When it comes to Life Insurance, it can come off as morbid. You’re thinking and talking about when you aren’t here when you’re still here - how much of a mind eff is that?  Life insurance is often overlooked, but it’s a key component of a financial plan, especially for those learning the basics of managing money. We’ve seen the GoFundMe and T-shirts, but Life Insurance can be the same price as your Netflix account or that 4 for $20 at Starbucks. Whether you’re just starting out or finally getting serious about protecting your financial future, knowing what type of life insurance fits your budget is crucial. 

I wanted to pause to update an older blog post about Life Insurance —  break down the basics of life insurance, how to determine what you can afford, why having insurance outside your job is essential, and even why you should consider life insurance for your children. I’ll also share a personal story about how the wrong classification can impact your policy.

Let’s start by talking about the types of Life Insurance that they are. When you know what’s out there, you’ll know how to formulate your decision moving forward. Even if you do know about these types of insurance, it’s good to know if they are best for you vs what social media tells you to do:

Types of Life Insurance You Should Know

When it comes to life insurance, it’s important to understand the two main types: Term Life Insurance and Permanent Life Insurance (Whole/ Universal Life).

• Term Life Insurance:

• Best For: Individuals looking for affordable coverage.

• How It Works: Provides coverage for a set period—usually 10, 20, or 30 years. If you pass away during that term, your beneficiaries receive a death benefit. If not, the policy expires unless you renew the term policy or convert it to another type of policy. 

• Cost: Term life insurance is often the cheaper option, making it a good fit for families on a budget.

• Example: A 30-year-old non-smoker could get $250,000 in coverage for as low as $15–$25 a month.

• Permanent Life Insurance (Whole Life and Universal Life):

• Best For: Individuals looking for lifelong coverage and a cash value component.

• How It Works: Covers you for your entire life and accumulates a cash value that grows over time, which you can borrow against.

• Cost: Permanent life insurance is significantly more expensive. Policies like Whole Life and Universal Indexed Life (UIL) can have hidden fees that erode the cash value and make it less beneficial for families making under $100K a year.

• Example: A 30-year-old non-smoker could pay over $200 a month for the same $250,000 coverage you might get for under $30 a month with a term policy. I’ve seen some Whole policies for around $40, it depends on your profile towards the policy and any riders (bonus things) you have on your policy. Let’s get into this real quick. 

+ Think about burial insurance as another option too to handle your actual burial. As with anything, please look into the payout (Cash Benefit, Death Benefit, etc) and the policy itself to know how it works when you transition.

++ Even if you don’t have any kids, think about your assets and who they will go to - could be your extended family, friends, or even charity.

Insurance Boost: Riders

An insurance rider is like a customizable add-on to your life insurance policy that gives you extra coverage or benefits for specific situations. Think of it as a way to tailor your policy to better fit your needs. For example, you could add a rider that covers long-term care or provides extra payouts for accidental death. While these riders offer additional protection, they usually come with a higher premium. It’s a great option if you want to personalize your coverage, but always make sure it fits into your overall financial plan.

 Here are some common types of life insurance riders:

• Waiver Of Premium Rider: If you become disabled or unable to work, this rider waives your premium payments while keeping your policy active.

• Accidental Death Benefit Rider: Provides an additional payout if the insured dies due to an accident, often doubling the death benefit.

• Child Term Rider: Offers life insurance coverage for your children under your policy, usually at a low cost.

• Guaranteed Insurability Rider: Allows you to purchase additional coverage at specific life events (e.g., marriage, birth of a child) without undergoing a medical exam.

• Return Of Premium Rider: Refunds the premiums you’ve paid if you outlive the term of your policy, typically for term life insurance.

• Long-Term Care (LTC) Rider: Provides funds to cover long-term care expenses if you become ill or disabled and need care services.

• Critical Illness Rider: Pays out a portion of the death benefit if you’re diagnosed with a specified serious illness, like cancer or a heart attack.

Adding riders can be helpful, but they often come with increased premiums, so it’s essential to evaluate whether the added protection fits within your budget and financial plan.

[Do you research what type of policy you need and what riders fit your goals? Use this blog post to help ask the right questions upon getting your policy. ]

A Thought About Universal Indexed Life (UIL) Insurance And Indexed Universal Life (IUL) Insurance

I’ve been seeing more and more social media viral content about UIL/IUL policies and how they’re amazing and bring wealth. Depending on how much cash flow you have and the risk tolerance you have (if the value drops will you be fine). However, for most families making under $100K, the high fees and complex structure often make it a poor financial move. I’ve seen people excited about the idea of their policy "growing with the market," only to be hit with hefty fees. These fees can eat into your cash value, and the return may not be as high as you think. Always ask about the fees, please!

