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Life insurance is not sexy. It’s not fun  to talk about and it’s definitely not a process anyone enjoys. However,  much like death and taxes, buying life insurance is an essential part of  life and a crucial element of sound financial planning. Most everyone  is aware that they need life insurance but, from my experience,  most people procrastinate until there is an important life event that  pushes them to buy it. However, there are some serious benefits to  buying insurance early on, especially if you have debt, are married or  planning on marriage, have or are planning on starting a family, or you  are a business owner.

How Does Term Life Insurance Work? Term life  insurance is quite simple—use it or lose it. In other words, you pay an  annual premium (determined by the insurance company) for the “term” of  the policy (usually 20 or 30 years) and if you die within those 20 or 30 years, your  beneficiary will collect the specified amount indicated on the policy.  For example, let’s assume you purchase a $1 million, 20-year term policy  and the premium is $600/year. Assuming you are current on your premium  payment, if you die within the 20-year period, your beneficiary will  receive $1 million, tax-free. 

How Does Whole Life Insurance Work? A whole life policy provides a set  amount of coverage for your entire life. As long as the premiums are  paid, your beneficiary will receive the benefit amount upon your death.  Whole life policies also build up "cash value" from part of the premium  being invested. It’s possible to access that cash value as the funds  grow.

Whole  life policies build up cash value slowly at first, but then pick up the  pace after several years, when your earnings start to grow faster than  your "mortality cost” (the cost of insuring you). At some point, the  cash value may eventually earn enough that it could be used to continue  to pay for your premiums until you die. Your insurer should be able to  provide you with a policy illustration to demonstrate the potential  growth of your policy.

Why Do You Need Life Insurance? One of the most  fundamental questions you should ask yourself when contemplating life  insurance is this: Will someone in my life be adversely effected (from a  financial standpoint) by my untimely death? This is different from  “Will someone be sad by my untimely death?” I will be sad. But I do not  want to assume your financial liabilities.

• If You Were To Die Tomorrow, Who Would Assume Your Debt?  If you own a home, a business, or have personal liabilities, someone  else will become responsible for those liabilities (generally your next  of kin). Therefore, your spouse, your parents or your siblings could end  up having to pay your debts after the good Lord takes you.
• Do You Have Children? Guess what? If you have kids  and you don’t have life insurance, you may have put your entire family  at risk. I know that seems a bit harsh but it is a potential reality.  Enough said on that.
• Are You A Business Owner? What would happen to  your business if something were to happen to you? Do you have a  succession plan? If you a business owner and do not have a succession  plan, speak to a financial advisor to get you on track to help you  create one. This could mean purchasing some type of insurance product  and creating some documents determining who would inherit your business  and its assets and liabilities.

How Much Insurance Do You Need? This is not an easy  question to answer and everyone is different. First, it depends on the  variables I mentioned above. It also depends on your age, your sex (men  are generally more expensive to insure than women), and how much  insurance you can afford. The general formula used by insurance agents  is somewhere between 7-10 times your annual salary. For example, if you  make $100,000/year, you should consider buying somewhere between  $700,000 to $1,000,000 of insurance. That being said, if your life is  complicated (kids, business, lots of debt), you should probably look to  increase that amount. Again, consider seeking the advice of a financial  advisor who understands your financials before making this decision.