Life insurance - you might have heard about it, you may even have it, but do you really understand what it is? IMO, insurance is unsexy, boring and sometimes frustrating. But it’s also a necessity. Understanding it will give you the chance to make sure you’re covered in an emergency - for you, your significant other and for your larger family.
Let’s break it down.
A life insurance policy is an effective way to guarantee that even when you’re not around, your family will be able to replace your financial contribution. We’re talking full-on, proactive coverage so your loved ones aren’t scrambling to stay afloat if you passed away suddenly. By design, life insurance helps your loved ones pay for a variety of expenses that you leave behind. Not only does it cover funeral expenses (which averages around $7,360), but it also helps pay for expenses that you were helping to pay for prior to passing such as your mortgage, car payments, even groceries. In short, a life insurance policy makes up for the lost income that comes with a death.
Ask yourself this question - if you were to die, say tomorrow, would anyone in your life suffer financially because of it? Notice, we said financially. Of course your family and friends would be terribly sad, but would any of them be responsible for expenses you leave behind? If you answered yes to that question, life insurance should be on your radar. Leaving a financial burden on those you love is probably the last thing you’d want to do following your death.
Life insurance is good to have, no matter who you are. But if you fall into any of the following groups, you’ll certainly want to consider a policy:
Being the breadwinner means that your household is dependent on your income to survive financially. If anything were to happen to you next week, what would your family do without you? Alden’s family was put in this unfortunate situation with the untimely passing of her father. It took an incredible blow to their family; emotionally, physically and financially. But their ability to keep up on all their bills was all thanks to having a good life insurance policy in place. So, if your S/O or kids rely on the money you bring in each month, life insurance is an incredible way to mitigate risk.
Married or in a committed relationship? If you are, we can almost guarantee you’re splitting the bills with each other to get by. Meaning, you’re dependent on your significant other’s income to maintain a living. Even if one of you makes a little bit more income than the other, money may be tight for your partner if you were to unexpectedly pass away and left them with all the expenses. What most people don’t know is that you don’t need to be married to share life insurance benefits with your partner!
When you think of long-term relationship, you probably think of your significant other. But on the other side of the spectrum is your business partner. If you’re in on a business with someone and suddenly pass away, it’s likely you will leave them in a bind. The last thing you want your business partner to go through is a complete shutdown of the empire you’ve built together - no matter the size.
Let’s just put it this way, if you have any dependents (your children, your siblings, your aging parents, etc.) that rely on you financially, life insurance is a must. Single parents and expecting mommas, we’re looking at you! With a little planning ahead of time, parents can ensure that their families are taken care of with a good life insurance policy.
If you’ve decided to level up to the next stage of adulthood and buy a home with your significant other, you may want to consider a life insurance policy. Based on U.S. home price averages, you’ll likely have a mortgage worth a few hundred thousand dollars that comes with your purchase. With a bill like that, it’s not unlikely that your S/O will need help to pay it off if you were to pass away. You may want to add life insurance to your running checklist of new homeowner responsibilities.
Now that you know if and why you may need life insurance, let’s dive into what it covers, how to get a policy, and how much coverage you’ll need.
A lot more than you’d think! Here’s what you can expect a good life insurance policies to typically cover:
While it may seem complex, life insurance is actually straightforward. Put simply, you choose a policy, pay for that policy on a regular basis, and the insurance company will pay your designated beneficiaries a sum of money (called the death benefit) if you pass away. Whether you obtain life insurance through your employer, or seek one out on your own, you’ll want to be sure that you choose the best policy for your specific circumstances. But finding the perfect policy requires some research. You can search and compare different life insurance providers online or go directly to a life insurance company (our friends over at Bestow know their stuff).
A big part of choosing the best policy for you is knowing how to pick between the different types that are available. For the sake of time (and your sanity), we’ll focus on the most common types including term life, whole life and universal life
Whole life insurance
When it comes to whole life insurance (also known as permanent life insurance) Here’s what you need to know:
Whole life insurance lasts until you die (it does not have a set term).
You’ll pay a fixed monthly premium.
Whole life premiums are really expensive (typically 10X more expensive than other options such as term life insurance).
Whole life policies can be viewed as an investment because they gain cash value that’s tax-deferred. The cash value it gains can actually be used for a variety of things - like taking out a loan. If you decide to cancel your policy, you’ll still get the cash value in return, unlike a term life policy.
