Life insurance – we’ve heard of it, we know how important it can be, we think we probably need it, but do we know how it works? What are we paying for when we make monthly policy payments? If you’re single with no children, do you still need life insurance?
Bottom line is, acquiring life insurance is one of the most positive financial moves you can make. It’s an even better decision to get it when you’re young and healthy, resulting in a more affordable rate on your policy. To clarify any confusion on what type of policy to choose or how much coverage to get, we’ve answered a healthy mix of commonly asked questions below.
1. WHICH DIFFERENT KINDS OF LIFE INSURANCE ARE THERE, AND WHICH ONE WOULD WORK BEST FOR ME?
There are essentially two forms of life insurance: term and permanent (also widely known as “whole life”).
A permanent life insurance policy lasts your entire life, while a term life insurance policy lasts for a specific amount of time — i.e. your policy’s term length. Usually, this can be 10, 15, 20, or 30 years. Typically, term life is a simple, affordable type of life insurance that’s easy to purchase and manage.
The core differences between term and permanent are cost, complexity, and cash value. Permanent life insurance has a cash value component that can allow it to grow over time and be borrowed from while you’re alive. Permanent insurance cash value capability and its lifetime coverage can make it more expensive and more complex to manage.
When it comes to term life insurance, you apply to have coverage in place until a certain point in your life when you would no longer need the coverage. This can include, but is certainly not limited to, your children becoming adults, or paying off your mortgage. Term life insurance’s primary goal is to protect your loved ones in the event of your (or your spouse’s) untimely passing, compared to a permanent life policy which may also be used as a vehicle for cash accumulation and/or estate planning purposes. For many, term life insurance is a sound, cost-efficient choice that protects your loved ones during the years they need it most.
2. IF I’M SINGLE OR DON’T HAVE KIDS (OR BOTH), DO I STILL NEED LIFE INSURANCE?
If you have any sort of financial obligation — whether it be student loans, co-signed debt, a mortgage, etc. — life insurance is always good to have. That way in the event of an untimely death, someone else will be able to pay these off for you. Especially if you have a partner, whether or not you’re married or have children, you share financial responsibilities. It’s important to have the conversation of who will take on your financial duties should something unexpected happen. Your term life insurance is a way to protect your loved ones, and you control designating beneficiaries.
3. IF I’M MARRIED, DOES MY SPOUSE NEED LIFE INSURANCE TOO?
Typically, both spouses have a life insurance policy with their partner listed as the beneficiary. You want to avoid your partner grieving and worrying about handling finances all at once.
A common misnomer is stay-at-home parents don’t require coverage since they don’t earn any income. This couldn’t be further from the truth, as a stay-at-home parent has a major impact on a household that is irreplaceable. If he or she were to pass away, extra space would be needed in the surviving partners budget for childcare, household needs, and more.
4. HOW MUCH LIFE INSURANCE DO I NEED?
The short answer for “how much” life insurance coverage you need is 5-10 times your income. However, the “optimal” amount depends on your specific circumstances. What’s important is to ensure the policy amount is adequate to cover any major expenses your loved ones would take responsibility for in the wake of your death.
5. HOW LONG SHOULD MY LIFE INSURANCE POLICY BE FOR?
The length of your policy depends on how long your loved ones need a financial safety net. For example, if you recently purchased a home and have a 30-year mortgage, you’d want the policy to last until the mortgage is paid off. You’d also need to consider the coverage length for your beneficiaries — how long until your kids are financially independent? How long until your student loans are paid off? These are some things to consider when choosing a term length policy.
6. WHAT KINDS OF EXPENSES WOULD LIFE INSURANCE COVER SHOULD MY LOVED ONES EVER RECEIVE A PAYOUT?
A term life insurance payout can be used for anything your loved ones desire. The range includes, but certainly not limited to, funeral/any end of life costs, mortgage payments, childcare or caregiving for your dependents, healthcare costs for your dependents, children’s education costs, or just everyday living expenses.
When you purchase life insurance, try to use it as an opportunity to talk to your beneficiary about the coverage amount and your vision for the proceeds being used. Ensuring your loved ones’ financial stability no matter what happens to you speaks volumes.
7. HOW DO I START THE CONVERSATION OF LIFE INSURANCE WITH A SPOUSE OR FAMILY MEMBER?
Death isn’t exactly the most pleasant topic to discuss with anybody – let alone people you’re close with.
However, life milestones are the most ideal starting point to help spark the life insurance conversation. Whether it’s getting married, a new baby on the way, or purchasing a home – all these life events are ideal segues. This approach takes the attention off of death, putting more focus on protecting your loved ones should the unexpected occur, turning it into a positive talk on financial planning.
These conversations also empower your relationship to cultivate positive financial behavior. These discussions open the door for financial planning in all areas of your financial life, not just the morbid ones. Think of life insurance as the contingency plan which compliments the most exciting areas of life and your plan for tomorrow.
8. WHAT DO INSURANCE COMPANIES CONSIDER WHEN DETERMINING YOUR RATE?
Life insurance companies consider your age, gender, overall health, coverage amount, and a few other items when determining your premium pricing. Generally, the younger and healthier you are, the more affordable pricing will be.
9. AM I ALLOWED TO MODIFY MY LIFE INSURANCE POLICY?
After purchasing an insurance policy, it’s always a best practice to check in on your coverage needs periodically — especially if you experience a major life change that impacts your financial situation. If you determine you require a longer-term length or a higher coverage amount, you’ll usually need to go through the application process again. Therefore, it’s usually a good idea to keep that policy from when you were younger and healthier and purchase an additional, supplemental policy that fills your coverage gap.
On the other hand, if you discover you require less coverage, you can always reach out to your life insurance provider or financial advisor and request to lower your coverage amount (which will also lower your monthly premiums.)
10. WHAT’S THE BEST TYPE OF LIFE INSURANCE?
Whether it’s a term or permanent [whole] life policy you choose to purchase, the best type of life insurance is the one that’s in force after the insured passes away. It’s the careful attention and detail a financial advisor provides that can help you determine what approach to life insurance would work best for your specific needs.
Have a question? Let us know!