You’ve probably heard that you need life insurance but aren’t quite sure what it is, what the pros and cons are, or where to start. Luckily, you’re in the right place.
Life insurance is one of the most important aspects of a complete financial plan – up there with emergency savings, retirement contributions and paying off debt. For most people, helping to financially protect loved ones in the event of premature death is crucial. And, the best part? It doesn’t have to be expensive.
Sometimes, life insurance can be confusing. So today, we’re breaking down exactly what life insurance is and how it works.
How does life insurance work?
Life insurance is a contract with an insurance company that helps financially protect your family if you pass away. You pay a monthly or yearly premium, and, if you pass away, the life insurance company pays a lump sum (called a death benefit) to the beneficiary or beneficiaries you designate.
Do I need life insurance?
Most likely. Most of us do.
The majority of adults need life insurance to help cover debts like a mortgage or student loans, help replace lost income if you’re married or have children, to offer some stability to your company if you’re a business owner, or to provide a safety net for other dependents. It can also be a nice thing to relieve financial stress on your loved ones and allow them time to grieve if you pass away unexpectedly.
The question you have to ask yourself is whether or not you have people who rely on you financially. If the answer is yes, then you need life insurance.
Common types of life insurance
The three most common types of life insurance are term, whole, and universal.
Term life insurance
Term life insurance provides coverage over a certain period of time (the term), usually 10, 15, 20, 25, or 30 years, for a fixed monthly premium. If you pass away after this period, and you have not extended your coverage, your beneficiaries will not receive payment. This type of insurance is usually the cheapest option and covers the needs of most people, providing a layer of financial protection in the years it is most needed.
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Whole life insurance
Whole life insurance provides coverage for life, no matter how long you live, as long as you pay your premiums on time. It also includes a growing cash value on a tax-deferred basis that can increase your beneficiary’s ultimate payout over time and provide an asset you can borrow against as you age. These policies are significantly more expensive than term life insurance policies but can be helpful estate planning vehicles for those with high net worth — or those who foresee a need for coverage over their entire lifetime.
Universal life insurance
Like whole life, universal life insurance is another type of permanent insurance, meaning it is designed to last one’s entire lifetime. Sometimes known as “adjustable life insurance,” you have the choice between a fixed death benefit, like term life, or an increasing one similar to whole life insurance. You can also change premium amounts, adjust your coverage amount, or use the cash value to pay premiums.
Which type of life insurance is right for me?
For most people, term life insurance is a sound choice enough. Term life insurance is low cost and offers you coverage while you need it the most – while your children are young or while you are still paying off your home and saving for retirement. You might be surprised to learn, for example, that a healthy, 38-year old woman could get a 20-year, $500,000 term life insurance plan for around $29 a month.
More expensive permanent life insurance policies — like whole and universal — can be cost prohibitive for some or require people to purchase less coverage in order to have a more affordable premium pricing. However, for those who want lifetime coverage and can afford the higher premiums, these cash value policies can accumulate money that can be used however you want.
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How much life insurance do I need?
A common rule-of-thumb is that you should have life insurance coverage equal to 5 to 10 times your annual salary. But while that is a good starting point, the exact amount of life insurance coverage you need depends on your personal circumstances.
If you have a large mortgage or you want to provide for your kids’ college education, you might need a larger policy, and perhaps a longer term. Alternatively, if you’re a stay-at-home parent, a multiple of your annual salary won’t work. You’ll need to consider what expenses your spouse might need to pay in your absence, like childcare and home upkeep.
However, these answers only tackle the coverage amount. The term is another consideration. Typically, it is recommended to select a term that covers you until your children are out of the house, the length of large debts, or until you plan to be self-insured through retirement and other savings.
The easiest way to make sure you have the right amount of coverage is to use an online life insurance calculator to get a personalized recommendation.
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How much does life insurance cost?
Life insurance policies are priced based the amount of coverage you want, type of coverage, the length of that coverage, and what the insurance company sees as your risk of death during the coverage period. Traditionally, a term policy will be the most affordable option.
For example, a healthy 35-year-old woman can buy a 30-year, $500,000 term life insurance policy for about $42 per month. A 20-year term for that same woman is about $24. If that woman is in good, not excellent health, the 20-year, $500,000 would be about $32. You can get a sample quote for your coverage needs here.
When determining your pricing, one of the most important factors is your current health. In addition to your current health, your medical history, family medical history, lifestyle choices, and income are also considered. Smokers, for instance, will pay significantly more for life insurance than non-smokers. People with very high-risk hobbies, like BASE jumping, might not be able to get coverage at all.
Once you secure coverage, you must make regular payments to keep your contract active. Health issues that arise after your policy is in effect can’t change the price or terms of your policy.
Remember: the best life insurance pricing is usually achieved the younger and healthier you are. So, if you know you need coverage, the best time to buy it is now. Plus, today’s life insurance is cheaper than ever before.
It’s not just easier life insurance, it’s an easier life.
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How to get life insurance
You’ll fill out a brief form about you, including your gender, age, weight, whether or not you smoke, and some other medical history. Then, you’ll receive an instant decision on if you’re eligible. In some cases, you will not need to take a medical exam, so you could have your final rate and coverage started immediately. (Keep in mind: it’s very important to be honest when completing the application. The issuance of the policy or payment of benefits may depend upon the answers given in the application and their truthfulness.)
If a medical exam is needed, you can take it at a time and place of your convenience. At Haven Life, we aim to make taking a medical exam as simple as possible. A trained paramedic will come to a place of your choosing. You can expect him or her to review your family’s medical history, measure your blood pressure, height and weight, and collect blood and urine samples.
Life insurance for your peace of mind
With an intangible product like life insurance, it’s easy to question if it’s worth it. The answer, though: absolutely.
While there’s no monetary value you can put on peace of mind, for many, knowing you have financial protection in place for your family is everything.
Peace of mind might be closer than you think.Learn more
Chelsea Brennan is the founder of Smart Money Mamas, a personal finance blog that focuses on family finance, investing, and reducing money stress. Chelsea is an ex-hedge fund investor whose work has appeared in a wide array of publications, including Forbes, Business Insider, and more.