Image by hockadilly
When you’re deep in debt, it’s hard to think about adding another expense to your already stretched budget. Life insurance tends to be “that added expense” which many deem to be unaffordable or simply not a financial priority.
As of 2010, only 44% of Americans had individual life insurance. That’s an all time low, down by almost 30% from the 1960’s.
The truth is that life insurance has become much more affordable and accessible, and with very slight adjustments in our spending or in the way we budget, most of us can afford the coverage; we just need to understand the importance and value of it for us and our families.
Here are few approaches to life insurance, depending on where you stand financially and based on your current family situation.
Life insurance for those who are in debt
Your debt to income ratio has a lot to do with whether you have or don’t have life insurance coverage. If debt repayment is your priority right now, great! Keep going and don’t give up on your debt repayment goals and strategy. What you do need to know is that your priority does not have to automatically disqualify you from purchasing a life insurance policy.
At this stage of your journey, especially if you have a spouse and children, you should at least purchase enough coverage to cover your current debt and mortgage. If you’re healthy, you can purchase a $200K – $300K policy for around $20 – $30 a month! A few reliable sites to shop for life insurance include: Insure.com or Accuquote.com.
With a slight adjustment in your spending habits, you can easily find $20 – $30 a month to purchase a peace of mind knowing that if something were to happen, your spouse would not have to worry about creditors.
Tax season is just around the corner, and many insurance companies will give you a discount if you pay once a year instead of once a month. You might consider using some of your tax return to purchase life insurance, if you expect to get a return this year.
Life Insurance Rule of Thumb
Life Insurance should not be viewed as a fool-proof provision but as a financial buffer and protection plan. As a rule of thumb, both spouses should have life insurance worth 10X their annual income. So, if you’re earning $50K a year, you should have a policy of $500,000 to cover your outstanding debts, mortgage and living expenses for a specific period of time.
Whole Life or Term Life Insurance? Private or through Employer?
In general, term life insurance is the best and most affordable option. You can purchase a 10, 20 or 30-year term policy and renew it once your initial term is up. The longer the term, the higher the payment, so if you’re really strapped for cash, you may opt for a shorter-term policy.
Your employer will often have free life insurance coverage for a smaller amount, covering both you and your spouse. If you’re not sure about your employer’s offer, check with your HR department so you are fully aware of the benefits. If you have an option of purchasing life insurance though your employer versus purchasing your plan privately, the second option tends to be a better one simply because if your employment were to terminate, your life insurance policy may terminate with it. If you purchase your plan privately, the plan will not expire unless you stop making the payments.
Last word of caution regarding your payments…
Do not pause your payments after just a few years. If you stop your coverage 3 years into it, those $30 monthly payments will turn into a $1060 loss! So make life insurance your priority, and if you have to downgrade or eliminate expenses like cable or other forms of entertainment, do so in order to assure those payments are made. After all, entertainment only costs you money month after month with no future benefit. Life insurance carries financial protection, hence should be much higher on your financial priority list!