Whenever I hear about the deaths of celebrities like Heath Ledger and Brad Renfro, my first thought goes to the children they left behind. I pray that the surviving parents have the strength to help their children through this. I also hope that the celebrities listened to their financial advisors and arranged for trusts and life insurance.
Most of us can only dream of earning the kind of money these celebrities make, but events like these are an important reminder of why every parent, spouse, or adult child with dependent parents needs a solid life insurance plan to cover expenses after their death. Unfortunately, deaths like these are also a reminder that tragedy can strike anyone at any time, famous or not.
Types of Life Insurance
Life insurance is generally available in two types: whole life and term. Your insurance agent is more likely to push whole life insurance because they earn a higher commission, but that doesn’t make it the best deal for you.
Term Life Insurance
For most people, term life insurance is the best bet. When you’re young, term life insurance is very cheap and rates rise as you age. You’re buying a fixed amount of coverage for that term, as long as you continue to pay the monthly premium. At the end of the term, you usually have the option to buy a new term policy. Terms generally range from 5 to 30 years. Use a site like NetQuote to get competitive quotes for term life insurance.
Whole Life Insurance
Whole life insurance is usually more expensive, but it contains an investment component. Your premium buys a fixed payout amount, but your payments also build cash-value. Most policies allow you to cash-out or borrow against the policy tax-free, although you usually receive less than you paid in. However, it usually takes fifteen years to build significant cash value. If you’re young and healthy, term is the better option. If you’re over 65, whole life may be your only option, but the cost will be dear.
How Much Life Insurance Coverage to Buy
The general rule of thumb is that you need a policy that covers five to seven years of your salary. So, if you earn $50,000 a year, you should buy a $250,000 to $350,000 policy. If you have very young children, you may way to opt for a policy equal to ten years of salary as a precaution. Although insurance is designed to cover the salary of the working spouse, many advisors also recommend buying coverage for a non-working spouse. They reason that the working spouse will have to pay for childcare, household help, and other assistance that the non-working spouse provided.
How Long a Term to Buy
Again, the general rule of thumb is to buy coverage that will last until your youngest child completes college. For young families, assume a 20-year-term. Many people buy coverage until their retirement age to recover lost income their spouse was counting on. Term life insurance for people over 70 isn’t usually available, or is prohibitively expensive.
Whether or not you’re a celebrity, life insurance is vital to anyone with dependents. Unfortunately, it often requires a tragedy to make us realize that and act upon it. If you don’t have life insurance, research plans today.