Don’t know much about life insurance? You’re not alone. Most people, unfortunately, miss this important step until it’s too late! We don’t want that to be your story. This article was written to help you learn and understand why life insurance is such a crucial part of your financial plan and why you should get it today!
Let’s look at a fictional scenario of two millennials. In their early years, Linda and Joe were skeptical about life insurance. They were both young professionals just starting their respective families and did not understand why purchasing a life insurance policy was such a pressing matter. However, Linda decided to visit her local insurance company to learn more. Well, Linda ended up purchasing a 20-year term life insurance policy and when she passed on unexpectedly, her family was financially stable years later. They used the death benefits from Linda’s life insurance to cover their expenses while they mourned the loss of a loved one.
Joe ignored life insurance, and in an unfortunate twist, lost his life. Suddenly, his family had to deal with his untimely death. If Joe had taken a life insurance policy, the family would not have felt the financial burden of lost income nor the burden of the other debts he accumulated. If you don’t want to let your dependents deal with the consequences of Joe’s actions and want them to be financially secure in the case of your premature death, then you should take the initiative to learn more about life insurance.
What is life insurance?
Life insurance is a contract between you and the insurance company. In exchange for monthly premiums, the insurance agrees to pay out a lump sum to your beneficiaries upon your death. The lump sum is most commonly known as the death benefit. In most cases, the death benefit is transferred to the beneficiaries tax free.
In a life insurance policy there are four distinct players. The insurer, the owner, the insured and the beneficiaries. In the case of Linda, the company she paid the premiums to was her insurer. She was both the insured and the owner of the policy while her family was the rightful beneficiary.
So why do you need life insurance?
The main goal of acquiring life insurance is to make sure that once you pass away, your dependents will have a source of income for years to come. In short, your death will not place a financial burden on them as the death benefit can be used to pay for a plethora of things. It can be used to pay for funeral and burial expenses as well as ongoing monthly expenses. Another way the money can be used is to settle all the pending debts at the moment of your death. If you had a car loan or mortgage, it can be used to pay them off and save your family from assuming unnecessary debts.
If you have a running business, the death benefit can be used to maintain it in case of your untimely death. The money can be injected into your business to keep it afloat and avoid bankruptcy. If you have children, the death benefit can be used to pay for future college expenses as well. As you can see, life insurance is a must if you have people who are dependent on your income! In fact, it is widely recommended that you obtain life insurance coverage that is 10-12 times your salary to cover all potential expenses your family could incur. This will remove some of stress often felt by a grieving family immediately after a loss.
Linda’s family benefited from the death benefit in many ways. They were able to sustain a normal life financially after her death. On the other hand, Joe suffered the blow of not purchasing one. His family took up the burden of settling his debts and other personal loans and struggled to pay their ongoing bills as they dealt with the reality of becoming a one income household.
Types of life insurance
There are different types of life insurance policies that you need to comprehend before deciding to purchase one. The most common policies you’re likely to come across are term life insurance and whole life insurance. Here is a quick summary of each.
Term life insurance
Term life insurance covers you for a given timeline and its rate is fixed for that period (20 years, 30 years, etc.). For example, Linda’s specified period was 20 years. When the term expires you can either renew the contract or forego the renewal.
It is also important to note that term life insurance is the cheapest and most convenient life insurance you can ever purchase. This explains why Linda bought this type. She was still young and could not afford high premiums. Term life insurance afforded her the option of low monthly premiums while obtaining a significantly large death benefit.
Whole life insurance
Whole life insurance insures you for the rest of your life so long as you continue to make the monthly premium payments. However, the monthly premium is often 12-14 times higher than term life insurance, for a much lower death benefit.
Say for example, Linda earned a salary of $50,000 annually. In this case, she would need at least $500k coverage (10 times her salary). For a healthy non-smoking 25 year-old, she could purchase a 20-year term life insurance with a death benefit of $500k for $30.45/month ($350 annually) while with whole life insurance for the same death benefit, it would cost her $415.85/month ($4,780 annually)! What a huge difference!
Whole life insurance also has a cash value component that serves as a savings or investment-like vehicle which gains value over the life of the policy. It can be borrowed against like a loan, and is paid out upon the policyholder’s death.
Benefits of term life insurance
Term life insurance can be an immediate relief to your loved ones in case of death. Although some life insurance agents argue that whole life insurance is better because of the cash savings vehicle option, term life insurance provides far more benefits. Remember, the purpose of life insurance is income replacement – not a savings account! Some benefits of term life insurance include:
- Allowing your beneficiaries to enjoy a higher death benefit, which you pay at a much lower rate compared to whole life insurance.
- Term life insurance is not taxable. Your beneficiaries receive the lump-sum amount in full.
