Life insurance provides ready money to the people who depend on your paycheck, should you pass away. It can help to:
- Pay for funeral expenses and medical bills
- Cover monthly bills, such as a car payment, rent or mortgage
- Pay off outstanding debt, including student loans or credit card bills
- Offset childcare costs if you're a stay-at-home parent or a parent who must enter the workforce
- Fund a child's future education
- Provide an inheritance for your children or a retirement account for your partner
Think of it like a security blanket that can help financially protect the people you love most.
How It Works
A life insurance policy is a protective contract between you (the insured) and an insurer (the life insurance company). In the event of your passing, the life insurance company pays your beneficiary (a person or organization that you choose) a set amount of money (benefit amount).
You can name any person or organization that you'd like as your beneficiary — and you can even name more than one. That's good news for parents who have more than one child and don't want to play favorites.
The amount your beneficiary (or beneficiaries) will receive is determined by the amount of coverage you chose to purchase. Best of all, your beneficiary will receive the benefit amount income tax-free, according to current laws.
Do I need life insurance?
Some people wait for a major life event to buy life insurance — a wedding, a new home, or a newborn. But the most important thing about life insurance is buying it before you need it.
It's not exclusively for those who are married or have children either. If anyone is dependent on you financially, such as an aging parent, life insurance is a must. Not sure if you need it? See if you fit into any of the following categories:
- You're married
- You have a domestic partner
- You have a spouse and kids
- Youre the primary breadwinner
- You're single with kids
- You have a home
- You own your business
- You have student loan debt
- You're retired
If this sounds like you, it may be time to buy life insurance.
When should I buy life insurance?
It's never too early or too late in life to buy life insurance. The sooner you buy it, however, the less expensive it might be. Why? Your age and health history are two of the factors that determine the cost of your premium rate (the amount you pay for your policy).
What better time to purchase your first life insurance policy than when you're young and healthy?
The type of life insurance policy you may need will depend on your unique situation, including your stage of life.
What type of life insurance do I need?
We all have different financial responsibilities. So, no one type of coverage is inherently better than another. What's most important is finding the solution that works best for your personal financial situation.
There are two main types of life insurance policies to consider: term and whole life insurance.
Term life insurance offers protection for a set period of time, or a "term." As the policyholder, you can choose your term, typically between 10 to 30 years. It's often the less expensive of the two options, as term life insurance policies come with an expiration date. Once that term ends, so does your coverage. It's best for those who have greater coverage needs for a certain period of time, such as while your family is still growing.
Whole life insurance, on the other hand, lasts for a lifetime. With each payment you make, a portion of it is set aside for a rainy day, which becomes your policy's "cash value." If your car breaks down or you have an unforeseen medical expense, you can borrow against your policy's cash value, often at a favorable rate.
Another reason people are often drawn to whole life insurance is the fixed premium rate. Your premium rate is locked in so that, even if your health status changes, the amount you pay for life insurance will always stay the same. For parents, that means you'll be paying the same rate when you're holding your first grandchild as you did when you held your first child.
One common type of whole life insurance policy is Guaranteed Issue Whole Life Insurance. It's designed for those ages 50-85, who want to apply for life insurance without answering health questions or taking a medical exam. So you get the coverage you need, without the hassle you don't.
How much does life insurance cost?
The price you pay for life insurance is determined by a number of factors, including your selected policy type and coverage amount.
Some of the other factors that influence your premium include:
- Health status
- Driving record
If you're in the habit of jumping out of a perfectly good airplane, for example, your premium rate might be higher than someone who watches Netflix on the weekends.
For this reason, when you apply for life insurance, you'll likely be asked a series of questions about your medical history and lifestyle. In some instances, a medical exam may also be required.
With your newfound understanding of life insurance, you can explore the options for life insurance policies or use this information as an icebreaker at your next social gathering.
Types of Life Insurance Policies
Though term life insurance is one of many types of life insurance policies available, it is popular because of it's flexibility, affordability and guaranteed payout.
A typical life insurance policy can come in a great number of shapes and sizes. If you're choosing a life insurance policy for the first time, it's important initially to decide which type of life insurance is ideal for your specific situation. Life insurance policies can generally be broken down into two categories - term and permanent.
Term life insurance, which can be a more popular option, provides coverage for a specific length of time which you choose; while permanent life insurance covers you in perpetuity. We find that term life insurance is right for many people, but if you have questions about whether you should purchase term or permanent life insurance, you can always contact one of our licensed agents for assistance.
What is a Term Life Insurance Policy?
Term life insurance policies are generally between 10 and 30 years in length. These term policies provide both a fixed premium (the amount you'll pay) as well as a fixed payout (the amount we'd pay your family). Term life insurance is a popular option because it boasts benefits that are attractive to people of most ages and situations. These benefits include:
- Affordability - Not only will you pay the same rate for the entire term, but you can also choose a coverage amount and term length to fit your budget.
- Low maintenance - Term life insurance allows you to "set it and forget it". As long as you pay your premiums, your policy continues throughout the designated time period.
- Guaranteed Payout - Your death benefit is fixed, meaning that beneficiaries receive the payout that you chose at the beginning of your term. More options - You can choose the term policy with the time limit and coverage amount that is ideal for your current and future needs.
Once you decide upon term life insurance, you'll need to consider for how long you'll need a policy to be in effect and the coverage amount that you'll need. Answering these questions begins by considering the following:
How long do I need a life insurance policy?
The length of your term policy depends on how long you anticipate financially supporting your loved ones. Ask yourself this...
- Do I have a mortgage or other debt? If you have debt, the length of time it will take you to pay it off can be a helpful indicator in the term length of your policy.
- Who depends on me? If you know how long you'll be depended on for financial support from a spouse or children, it can help you identify the length of time you'll need a term policy.
- What can I afford? The dollar amount of life insurance coverage you need can affect your term length. If you need a high amount of coverage, you may want to consider a shorter term length to fit your budget.
How much life insurance coverage do I need?
Some experts will tell you that the answer is between 7 and 10 times your salary, but it can vary tremendously based on your individual needs. Ask yourself this...
- How large are my debts? If you have a mortgage, student loans, business loans or any other debts, a good beginning can be to calculate the total amount of your outstanding debts.
- What life events do I want secured for my family? You may want your death benefit to assist in childcare or college tuition for your children. Perhaps you want to provide supplemental retirement for your spouse in addition to your funeral expenses. Once you've considered what you'd want your death benefit to help cover financially for your family, try to calculate the total amount of money it would cost to do so.
The answers to these questions may not seem clear immediately, but with a little consideration ahead of time and some guidance from one of our licensed agents, you'll be able to make informed decisions throughout the application process. You can also use our life insurance calculator to find out how much life insurance you need.
Sources: https://www.aigdirect.com/life-insurance-basics/what-is-life-insurance, https://www.aigdirect.com/life-insurance-basics/choosing-a-life-insurance-policy