If you’re budget-conscious, you’re better off sticking to a simple term life insurance policy and investing in low-cost index funds separately. 

When talking about life insurance, you might come across UIL (Universal Indexed Life) and IUL (Indexed Universal Life). Although they sound similar, it’s important to understand the distinctions, especially when deciding what’s best for your financial plan.

Fun(d) Fact: I feel the same way about annuities (for some people). I used to do product marketing for wealth products like annuities, so I know what I type. 

Indexed Universal Life (IUL)

• How They Work: IUL is a type of permanent life insurance that provides a death benefit and builds cash value over time. The cash value is tied to the performance of an equity index (like the S&P 500), but your money isn’t actually invested in the market. Instead, the insurance company credits your cash value based on the index's performance up to a cap.

• Pros: You get the potential for higher cash value growth than traditional universal life policies while being protected from market losses due to built-in floors (usually 0%, meaning you won’t lose cash value even if the market performs poorly).

• Cons: The caps on gains can limit how much you benefit from good market performance. There are also administrative fees and other charges that can reduce your overall returns. IULs can be complex, and for individuals earning under $100K, the high fees may outweigh the potential benefits.

Universal Indexed Life (UIL)

• How They Work: UIL, as mentioned, is more of a generic term that people often mistakenly use to refer to Indexed Universal Life policies. It’s essentially the same thing as an IUL.

• Pros and Cons: The pros and cons mirror that of IUL since they're essentially the same. However, some people mistakenly refer to UIL as a standalone product, so it’s important to clarify that the term they're usually referring to is Indexed Universal Life.

Should You Consider IUL or UIL?

Short story short, nope. Especially if you aren’t sure of the fees, comfortable with loss. Also if you aren’t very knowledgable about how they work, I don’t care what your agent told you or what that person with half a million followers said. Yes, personal finance is personal - but you need to research everything you read. Even this content and see how it works for you vs what they say it could do. If people in the income range of under $100K, IUL/UILs often aren't the best fit because:

• Fees Can Be High: IUL/UIL policies come with administrative costs, cost of insurance, and additional fees that can eat into your cash value.

• Complexity: The structure of these policies can be difficult to understand, and you may not get the returns you’re expecting.

• Better Alternatives: For most people, a simple term life insurance policy paired with investing in low-cost index funds may provide better long-term financial security without the high fees and complexities.

When considering IUL/UIL policies, the fees and performance of the product (how it’s underwritten) aren’t the only things to be cautious about. There have been cases where some agents push these policies as part of MLM (Multi-Level Marketing) schemes or even scams, prioritizing their commission over your financial well-being. They may oversell the growth potential while downplaying the hefty costs, or push you to recruit others into the same policies. This can create a cycle where clients are pressured into buying expensive products they don’t fully understand. Always work with a licensed, reputable agent who provides clear and honest information and a company that is well-known when it comes to these types of financial products.

How to Price Life Insurance Within Your Budget

Finding the right life insurance means balancing coverage with affordability. Here’s how to approach it:

• Assess Your Financial Needs:
  Think about why you need life insurance. Do you have dependents who rely on your income? A mortgage or significant debts? A good rule of thumb is to buy a policy worth 10-12 times your annual income.
  Example: If you make $50,000 a year, you should aim for coverage between $500,000 and $600,000.

• Set A Budget:
  Life insurance shouldn’t derail your financial goals. Ideally, spend no more than 1-3% of your annual income on life insurance premiums. For someone making $60,000, that translates to spending between $50 and $150 a month. Even if you have a policy that costs $15/$20, having some insurance is better than having NO life insurance. 

• Shop Around:
  Life insurance quotes vary widely. Get quotes from multiple providers, and make sure you understand what’s included in the policy. The platforms I recommend are MoneyGeek and NerdWallet. Also, think about any other insurance you already have - life if you have auto insurance with ____, do they offer you a lower life insurance rate if you ‘bundled’ your policies? Don’t forget to negotiate!

Stat: According to a 2022 study, 42% of Americans say they would face financial hardship within six months if a primary wage earner died, highlighting the importance of having enough coverage.

Insurance Beyond Your Job: Why You Need It

Many employers offer life insurance as part of their benefits package, which is a great perk. However, this coverage usually only amounts to 1-2 times your annual salary, which likely isn’t enough if you have dependents or significant debt. Plus, this insurance doesn’t follow you if you leave the company. When you leave, the policy stays and gets moved to the next person walking into the company. This is why I suggest that you have multiple policies, more on that in a bit. 

