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The information provided in this section refers to life insurance in general and is designed for all audiences. For information on the specifics of the CU optional life insurance plans for benefits-eligible employees, follow the link at the end of the section.
How does it work?
Life insurance is meant to financially protect other people in the event that the insured person dies.
Where life insurance gets complicated is when it is combined with another financial service, like the option to take out a loan against the policy, or the option to invest the money in stocks or bonds.
If your goal is simply to financially protect your dependents in the event of your untimely death, then most experts will recommend a term life insurance policy. If you want to combine life insurance with another type of financial instrument (e.g., investments, loans, estate planning), then the type of policy you should buy will vary, and you should definitely consult with a financial professional to learn about the various options that are available.
We'll focus on life insurance in the pure insurance aspect. That is, insuring against an untimely death.
Who should consider life insurance?
- People with financial dependents
Common examples of financial dependents include young children, live-in elderly parents or a non-working spouse. Life insurance would protect these people in the event that you and your income are gone.
- Unpaid people who contribute to the household
People whose unpaid work contributes to the household may also need life insurance on themselves. In their absence, the work would have to be paid for outside the home. The most common example is the need to fund outside day care to replace a stay-at-home caregiver.
- People who own businesses
Financial dependencies are created when people go into business. If a business owner dies, there should be some protection for the business partners and to insure the business can survive.
- People whose debts would be transferred to others
If your debts or expenses would be transferred to another party upon your death, then life insurance would protect that party from facing your obligations.
When focusing on personal life insurance, consider your current (and future) household composition. Think about how many earners there are, who is contributing unpaid work to the household, and whether or not there are other financial dependents.
Another consideration is whether or not to purchase life insurance for children. In the event that a child dies, the payout from a life insurance policy could be used to pay for any medical bills that were incurred, thereby protecting the household’s finances.
How much do you need?
There are many rules-of-thumb out there for how much life insurance people need (e.g., 10 times your income). Life insurance is completely individual, so there's no substitute for calculating how much you need based on your specific circumstances. There are many life insurance calculators available online. You can check the website of your bank, insurance company or retirement account as a starting place. Basically, it comes down to the value of the income you are looking to replace over a specific length of time.
Many people are tempted to skip calculating their life insurance needs and instead figure out how much they feel comfortable paying each month and buy that amount of coverage. That's a gamble. You may be over-insuring or under-insuring if you use that method.
What kind of payout do you want?
Are you looking to maintain household income indefinitely, or are you looking to provide a financial cushion for just a few years? A policy that replaces income for many years will need to be much larger than a policy that provides a short-term financial cushion. The larger the coverage amount, the more the policy will cost.
Should the policy pay off all debt?
Many people wonder if they should include the cost of paying off their mortgage or other debt in their life insurance policy. It depends.
Some people prefer to ensure that the debt will be paid off entirely and none will be borne by the surviving dependents.
Others prefer to make sure that the policy includes enough income so that the dependents can comfortably make the monthly debt payments.
How much do life insurance policies cost?
Several factors will influence the cost of your policy premiums:
- risky occupation;
- risky activities;
- driving record; and
- the type of policy.
You may be required to submit to a health exam before you can obtain a life insurance policy. Your cholesterol level, your weight and your blood pressure are commonly factored in. If you are young and healthy, you'll generally pay lower rates.