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Life insurance
If you have loved ones depending on you for financial support, get life insurance. It’s the best way to make sure they’re safe from financial harm in the event of your unexpected death.
- You should buy life insurance if you have loved ones who rely on your income for the majority of their financial support.
- How much life insurance to buy depends on your unique financial situation.
- You employer may offer a free life insurance plan as an employee benefit.
- Before buying a life insurance plan, look at your budget to see how much you need and compare policies.
- Buy life insurance early if you’re planning to have a family or have a family history of certain medical conditions.
- Buy term life insurance to keep costs down.
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Life insurance is optional, but it’s a good idea for anyone who has a family or is planning to start one. The earlier you get life insurance the less expensive it is. Certain health conditions can affect whether you qualify for life insurance and how much you will have to pay. Before you buy a policy, set a budget and compare your options to pick the one that is best for you.
What is life insurance?
The purpose of life insurance is to protect anyone in your life who depends on you as a primary source of income. If you have loved ones that rely on you for the majority of their income, a life insurance policy will help ensure they can cover the expenses of daily living in the case of your unexpected death.
Life insurance provides funds to the beneficiaries when the person who was the named insured dies. Beneficiaries are the people named to receive the death benefits of the insurance policy. They can be anyone, but married couples often name each other or children as beneficiaries. If the children are minors, parents may name a trustee to handle the money on behalf of children.
Why do I need life insurance?
Decisions about life insurance are mainly based on financial considerations, but they also are very personal in nature. The amount of insurance that is right for one person isn't necessarily what's right for another who is in an identical situation financially.
Young, single people with no dependents rarely purchase life insurance. With nobody depending on you for income, it's questionable whether life insurance is really necessary. But at some point most people lives, you may need to buy at least some amount of life insurance.
Once you are married or have children, having life insurance to protect them in the case of an early death is critical. Families can be financially devastated when the earning spouse dies unexpectedly.
When should I buy life insurance?
Purchasing a life insurance policy early will typically keep your premiums quite low and affordable. So if you are planning to get married and start a family, you may want to consider buying a policy. Insurance gets more expensive as you get older and an inexpensive 30-year term life policy that you buy at age 25 might be a lot more expensive if you wait to buy it at age 35 or 40.
Buying life insurance early also helps you to plan ahead for the unexpected. If you wait and contract an illness, for example, you might be denied coverage or have to pay higher premiums than if you had bought your policy when you were healthy. This is another reason to consider buying earlier. If you have a family history of certain illnesses, you may want to consider buying life insurance early, just in case.
How much life insurance should I have?
The amount of life insurance you need depends on your unique financial situation. When shopping for life insurance, look at your household budget for how much your annual expenses are and look for an amount of life insurance that can cover those expenses for as long as you wish to provide income for your dependents. Usually, you can use a multiple of your household income as a good base number if you don’t have high debt and live an affordable lifestyle.
Try some life insurance calculations at these sites:
- Life Foundation: www.lifehappens.org/life-insurance-needs-calculator
When you’re talking with life insurance agents, they’ll typically run through a needs analysis to help you determine the amount that's right for you. This analysis should look at your assets, debts, income and typical expenses, as well as your long-term financial goals. Be sure to realistically consider the financial problems that would result if you were to die and leave your family without your income. If you don't have a family yet, but plan to have one — think ahead to the expenses you’ll have then.
It’s a good idea to talk with your spouse, other members of your family and even a financial professional to help you determine how much life insurance you need. You want to avoid buying too much or too little based on your situation.
How do I get life insurance?
Many employers offer life insurance as a free benefit to full-time workers. If you have access to free life insurance through work, take it. There’s no need to miss out on this free benefit.
If you do not have a life insurance policy through work or your free policy doesn’t offer enough coverage based on your family situation, you want to consider buying private life insurance. Don’t necessarily purchase this through your employer, even if they offer excess coverage — there are many life insurance providers and you’ll want to compare different policies and their costs to pick the best one for your situation.
You can compare life insurance policies at:
- Bankrate: www.bankrate.com/insurance.aspx
- Lending Tree: www.lendingtree.com/insurance
To obtain life insurance, you may be required to have a medical exam and supply a detailed medical history during a process called underwriting. Maintaining good health helps to reduce the cost of your life insurance premiums — the amount you pay each month. If you have a serious health condition or are a current or former smoker, you could be denied life insurance or be charged higher premiums — so be sure to ask different insurance providers how their policies may be different if those conditions apply to you.
What are common life insurance rules?
An incontestable clause is a rule, or provision, of both life and health insurance policies that once the policy has been in effect for a stated period of time — usually two years — the insurance company cannot question items on your application in order to deny you coverage.
A life insurance rider is a small insurance policy that modifies the coverage of the main policy. A rider usually adds or excludes coverage or alters benefits. Insurance companies offer several types of riders, such as guaranteed insurability and accidental death riders and the costs of these can quickly add up. Be sure you need the extra coverage before agreeing to the added premiums.
