Let’s talk about life insurance for a minute. Do you really need it? If you’re young, your initial instinct is probably to say, “No! I’m young, strong, and able to drink a case of Red Bull without flinching. Why would I need life insurance?” You laugh in the face of danger and regularly defy death in ways that terrify your mother.
If you’re a bit older, and your body has body has begun to fall apart, you may think you need life insurance but you’re not exactly sure.
So let us help you out a bit. In this post, we’re going to answer some commonly asked questions about life insurance and help you figure out whether you should purchase it.
- What exactly IS life insurance (different types, what it covers, etc.)
- Do YOU need life insurance (the answer isn’t always, “Yes.”)
- Do you already have life insurance?
You won’t exactly be a life insurance expert after reading this post, but you’ll certainly have a better understanding.
What Exactly Is Life Insurance?
Let’s start with the basics. Life insurance is money that gets paid out when you die. Yes, that’s bit morbid, but it’s something every person must confront eventually. The money can be paid out in a lump sum or in regular payments. The point of life insurance is to give you and people you care about assurance that, in the event of your death, they will be taken care of.
An example. Let’s say that, due to a freak bowling accident, you end up going to that great bowling alley in the sky. A ball got loose, you got stuck in the pinsetter, whatever. The details don’t matter. All that’s important is that you are no longer around to take care of those you love and your bowling team is without their heavy hitter.
If you had purchased life insurance prior to the bowling mishap, the insurance company will disburse funds to those named in the policy, like you spouse or children. Having the life insurance policy allows you to bowl without fear, which, honestly, is the only way to bowl.
Life insurance gives you the peace of mind to know that your family will always be taken care of, even if the worst happens.
How much money will your dependents receive upon your untimely death? That depends on how much coverage you purchased in the first place. Better coverage means you pay more for the life insurance while you’re alive but also your dependents receive more upon your death. The policy you choose will ultimately determine the payout upon death.
When it comes to purchasing life insurance, you have two basic options.
Term Life Insurance – Often called “pure life insurance”, a term life insurance policy runs for a specific length of time and only pays out if you die during that time (that’s important to understand). Terms usually run somewhere between 1 – 30 years, with the most common coverage being around 20 years.
Most people choose a term life insurance policy that terminates sometime around the time their family is no longer financially vulnerable, like when the kids are grown, the house is paid off, and there is lots of money in savings. You could also end your term life insurance policy at the time you expect to win the lottery but we don’t really recommend this.
Whole Life Insurance – Whole life insurance covers a person from the moment they purchase the policy until the moment they die. There is always a payout. As long as you keep up with the premiums, you can be sure that your family will receive funds when you pass away.
Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. The premium remains the same for as long as you live, the death benefit is guaranteed, and the cash value account grows at a guaranteed rate.
Now, let’s be clear about something. Life insurance only covers life. In other words, the money is only paid out in the event of your death. This is why in crime shows, you never see the jealous spouse just making her husband sick to collect on the life insurance policy.
If you are involved in a roller skating mishap and find yourself unable to provide for your family, life insurance does NOT kick in.
And, there are usually certain things that are not covered in life insurance, such as if you die due to a drug overdose or alcohol abuse. Also, if you participate in risky sports (BASE jumping, roller bowling, etc.), you may need to pay extra to be covered. Finally, if you already have a serious disease or health issue when you purchase the policy, that also may not be covered.
However, if you get declined for life insurance, you do have options. You can find out more about those here.
Do YOU Need Life Insurance?
A simple way to determine if you need life insurance is to answer the following question:
Will anyone be financially hurting if I die?
There will be people who are very sad when you die. There will be people who certainly miss you. But will there be people who will face financial difficulty when you die? That’s the key question.
- A spouse who relies on you for income
- Children for whom you provide
- A family living in a house with a mortgage
If you answered, “Yes,” to the above question, then you probably should have life insurance. Even if you don’t have dependents, you may want to consider life insurance to cover funeral expenses.
You may not need life insurance if you are…
- Your spouse isn’t counting on you for income
- An eccentric billionaire living in a castle
- A nomadic desert wanderer without friends, family, or home
Do You Already Have Life Insurance?
Depending on your employment status, you may already have a life insurance policy. This policy will probably cover you up to some multiple of your current salary, which may or may not be enough to cover income needs after death.
A few things to bear in mind:
- If you stop working for that employer, you insurance policy is gone. When that happens, you will either need to purchase another policy or begin working for a company that provides insurance.
- Your employee life insurance may not be enough. Depending on your current salary and the amount of coverage you receive, you may want to consider purchasing an additional policy to make up the difference. The last thing you want is for your dependents to discover that you had a paper-thin policy.
Should You Choose Term Or Whole Life Insurance?
Term life insurance is ideal if you only need coverage for a specific period of time and are focused on what is most affordable. And, if you want to convert your term policy to a whole policy, that option is usually available.
If your children will be grown and financially independent by the time they’re 25 (like that will happen), you may be fine with term insurance.
Whole life insurance is best for those:
- Who want to provide money for estate taxes. If you’re leaving a sizable chunk to your dependents, they’re going to have to spend quite a bit on the estate taxes. Whole life insurance can help defray the costs.
- Who have a lifelong dependent, like a disabled spouse.
- Who want to spend all their retirement savings and still have something left over for funeral expenses. If you’re going to go hog wild in Fiji after your retirement, whole life insurance may be your best option.
When deciding between whole or term life insurance, consult with an expert. Lay out your situation for them and ask their opinion. Tell them what your situation will be like in 20 years and then get their recommendations. Additionally, since life insurance directly affects those close to you, bring them into the discussion.
Life insurance is one of those things that you hope you never have to use. Still, if you have people who depend on you, it’s essential. Failing to secure the right life insurance can leave those you care about in serious financial trouble.
If you need life insurance, Rootfin can help you find the right policy with our “Instant Life Insurance Quotes” tool. We’ll work on behalf of YOU with the nation’s top insurance carriers.