- Did you know that the death benefit is not part of a probate estate? No third party can claim to share the benefit. This translates to prompt payment to the beneficiaries. No tedious legal process involved – just a seamless payment.
- The younger and healthier you are, the cheaper your premiums will be. The cost to insure yourself as you get older increases and so does your chance of developing different medical conditions that also adversely affect your premiums. Linda was able to afford her premium payments from a young age which would not have been the case had she purchased a whole life insurance.
Having life insurance should be part of everyone’s financial portfolio. If you have someone who is dependent on your income, this is one of the few ways you can ensure that your family will be taken care of in the case of your death without the added burden of financial stress. While the thought of having whole life insurance seems enticing, term life insurance is the better option for most! Ideally, once your term is up, you would have saved/invested enough money (the difference you’re saving between the term life insurance and whole life insurance monthly premium) to not need another life insurance policy. The financial decisions you make between today and 20-30 years from now, should put you in a position where your assets insure you and you no longer need a life insurance policy. Regardless of where you are on your journey, having life insurance is a no brainer. Tomorrow is not promised. Make the decision today to give you and your family the peace of mind that is needed knowing they would be in a good place in the event of an unexpected death. You will be happy you did so!
It’s great that life insurance can be used to cover your funeral costs as well as the monthly expenses of your loved ones. I have been taking care of my disabled brother for about two years now, and I am worried about what would happen to him if I were to unexpectedly pass away. I think I will start looking for a life insurance policy to make sure he is taken care of should the need arise.
Yes, life insurance is a must! Definitely do your research to find a good policy so your loved ones can be taken care of. It’s one of the best gifts you could give them!
It’s good to know that term life insurance is typically more affordable with better benefits. I have been considering purchasing a life insurance policy for the peace of mind that my family will be taken care of. I think I will go for a renewable term policy.
It absolutely is! And yes, a renewable term policy is the better option by far!
Glad you found the article helpful Lyla!
I too used to believe buying insurance to be a daunting task and something that i was reluctant to get because I had this preconceived idea that its a complicated process. But times have changed and there are numerous online sites and independent insurance agents that can guide you and have made the process of buying an insurance very easy. From my own experience I found great help and service at IFG Insurance Services. They guided me every step of the way and i found a plan that worked just right for me. I have recommended them to people I know personally and online.
Thanks for sharing Ryan. It is definitely too easy and too important not to set up a good term life policy!
I agree with your post on term and whole life policies. I have both policies and I have had them for many years. I am a single mother of four kids which two are grown now 27 and 24 and the other two are 17 and 16. I took out a term life policy so if anything happened to me while they were still young they would be taken care of financially , and they could stay together as a family. Additionally, I wanted them stay in our home and be able to go to college. My term life policy is set to expire in 4 years at the age of 49. I will not renew the policy it will be too expensive but, I also knew going into my contract it was only for a “term”. You have to be prepared for the worst. I must also say at this point I am grateful for having my whole life policies too because when I turned 39 I started having some health problems not too major I developed thyroid disease which caused me to have bouts of Atrial Fibrillation. Which now is considered part of my medical history, and I can tell you life insurance companies take a hard look at my medical history when I want to buy life insurance. So at this point I am not worried about buying anymore life insurance my term policy will take me up to my kids all getting grown and my whole life policies will take me too the end. I am glad I purchased both while I was in my early 30’s. When it came to my whole life policies I didn’t take out a very large policy but it’s over a hundred thousand dollars, so my family could bury me nicely and have something left over. Planning works. I love the old saying a failure to plan on your part does not constitute an emergency on my part. But it does constitute a emergency if you have a family and you don’t plan. Lastly, when people look at their benefits at work if they sign up for life insurance they should always ask if the policy is portable if they leave the job. Most of those are good policy with low premiums because of the group discount. Furthmore, they are usually easy to convert and your premiums don’t change. Everyone should have insurance outside of their jobs, but I find in this day and time it’s not the norm.
Hello Ms. Kimberly,
Thank you so much for your thoughtful reply! You brought up some great points to consider. We can all learn from your experience and do our due diligence to ensure our loved ones are taken care of in the case of an unexpected death.
I lost my husband at age 50. We had 2 young kids, a car loan, a home loan for an addition. The loss was due to a sudden illness so there were also large hosptial bills, and then suddeney a funeral to pay for. I’m so fortunate he had life insurance so my children can continue to live in the home they love, go to the same private school. Everybody needs it.
Thank you so much for sharing your personal story with us. It gives great insight into the unpredictability of life. Praise God for the wisdom He gave your husband to purchase life insurance so that you all were taken care of financially while mourning his loss. I hope you all are doing well and carrying on the legacy he left. Thank you for visiting our site and for being kind of enough to be transparent. God bless you.