Options When You Leave Your Job:

• Convert Your Policy: Some employers allow you to convert your workplace life insurance into an individual policy, but it’s often more expensive.

• Buy Your Own Policy: Even if your job offers life insurance, consider purchasing a policy outside of work that gives you more coverage and stays with you wherever you go.

This way, you’re not dependent on your job for this critical part of your financial safety net.

Life Insurance For Your Children: What You Need To Know

Parents often ask if they should get life insurance for their children. I always suggest that Parents not only get Life Insurance for their kids, but other things like an IRA, 529/UGMA/UTMA, etc. You’re your child’s first financial planner, set the foundation. While it’s not as common, it can be a good idea to lock in low premiums early on and provide coverage for them into adulthood. Psst - if you have a child with someone, make sure that you have a policy on the other parent for the benefit of the child in case you aren’t with them. 

However, be mindful of how your child is classified by the insurance company. I had a client whose child was incorrectly classified as a smoker on a whole life insurance policy—even though the child had never smoked! This error resulted in much higher premiums than necessary.

Action Steps:

• Double-Check The Application: Always review the details before you sign off on the policy, especially how your child is classified.

• Consider Term Or Whole Life: Some parents opt for small Whole-life policies to cover funeral expenses or as a gift to their child later in life. Just make sure the fees don’t outweigh the benefits.

If you're on a budget, term policies with child riders are often a more affordable way to provide coverage without overpaying for costly whole-life policies. I still feel that term would be a great option for you to get for them when it comes to life insurance.

Naming Beneficiaries: Another Focus

While I talked about estate planning on a budget in this post, I wanted to bring this into this chat again. Choosing the right beneficiary is crucial in making sure your life insurance policy helps the people you intend to protect. Here’s what to keep in mind:

• Primary vs. Contingent Beneficiaries:

• A primary beneficiary is the first person to receive the death benefit, usually a spouse, partner, or child.

• A contingent beneficiary receives the benefit if the primary beneficiary passes away before you do. Always list at least one contingent beneficiary to cover all your bases.

• Regularly Update Your Beneficiaries:
  Life happens—divorces, remarriages, or the birth of a child can change your wishes. Review and update your beneficiaries every few years or after a major life event.

Fund Tip: Make sure the beneficiaries on your life insurance match those on other accounts, like retirement funds and savings, and that this is reflected in your estate plan.

*If you’re wondering about my other thoughts about life insurance and different scenarios involving it, check out my features on MoneyGeek.

Incorporating Life Insurance Into Your Financial Plan:

As a Financial Planner, what would I be doing if I didn’t have you layer this into your overall financial plan, rich or resourceful. To make the most of your life insurance, it should be part of your overall financial plan. Here’s how to include it:

• Create A Budget For Premiums:
  Start by working your life insurance premium into your budget. Automating payments can help make sure you don’t miss any due dates, which could lead to a lapse in coverage. 

• Align With Your Estate Plan:
  If you have a will or estate plan, make sure your life insurance policy aligns with it. For instance, if you set up a trust, consider naming it as your beneficiary to ensure your assets are distributed according to your wishes. 

• Consider Your Long-Term Financial Goals:
  Think about how life insurance fits into your broader financial goals. Are you aiming to leave a legacy for your children? Or simply ensuring that your partner or family isn’t left with significant debt? Choose a policy that supports these goals. Also if you have multiple policies, structure them to be assigned to a specific thing. For instance, one policy could be to pay off the house (in case it's not in your estate), etc. Think of them like income streams. 

Fund Stat: Studies show that 54% of Americans are underinsured, meaning they have less life insurance coverage than they need. Avoid being part of this statistic by reviewing your financial situation and choosing the right coverage. That figure will increase if you look like me or a minority. 

Final Thoughts

Choosing life insurance may seem overwhelming, but by understanding the basics and determining what fits your budget, you can make an informed decision. Whether you opt for a term policy or a permanent one, having life insurance is an important step in securing your family’s financial future. Be sure to secure coverage beyond your employer, especially if you're planning to switch jobs, and always double-check policy details—especially when it comes to your children. Also, make sure that you pay your premiums, a lapsed policy is a horrific thing to experience. 

As you continue building your financial strategy, remember that your future—and your loved ones’—deserves protection. Now’s the time to start, no matter the wallet! 

Sources:

• LIMRA, “2022 Insurance Barometer Study”

• NerdWallet, “Life Insurance Calculator”