Insurance for the Average Person

Although life insurance is owned by the wealthiest among us, mainly as way to maximize large estates for their heirs, its true purpose is to create an instant estate for the average person who hasn’t had the time to build one. For the average person, this instant estate is the way that financial security is provided for surviving family members when the capital may not be available through personal assets or savings.  So, it is the average among us who have the greatest need for life insurance and whose survivors will benefit the most.

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Why the Average Person Needs Life Insurance

While it’s very simplistic to use statistics to define the average person in America, it does provide a starting point in determining the role that life insurance can play in our financial lives. According to U.S. Census Bureau statistics for 2008, the average person is a male or a female (the gender breakdown of adults is nearly a statistical tie – 49% male, and 51% female), age 36, married with 1.2 children and earning an income of about $42,000.  She owns a home valued at $275,000 with a mortgage of $187,000 and has about $30,000 in retirement savings.  Her family’s monthly expenses are $2,600 and they save about $300 per month.  They also have about $5,500 in debt outside of their mortgage.

The average person has aspirations of providing for the education of his or her children, buying a bigger home, paying off debt and retiring on time. But, for average people, life happens and the aspirations that we hold can easily get sidetracked when unexpected events occur, especially an untimely death.  For the average person, life insurance provides the capital needed for the family to stay on track with its goals when the family hasn’t accumulated enough on its own.

In order for this typical family to live securely without debt encumbrances and with the knowledge that the kids will have educational opportunities, the capital needed today would be as much as $525,000.   These funds would pay off debt, establish a college fund, and cover child care expenses to allow the surviving spouse to continue to work.  It also provides a stream of income that will partially offset the lost earnings of a primary breadwinner.  Considering the lost earnings of a primary breadwinner over a lifetime, this is not an amount that will suddenly thrust the surviving family into the ranks of the wealthy, however, invested wisely, it can provide the essential financial security blanket a family needs.

The Insurance Solution

The good news is that the average person owns at least one life insurance policy. The bad news is that the average face amount is about $125,000 which would be woefully inadequate to cover the most essential needs of the family.  And, it doesn’t address the reality of the typical family where the surviving spouse is either not currently working, or is not the primary breadwinner. 

Using this profile of the average person, it would not be excessive to recommend that he or she purchase a life insurance policy with a face amount of at least $500,000.  Although this increases the total amount of insurance to $625,000, the overall costs could be less than if a policy were purchased for under $500,000 due to the coverage bands offered through most insurance companies.

The Insurance Policy

At this point, the issue comes down to which type of life insurance the average person should own.  The reality is, when it comes to choosing a particular kind of policy, there is nothing average about any one person.  There are highly individual factors that must be considered that reflect a person’s preferences, financial situation, future earnings prospects of the family, financial outlook, risk tolerance and, most importantly, health.

There are essentially two forms of life insurance: Term life which is pure life insurance that covers a temporary protection need. And, cash value insurance (whole life, universal life, variable life) which provides long term protection with a savings element. 

Term Life

Term life is a low cost way to own life insurance and is most practical for people on a strict budget.  It is also ideal when there is a known period of time for which the need for life insurance will last.  Most term policies will either expire at some point in time (level term) or the premiums will, ultimately become very expensive due to the insured increasing mortality costs (yearly renewable term).

The risk is that, if the need for life insurance protection continues beyond these points, the cost of buying a new term policy or continuing with the renewable term policy could prove to be expensive. The biggest risk is finding out that you’re uninsurable due to a medical condition or history.

Permanent Life

Permanent life is more expensive than term; however, the actual cost of insurance is about the same. The difference between the premium amount and the cost of insurance is invested in a cash value account that is allowed to accumulate tax free.  The buildup of the cash value enables the life insurance company to level out the premiums even though the insurance costs increase as you age.  The primary advantage of a permanent life insurance policy is that the premiums will never increase and the life insurance coverage will continue as long as premiums are paid.

When the cash value accumulates sufficient funds, they can be applied to reduce or eliminate the premium payment while maintaining the death benefit. Cash values can also be used to purchase additional death benefit if the need for more coverage arises.  For long term protection, permanent life insurance can be more cost effective.

Summary

There is no typical family when it comes to choosing a life insurance policy, however, for most families, where there is only one primary breadwinner, the need for life insurance often doesn’t end once the kids are grown and out of college.  A surviving spouse that is the secondary breadwinner, or is not currently in the work force, will have a difficult time maintain a lifestyle that was established based on the earnings of both spouses.  Thoughtful consideration should be given when purchasing life insurance to ensure that it truly reflects the needs, desires and hopes of the surviving family.

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