Some people should get life insurance. Others, not so much. If you have children, a partner or other family members who depend on your income to cover their living expenses, then yes, you’ll want to look into getting life insurance. Let’s get into more details below.
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How Life Insurance Works
When you pass away, life insurance pays your dependents money, either as a lump sum or in regular payments. It’s designed to give you reassurance that the people you love will be taken care of, after you’re no longer there to provide for them.
The amount your dependents receive hinges on the coverage you purchase. There are two main types of life insurance: term life insurance and whole-of-life insurance.
Term Life Insurance
A term life insurance policy runs for a fixed period of time, such as 5, 10 or 20 years. Most people buy this type of life insurance to cover them until their mortgage is paid off, they retire, or their children are grown.
This type of life insurance pays out no matter when you die, as long as you stay on top of your premium payments. Because whole life policies do not have fixed end dates, they end up being much more expensive than its term life counterpart.
What Isn’t Covered By Life Insurance?
For the most part, life insurance only covers death. Unfortunately, you won’t be covered if you’re unable to provide for your family due to disability or illness. Some policies do offer a terminal benefit, paying out on diagnosis of a terminal illness. But this feature is not always standard.
Most life insurance policies come with exclusions, or things they don’t cover. For example, you might not be covered if your death is the result of engaging in a risky sport or illicit drugs. If you take out a policy with a predetermined health problem, your insurance may exclude any cause of death related to that illness. You do have the option to buy additional insurance products which will cover critical or long-term illness and total or permanent disability.
How Much Is Life Insurance?
Your insurance premiums will depend on a number of things, including:
- Your age
- Your health
- Your lifestyle
- Whether or not you smoke
- Length of policy
- Amount of coverage
The younger you are, the less likely you’ll die from a medical condition, so your policy will be cheaper. You might be able to bypass the medical exam, but if you choose this route, you’ll probably have to pay higher rates.
Do You Need Life Insurance?
There are a number of different scenarios where I’d recommend buying life insurance. To put it simply: if you have people relying on your income for their financial well-being, then you should get life insurance. Relevant dependents may include children, a spouse, aging parents, or even the cosigner of a loan you took out. Common scenarios where you might feel more assured with life insurance include:
You Have Young Kids
Your children will depend on you for a long time to come, plus you’ll probably want to start saving for their college fund and other future milestones. Unless you’ve already built a big nest egg to cover everything, you’ll want to consider taking out life insurance to fill the gap.
You’re in a Domestic Partnership
Got a mortgage that requires both your salaries for payments? Does one partner earn much more than the other? A life insurance policy makes sure you’re covered.
You Have a Private Student Loan
Although federal student loans are forgiven when the borrower dies, private student loans don’t offer the same protection. The debt will transfer to whoever co-signed the loan, which is usually the parents. To protect your folks from getting stuck with your student loans, you’ll want to take out a life insurance policy.
You Own a Business
You might want to take out a life insurance policy with your business partners as a beneficiary, in addition to your family, especially in the situation where the business could cease to exist without you. You can also stipulate a buy-sell agreement, providing funds for your business partners to buy out your remaining shares from your family.
You’re Super Rich
If you are leaving behind enough money to trigger estate taxes, you’ll want to use a cash-value life insurance policy to foot the tax bill. You can also consult a financial advisor about estate planning as opposed to taking out life insurance.
Who Doesn’t Need Life Insurance?
Even if you play an important role in your family’s life, you may not need life insurance. Here are a couple scenarios where you probably don’t need one:
Because life insurance takes the place of your earning power, stay-at-home parents don’t need the same kind of life insurance as working parents. You might, however, consider taking out a small policy to cover daycare and other costs that might be incurred if the stay-at-home parent is no longer here. This kind of insurance is smaller and shorter in length than a standard term policy.
In the best case scenario, you won’t need life insurance once you reach retirement age. You’ve paid off your debts, and your kids are standing on their own two feet. There’s no danger of unloading any financial mess onto someone else if you’re gone. When you’re financially free, there isn’t really a need for life insurance. If you want to leave an inheritance, you’ll probably stockpile more money with investments, rather than a life insurance policy.
While some agents may try to sell life insurance on your kids, I wouldn’t recommend it. Children don’t normally earn and support the family, so in most cases, they don’t need life insurance.
When Should You Get Life Insurance?
It really depends on what’s going on in your life. Before we delve into it, keep these things in mind:
- Buying life insurance gets more expensive as you age. Each year that you wait, expect your premiums to go up 8% to 10%. However, once your policy is in place, your rate won’t budge.
- Holding life insurance too long is costly. Buying life insurance at 25 is cheaper than getting it at 45, but you may not need coverage for that long. If you buy later, it could even out the cost. To put it in perspective, paying $30 a month for 20 years is the same as paying $60 per month for 10 years.
My recommendation is to purchase life insurance when someone starts to depend on your income, and set the term for as long as you think they’ll have to rely on you. By following these criteria, you won’t spend before you have to, but you’ll also lock in the cheapest rate possible.