In some cases, whole life insurance may even earn annual dividends that you can also use for other things. This isn’t a guarantee with every whole life policy though.
Whole life insurance could be the right option for those in absolute need of a death benefit, no matter the age or situation of your dependents. Some people also use it as an investment vehicle.
Universal life insurance
Universal life insurance is sort of like whole life insurance, but it comes with more flexibility.
Just like whole life insurance, universal life insurance lasts your entire life, or until age 121, and accumulates tax-free cash value that you receive if you decide to cancel your policy.
You can also leverage the value of your universal life policy as an asset to take out loans.
Universal life is generally seen as a bit more flexible than whole life. You have the ability to adjust your premiums and coverage amounts, perfect for when times are tough and you can’t really afford that high premium. The potential cash value of your policy just has to be enough to cover your required expenses for that particular month. Sometimes, depending on the cash value you’ve racked up, you can even skip premium payments.
You may be able to increase or decrease the death benefit if you feel like you need more or less coverage for your dependents at any point in time, whereas death benefits are fixed with whole life insurance.
Universal life insurance is still about as pricey as whole life insurance, but gives you the coverage for life.
If you’re looking to cover your dependents no matter the circumstance and have flexibility with payments and death benefit amounts, this may be right for you. You could also use this policy as a tool for investment planning. Keep in mind though, universal life comes at a price tag in-line with whole life insurance.
Term life insurance
Term life insurance is the simplest and least expensive form of life insurance there is -- ie. what you buy is exactly what you get.
Here’s the scoop:
In most cases term life insurance is by far the simplest and most affordable type of life insurance
It allows you to pick a specific time period of coverage, usually 10, 20, or 30 years, which determines how long your coverage lasts. No one receives any payout unless you were to pass during the term you select
You pick a coverage amount, usually between $50,000 and $1 million. This amount is called the death benefit, or how much your beneficiary would receive if they need to cash out on your policy. It’s also tax-free, so the coverage amount you choose is exactly what your beneficiary will receive.
After purchasing your term policy, you’ll pay a monthly premium that won’t change over the term you’ve selected (aka fixed rate).
Your payments don’t have any cash value, which means your monthly contribution won’t be given back to you if you outlive your term length.
The thought behind term life insurance is that you provide the coverage for only the amount of time you think you’ll need it. A length of time until our children are all grown up, your house may be paid off and there just aren’t too many people dependent on your income anymore. You won’t get any cash value back after your policy ends, which is another reason why it is far less expensive than alternatives. So do this if you need something cheap that covers you for a certain period of time, like until your dependents are in a place where they can support themselves financially. But this insurance option won’t create any value for you beyond this point (in terms of an investment vehicle).
As soon as you’ve determined which type of policy is best for you, you’ll want to decide how much coverage you’ll need. This obviously will change from one person to the next since everyone’s situations are not the same, but you’ll want to consider a variety of factors:
Dependents - this is by far the most important factor to consider. Who (and how many people) would you need to support if you passed away? You’ll want to be sure you have enough to cover everyone for a very long time.
Debt - consider any student loans, car loans, credit cards, etc. You’ll need enough coverage to pay those debts off!
Monthly expenses - you and your family have probably built an established lifestyle that comes with a variety of monthly expenses. Make sure your coverage amount can allow them to continue living that same lifestyle without your income.
Everything in between - think childcare, housekeeping costs, extracurricular activities, and college tuition.
When you’re deciding on how much coverage you’ll need, try to think of everything your loved ones may need help with financially after you’ve passed. Make sure the amount you choose covers all the bases. A good rule of thumb to use is 7-10X your annual salary to determine your target amount.
Ready to get life insurance? You’re not alone! Here are some options to get you going:
START WITH RESEARCHING YOUR OPTIONS
NerdWallet is a great resource for you to compare policies and prices across different providers. They have a network of companies that they’ve included and grow the list daily.
GO WITH A DIGITAL INSURER
We’re personally big fans of Bestow because of their simple online application process, customizable options for insurance policies and affordable rates. See what they’re all about and get life insurance coverage in a wink.
GO WITH A LOCAL INSURANCE BROKER
If you prefer the personal touch of discussing with someone over the phone, google an insurance broker in your area that specializes in life insurance. Insurance brokers typically offer you multiple different product options and can provide hands-on advice on which insurance product might be best for you.
Do it together on Zeta - A (totally free!) online tool to help couples manage their money.
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