenses that you don’t yet have the funds to pay. Once your life insurance benefits arrive, immediately payoff the cards. This next chapter will be hard enough without debt hanging over your head.
The cost of term life insurance may not seem worth it to you. But if you are young and healthy, this is the perfect time to secure a low premium that will take care of your loved ones for up to 30 years should something unexpected happen. Ready for some good news? 99% of people that take out a term life insurance policy outlive it. That means they live longer than their policy and end up “throwing away” the money they spent on premiums over the years. But I’d argue it is still worth it to insure your loved ones. Worse case, tragedy strikes and your loved ones are grateful to have the financial support, best case you live long enough not to need it, and that’s not so bad either.