Understanding the Basics of Life Insurance
When it comes to taboo topics, death is high up on the list. So is money. Combine the two and what do you get? Life insurance, something that no one wants to think about.
Buying life insurance can mean the difference between your family financially surviving an unfortunate accident and them becoming destitute.
And, while the process of getting life insurance might be both depressing and cumbersome, it’s also part of being a responsible family member. Read below to understand how life insurance works, where to buy it and how much you might need.
What is Life Insurance?
Life insurance provides a payout, or death benefit, when you die. As long as your policy is active, your beneficiaries will receive the death benefit from your insurance company. Side note: some insurance companies may not pay out for a specific cause of death, such as suicide.
Life insurance has a monthly premium, which will vary depending on your age, gender, overall health and other factors. When signing up for a life insurance policy, you usually have to take a medical exam that will determine your health rating. The higher your health rating, the lower your premium. In rare cases, those in poor health or with a chronic health condition may even be denied a life insurance policy. For example, if you were diagnosed with cancer a few years ago, you may find it hard to qualify for life insurance.
Why Should I Buy Life Insurance?
The purpose of insurance is to protect you in case something unexpected happens. With life insurance, your policy will help provide for your family if you pass away while they’re still relying on your income.
Most people buy life insurance to help their family. If they die while their life insurance policy is active, then their beneficiaries can use the proceeds to pay off debt or cover living expenses.
If you’re single and don’t have any dependents, you may not need to buy life insurance. However, some people still choose to buy life insurance when they’re single because policies are cheaper to buy into when they’re younger.
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A stay-at-home parent is saving the family thousands of dollars in childcare, food prep and cleaning services. If they died, those services would have to be paid for. That’s where life insurance comes in.
Types of Life Insurance
The two most common types of life insurance are term and whole. Before choosing which life insurance policy is best for you, you should know how they compare.
Term
A term life policy lasts for, you guessed it, a specific term. This usually ranges between 10 and 30 years. When the term expires, your coverage will end. Many people choose to buy a term policy that corresponds to how many years they have left on their mortgage.
Monthly premiums for term life policies are relatively affordable. For example, the average monthly premium for a $500,000 20-year term policy is $26 or about $312 a year.
Term life insurance is the best choice for most people because it provides significant coverage without cramping your budget.
Whole
A whole life policy can last for your entire life, as long as you keep paying the premium. When you have a whole life policy, you have a death benefit as well as the cash value of your policy. You can borrow against the cash value.
Because a whole life policy can cover you forever, the monthly premiums are usually much more expensive than term life policies. For example, the average monthly premium for a $500,000 whole life policy is $440 a month. That’s more than $5,000 a year.
Most people don’t need whole life insurance because once they stop working, no one is relying on their income. If you pass away while you’re retired, your heirs can live off your remaining retirement savings.
Where to Buy Life Insurance
Many employers offer life insurance as a company benefit. However, this amount often isn’t sufficient to meet your family’s needs. You can buy life insurance from any insurance company. To get the best deal, compare multiple policies because rates may vary dramatically across different providers.
To get multiple quotes easily, you can use an insurance broker who has access to dozens of different companies. You can also use an online company like PolicyGenius, where you can fill out one application to get various quotes.
If you’re buying a policy from a broker or agent, make sure that you do your own research on how much coverage you need. When you buy a policy, the person selling it to you earns a commission. The bigger the policy, the bigger the commission.
How Much Life Insurance Should I Buy?
The amount of life insurance you should buy depends on your family’s needs. If you’re the primary breadwinner, you may need to buy a significant policy. But, if your income is minimal, then you may not need a huge amount of coverage.
However, don’t think that you don’t need a policy even if you’re not providing financially for the family. For example, a stay-at-home parent is saving the family thousands of dollars in childcare, food prep and cleaning services. If they died, those services would have to be paid for. That’s where life insurance comes in.
A basic rule of thumb is to buy 25 times your annual income. However, to find your perfect number, figure out what your family’s income and expenses would look like if you passed away. Figure out if expenses outstrip the remaining family income. If they do, multiply that gap by the number of years you want to provide support for your family.
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Life Insurance FAQs
Can I Buy Multiple Life Insurance Policies?
There is no limit on how many policies you can purchase. Some people start off with a low value policy and buy a larger one when their needs change. For example, you might buy a small policy when you’re just married and then buy another policy with a higher death benefit if you have a kid.
Can I Cancel a Life Insurance Policy?
If you no longer need life insurance, you can cancel the policy. If you have term coverage, you will generally not receive any money back, but your payments will stop.
If you decide to surrender a whole life policy, then you will receive any cash value that has built up over time.
Is Life Insurance Taxed?
Life insurance payouts are not taxed. If your heirs receive money from a life insurance policy, they will not have to pay taxes on it.
