Would your family be financially ok if your income disappeared tomorrow? If the answer is no, then life insurance becomes a critical piece of your overall financial plan. A life insurance policy can protect against lost income so your spouse/kids can maintain their lifestyle, pay off big debts like mortgage or loans, covers childcare and daily expenses even for a stay-at-home parent, funds future needs like college, and prevents a financial crisis during an emotional crisis.
For most families your life insurance needs are higher when kids are younger. Should a parent pass away too soon then the kids are still financially dependent, usually debts like mortgage are still larger, and you’ve saved less in assets and investments. Over time the need for life insurance protection declines as kids graduate college and start working, your mortgage and debts are smaller or paid off, and you’ve accumulated much more in savings/investments.
For these reasons, a term life insurance policy for a fixed period such as 20 years may be a good solution and very affordable for many young families already juggling a variety of fixed expenses and savings goals. Try and view it as, I’ll pay a small premium to protect against the bigger risk of passing away too soon, and not as what if I outlive the 20 years then I lose all my premiums? There are other types of policies that are more permanent and build up cash value, which may make more sense for some people based on their financial situation and goals. However, permanent policies cost significantly more and are used for wealth transfer, tax planning strategies, business succession, and legacy. For most young families term life is usually the right starting point so you can obtain maximum coverage at the lowest cost. Try to avoid underinsuring because permanent is too expensive. Sometimes people will buy a small permanent policy and skip adequate term coverage. In that scenario, the family is under protected should a parent pass away too soon. Think, get the right amount of protection first (term), then you can always consider adding sophistication later if necessary.
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