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Life insurance 101: Your guide to getting the right policy

For many people, life insurance is one of those “I’ll figure out later” products that might not seem applicable in certain stages of life. And for others, there’s this idea that life insurance could be beneficial — but would be a big hit to the family budget.

However, life insurance is for anyone. At every stage, and especially at every budget. In fact, life insurance is one of the smartest financial moves you can make if your family is on a tight budget!

There’s a lot of misconceptions out there, but we’re here to change the way you think about life insurance. Ahead, we’re breaking down everything you need to know, so you can make an informed decision on the policy that’s right for you — and the most beneficial to the loved ones that rely on you.


What is life insurance?

Life insurance is a peace of mind product. It’s meant to replace your income in case the unexpected happens and you are no longer around to support your family or loved ones. Like most types of insurance, no two policies are exactly the same — plus, there’s always room for customization or add-ons.

How does life insurance work?

Life insurance is legally binding. It’s a contract between you and the insurance company. You make regular payments (called a premium, which is typically paid monthly) in exchange for a death benefit (sorry, it sounds dark, but that’s what it’s called) payout. Your payout depends on the kind of life insurance you choose.

Who is life insurance for?

In short — everyone. Life insurance isn’t just for the 1 in 5 families with a stay-at-home parent, or ones with a single-income household.

Life insurance can help you in any stage of life. If you’re young and single, life insurance can help your loved ones pay off any debts or a mortgage you might have left behind. Or if you’re planning on having a family someday, you can secure a lower rate for a longer term now while you’re young.

What types of life insurance policies are out there?

Let's break down two common kinds of life insurance policies you can buy — term life insurance and whole life insurance.

Term policies are more flexible in length. Plus, they are usually pretty simple and low-cost. If something were to happen to you while your policy was active, your death benefit would be paid out to your beneficiaries, or the individual(s) you chose to receive the benefit.

Term life insurance policies can also:

  • Be purchased for a set time period, like 10, 20, or 30 years.

  • Be converted to whole life insurance.

  • Become more expensive as you age.

  • Have low monthly costs with an easy signup process.

Whole life insurance, also called permanent life insurance, is more complex. It’s lifelong coverage that also has an investment component, which is known as the policy’s cash value. This cash value grows in a tax-deferred account, so you don’t pay taxes on these earnings while they accumulate. You can use this money in retirement if you’d like or pass it on to your dependents.

Whole life policies also feature:

  • A set premium for as long as you live.

  • A guaranteed death benefit.

  • Eligibility for annual dividends.

  • Higher monthly costs, with a higher payout in the end.

  • Eligibility to pay for estate taxes.


My employer offers free life insurance as a benefit. Is that enough?

A lot of employers offer life insurance for eligible, full-time employees — which is a great option! These benefits are usually equal to your annual salary. For some (like those without any debts or dependents), this might be enough. But for others, like those with a stay-at-home partner, a mortgage loan, a larger amount of debt (like student loans, for example), or a large family, an individual life insurance policy might be the better option for you.

And as with most employer-sponsored benefits, your policy is tied to your employment. So if you lose or leave your job, your benefits will not continue — and it could leave you with vulnerable gaps in coverage. There are a few other considerations you should be thinking about when it comes to employer-provided life insurance, too.

You’re probably wondering — if you need more coverage, where do you start? And how much life insurance should you buy? Stay with us — we’re about to help you figure that out.

Which life insurance policy is best?

There are a number of things to consider before you decide on a life insurance plan. But it mostly comes down to your unique needs.

Consider term life insurance if:

  • You need it for a specific period of time. For example, if you have young children and want to make sure there will be funds for their college education, you might want a 20-year term life plan.

  • You have a limited budget. Term life insurance is significantly cheaper than whole life. Some insurers (like this one) allow you to upgrade to whole life insurance before the end of your term, if you’d like.

  • You have a family. From daycare to college (and maybe a few vacations to Walt Disney World in between), you want to make the most of your present day. A term life insurance policy can ensure that your family has the same financial security they are used to — even if you’re not here.

Consider whole life insurance if:

  • You need insurance for as long as you live. (Even if you live to be over 100.)

  • Your dependents will not be able to work or support themselves and will need the money when you’re gone.

  • You have an estate. A whole life insurance policy can build and enhance your estate to ultimately provide money to dependents.

If you’re leaning toward term life (which experts agree is the more financially sound choice), you have more flexibility in the term length and payout amount. With that in mind, think of these factors too:

  • The current state of your health

  • Your family’s financial needs

  • The age(s) of your children

  • Your current debts

  • Your retirement plans

  • The future needs of your family (like college tuition, for example)


Life insurance terms to know

Sometimes, life insurance can come with some head-scratching jargon. Before you sign the dotted line on a life insurance policy, make sure you understand what you’re getting. Get clarity on some of the most common terms to know below.

Premiums: the payment you make to your life insurance company to keep your plan active.

Beneficiaries: the people you choose to receive money when you die. You can choose anyone you’d like — they are most often spouses, children, or other family members.

Death benefit: the total amount of money your beneficiaries will be paid if you (the covered person) die. You can choose this amount when you get your policy. Typically, if you’d like a high-paying death benefit, your premium will also be higher.

Riders: options you can add to a life insurance policy for more customized peace of mind. Some examples of riders include:

  • Accelerated death benefit: If you become critically ill, injured, or disabled, this option can waive your insurance premium payments until you are able to return to work full time. Waivers can be issued from ages 18 to 55 and are subject to terms and conditions.

  • Children’s term life insurance: Whether they are biological, adopted, or stepchildren, you can add on term life coverage for your kids, too.

  • Accidental death: In the case of a fatal accident, this option pays out an accidental death benefit to your beneficiary (that’s above the current benefit limit of the policy). Ideal for those who work in a hazardous occupation or can’t afford to buy sufficient life insurance coverage.

  • Waiver of premium: If you become critically ill, injured, or disabled, this option can waive your insurance premium payments until you are able to return to work full time. Waivers can be issued from ages 18 to 55 and are subject to terms and conditions.


How to choose the right amount of life insurance

Think about how your life is today. You might be a two-income household, comfortably handling your mortgage, car payments, and other monthly expenses. You even have enough to start saving for retirement and your children to go to college. But then, think about if suddenly, something happened to you or your partner, and that second income went away. Not to mention, funeral costs and medical bills, if applicable to your situation. How would you or your surviving partner handle these expenses now — and others to come in the future?

Life insurance — and the payout amount you choose — is personal. Sure, a multi-million-dollar payout sounds like a great idea, but will the higher monthly premium put a strain on your budget today? A good rule of thumb is to buy a policy valued at a minimum of 10 times your annual salary. For those with spouses or a lot of debt, this figure might be a little more. It’s important to strike the right balance of protecting your tomorrow, at a rate you can comfortably afford today.


Discover how life insurance can help you protect what matters

Just like any other form of insurance, you have options. It’s important to take the time to shop around and get quotes from several insurance companies before you make your final decision. You’ll also want to make sure that the insurer is in good standing to be in business, and you don’t run the risk of the company going out of business during your insurance plan timeline. (It can happen!)

Tags: Life, Care, Life Insurance

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