How Does Life Insurance Impact My Retirement?
Our personal finances are a puzzle made up of many pieces. We have our checking accounts, savings accounts, investment accounts, retirement accounts, and insurance policies. Each of these plays a different part in preparing for retirement.
What is the Primary Goal of Life Insurance?
The primary goal of life insurance is to cover your family’s expenses in the event of an untimely death. While we don’t like to think about our own mortality on a regular basis, some day it is entirely possible that for reasons far beyond our control that we will not be here any longer.
If you have a family, you want to ensure they are taken care of when you are gone. I know that is the biggest reason I pay for life insurance. I know that if I get in a car accident on the way to work, get eaten by a cougar when hiking, or join the list of stupid deaths at the Darwin Awards that my wife and (future) kids will be okay.
I know that I am the primary bread winner in my home and that if my income were to stop today, my wife would be fine for about two or three years with our savings. But what about the year after that? And what about funeral expenses? And what about putting our kids through college? And what about her future and retirement?
Those are all a lot of scary situations that I don’t want to leave my family in. As long as I’m alive and, thanks to life insurance, as long as they are alive, I never want my family to be hungry. I never want them to worry about their home. I never want them to be without anything they need for a comfortable life.
But what does that have to do with retirement?
Does Insurance Pay Me In Retirement?
There are several types of life insurance with different implications depending on how long you live and how you choose to structure your policy.
There are two main camps of life insurance you can choose from. The first is an investment style life insurance, most commonly known as whole life, universal life, or variable life. When you pay for these types of policies, you are contributing to two potential situations. First, if you pass away, your family gets paid the lump sum we discussed above. Second, a portion of your payment goes into an investment vehicle that pays you a monthly income after a certain time down the road.
The benefit of this is that you know you will get money back at some point. Either through your policy payout (which we hope doesn’t happen) or through an investment return, you will get money back.
The downside of these policies is that the payment can be expensive. Really expensive. After all, you are paying for both insurance and an investment at the same time.
On the other hand, there is term life insurance. That is what this site is all about. Term life has a much lower cost each month than an investment style policy. But with that, if you live to the end of your term (usually 20 or 30 years), you don’t get any money back.
Is that good or is that bad? Neither. The two types of policies have different costs and different goals. If you are young, for as little as a few hundred dollars per year you may be able to protect your family with a policy worth hundreds of thousands of dollars. As your income increases and your family grows, you can always tack on an additional policy to increase your insurance into the millions of dollars in coverage.
How Does This Fit Into My Retirement?
So you have two basic options for your retirement when thinking about life insurance. You can pay extra into life insurance now and have an insurance company manage that investment and pay you in the future or you can pay a lower payment now and invest on your own.
I know that I am pretty well versed in investments and retirement planning, so I don’t plan to fall back on investment life insurance in my future. I am saving nearly 20% of my income each month and plan to continue increasing that each year.
For life insurance, I am only planning on term life insurance. By the time 20 or 30 years come around, I plan to have saved plenty through my own investment accounts to protect my family in the event I’m not around anymore. I know that if I am in control of my investments, I will continue to put money away for the future and I can save each month until then.
What is Right for You?
I know that everyone doesn’t have two finance degrees. That’s why I’m the one writing here. But I am not that special. You can save just as easily as I can.
For most of us, a good 401(k) retirement plan, your own savings account, and term life insurance will do plenty to cover us and our families in the future. Your term life insurance policy is there as a safety net just in case. Your 401(k) and individual savings and investments are there for when we live to a ripe old age.
If you don’t know where to start, make sure to take full advantage of your employer’s 401(k) plan and matching each pay period. Always put away more in an emergency fund too, so you can get to that savings without paying a tax penalty.
As for the insurance, if you don’t know where to start, you have come to the right place. Head to the quotes section to get started. All you need to do is enter your zip code to get started, no personal information required.
What are you waiting for? Protect yourself and your family’s future today.
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