What are the types of life insurance?
When you’ve decided to buy life insurance, you are going to come across several types to buy. While there are quite a few variations on each, the two broad categories are term life and whole life insurance.
Term life insurance
Term is the best insurance option for younger people. Term insurance is pure insurance, meaning it pays if you pass away during its term, but otherwise has no cash value or saving component. It’s also one of the cheapest options you can find because the policy doesn’t have this cash value. The amount of term insurance to buy depends on all of your sources of income and level of expenses you wish to provide to your beneficiaries after you’re gone.
As the name implies, term only covers you for a fixed time period, usually 10, 15, 20 or 30 years. During this term, your life insurance premiums are guaranteed not to increase. If you pass away during the term period, your beneficiaries get a cash death benefit. If you live longer than the term period, you have the option to continue your life insurance coverage for an annual, renewable premium, which is generally much higher.
Permanent or whole life insurance
There are a few types of permanent life insurance, which provides coverage for your whole or entire life. You might consider permanent life insurance if you want your loved ones to receive a large payment amount at your death, even if they no longer depend on your income, or if your estate-planning needs require an outside source of cash (such as owning a small business). But, because permanent life insurance is more expensive than term life, we recommend sticking with term life insurance in most cases.
There are a few types of permanent life insurance that you may come across:
- Traditional whole life
With traditional whole life insurance, the premium payments are fixed and paid either over your entire life, or over a set period after which the policy is considered fully paid for. Unlike term, which is pure insurance, whole life policies have a cash value component. Whole life costs quite a bit more than term life because of that cash value component.
- Universal life insurance
Universal life is a type of whole life insurance where the amount of premium you pay is flexible over the life of the contract. After the first year, you are able to decide how much you want to pay. Throughout the life of the policy, you’re credited with income on your premiums and the cost of maintaining the policy is taken from your account. If you don’t pay enough and the policy isn’t credited with enough income, the policy will lapse.
- Variable Universal Life Insurance (VUL)
VUL is one of the more complicated financial products out here and can have high hidden costs. There also are very limited cases where this type of insurance is a good idea. VUL works a lot like universal life insurance except that you can choose how your premiums are invested. It’s similar to a 401(k) where you have a list of investment alternatives.
Where do I get life insurance?
As always with all things finance, the golden rule is to fully understand any contract or product before signing up. While term insurance policies can be simple to figure out, if you are considering whole life or another permanent policy, you should review your contract with your estate-planning attorney.
- See also: Financial professionals
Get it from your employer.
Many employers provide, at their own expense, a basic life insurance benefit, often equal to one to two times your base salary or a flat amount like $50,000. It’s important to keep in mind that if you have group coverage and you leave your job, you generally are not able to take the coverage with you. Premiums are typically paid through an automatic payroll deduction and can be as much as 10% to 20% less because of efficiencies in enrollment and billing procedures. Additionally, you may be eligible for more coverage under a voluntary plan than is offered by a traditional group plan. If you are interested in buying additional coverage, you should shop for other options before automatically choosing to go with your employer’s life insurance company.
Work with an insurance agent or another financial professional.
Determining how much and what kind of insurance to buy is one of the most complicated decisions you’ll ever make. A qualified insurance professional will conduct a comprehensive financial needs analysis, and walk you through the multitude of questions you need to consider to determine how much and what kind of insurance is right for you. Of course, the quality of advice you get is dependent on how good your agent is. You’ll obviously want to work with someone who has the right licensing, training and experience.
Research online..
You can get instant quotes, apply for, and even purchase policies all online. Some insurance company websites also offer the option of buying online, but most will typically try to direct you to an agent who can provide you with personalized service. Keep in mind, most websites only offer term insurance, not permanent. Also, if you buy online, you are in charge of figuring out which policy is right for you.
A few websites allow you to compare the rates of several companies at once:
- Insure.com: www.insure.com
- InsWeb Corporation: www.insweb.com
- Accuquote: www.accuquote.com
Call an insurance provider.
If you want to buy term insurance and you have a good sense of how much coverage you need, you may be able to get the right coverage you need by buying directly by calling the insurance company. Just be aware of the possible limitation — most direct sellers only offer term insurance, and you generally won’t have the benefit of advice from a qualified insurance professional.
Words to know
Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary
Links we like
Here are a couple online features you might find useful:
- Insurance Information Institute:
www2.iii.org/individuals/lifeinsurance
Price comparison sites:
- Insure.com: www.insure.com
- InsWeb Corporation: www.insweb.com
- Accuquote: www.accuquote.com
- Bankrate: www.bankrate.com/insurance.aspx
- Lending Tree: www.lendingtree.com/insurance
Calculators:
- Life Foundation: www.lifehappens.org/life-insurance-needs-calculator
