Understanding how life insurance works is the first step in making an educated choice for you and your family.
Life Insurance, it's not for you-it's for them.
Let's start with the basics, what is life insurance? Similar to other types of insurance you may already have, life insurance is a contract between yourself and an insurance company. As long as your premiums are paid, the insurance company will provide a sum of money (called a death benefit) to your named beneficiaries in the event of your death.
The main purpose of life insurance is to protect your loved ones from loss of income if you were to pass away. If you are a main provider or contributor to your household, getting a policy for your life is definitely worth considering. Life milestones that make life insurance more worthwhile are things like getting married, buying a house, and having children. If your income is a necessity to maintaining your current lifestyle and achieving future goals, it is worth getting life insurance to help provide for your loved ones should an untimely death occur.
What is a Beneficiary?
A beneficiary is the person or entity you name to receive assets after your death. Primary beneficiaries are listed first, and contingent, or secondary beneficiaries listed after. Contingent beneficiaries will only receive assets if there are no living primary beneficiaries.
When do you need it? Here are some questions to ask when considering life insurance.
Would your spouse or partner be able to maintain your current lifestyle without your salary?
Would paying the mortgage, rent, and other household bills be difficult without your salary?
Would the household be able to afford childcare if someone currently at home with children has to return to work?
If helping children with college is a goal, would that be achievable without your salary?
Do you have any cosigners on personal loans or private student loans? If you were to pass away, would they be able to afford your debts?
Regardless of your situation, life insurance can help create peace of mind when considering the many possible outcomes in life.
How much life insurance should you have?
A good rule of thumb when deciding how much life insurance to purchase is your annual salary multiplied by 10, or multiplied by how many years you would want to replace your income. If you are earning $50k a year, consider a policy with at least a $500k death benefit. You will also want to consider any outstanding debts, mortgages, and future goals you and your family may have. Do you want to make sure there is enough to pay off the mortgage should you pass away unexpectedly? Do you want to leave enough to enable children to go to college if they desire? Consider all areas that the death benefit could be used for to help set a realistic amount of coverage.
How are your premiums determined?
Your premium is the amount you agree to pay in exchange for coverage. Premiums can be paid annually, quarterly or monthly, and insurance companies look at several factors when determining the amount. The higher the death benefit, the higher your premiums will be, but the other factors that will impact your premiums are; age, health and gender. A young, healthy person is statistically less likely to die, therefore they are less expensive to insure. Insurance companies may also look into your medical history or request a doctors visit before approving a policy.
Term vs. Whole Life
After you've established a need, decide what kind of life insurance is best for those needs.
Term insurance is the most basic and purest form of insurance. You select the term of coverage (typically 10, 20 or 30 years) and the amount of coverage needed. If you die within that term, the death benefit is paid out to your beneficiaries. Once you have come to the end of the coverage term, you will not receive any cash or death benefit, it's sole purpose is to payout in the event of your death, if within the agreed term. Term insurance is usually quite affordable, many young adults can expect to pay under $25 a month for a considerable amount of coverage.
Whole life insurance will provide coverage for your entire life, as long as your premiums are paid. Along with providing a death benefit, there is also a living benefit of a cash account which builds up over the life of the policy. The cash account creates a potential source of future tax-free income, which can be used for retirement, college expenses, or any other purpose. Because you are building up a cash account, the premiums for whole life insurance are significantly higher. A young adult can expect to pay over a hundred dollars a month up to several hundred, depending on the amount of death benefit. If you keep a whole life policy for your entire life, as it's intended, you are likely to see a much higher return on investment, and have the benefit of accessing funds while you're living.
As with many personal finance topics, the choice of life insurance is personal. There are plenty of products out there, so it's important to explore and understand your options to make the best choice for you and your family.
For more information, please feel free to schedule a call. I am more than happy to sit down, run quotes, and help find the best fit.