What is life insurance?
So, what is life insurance? Life insurance provides a lump sum of money to a named beneficiary, in the event that the insured person dies. In exchange, the insured policyholder pays a premium to their insurance company.
A life insurance policy is a legally binding contract. For the policy to be “in force” the policyholder must keep up with their premium payments, or they risk a claim being denied.
When the policyholder passes away, their beneficiaries receive a payout. Beneficiaries are decided by the policyholder, and they are usually loved ones. However, a life insurance beneficiary can be anyone. Some people will choose to donate their life insurance payout to a charity.
There are different types of life insurance policies, such as Term life & Whole life. Term life policies only last for a set number of years, while Whole life policies cover a person’s entire lifetime.
How Does Life Insurance Work?
Term life insurance policies consist of two main part; a premium and a death benefit. However, Whole life insurance policies have an additional third part, which is called a cash value.
A death benefit is the total sum of money which the insurer guarantees to the life insurance beneficiaries.
A life insurance premium is what the policyholder will pay the insurance company in exchange for their policy. As long as premiums are paid, the insurer must then pay out a death benefit, in the event of a policyholder death.
Finally, a cash value is a living benefit. It can be used as a savings account by the policyholder during their lifetime. On top of this, the cash value can also be used to pay premiums on their insurance policy.
How To Calculate Your Life Insurance Needs
When deciding the amount of coverage that you need from a life insurance policy, you should think about what you need life insurance for.
People buy life insurance for a number of reasons, some of the main ones are;
- Covering funeral costs
- To provide financial security for a family
- Paying off debts
- Paying for college for children
- Covering mortgage payments
Once you know what you would like to cover, you then need to add up your total savings (assets, investments & savings) and subtract that total from the level of coverage that you need. You will then have a figure amount for how much coverage you need from a life insurance policy. You can even find life insurance for specific coverage amounts, such as; $250k life insurance policies, $500k policies, $1million life policies.
You should also be aware that life insurance needs change over time, just like your life does. When you’re young and unmarried, you may not need as much life insurance as you would do if you decide to start a family.
Once you have a family, you will have dependents to cover, and you will want to reconsider your policy coverage level.
Who Needs Life Insurance?
If you’re asking yourself the question “Do I need life insurance?” then you want to know more about which types of people a life policy is for. The answer is different for everyone.
Whether you need life insurance depends on your goals. However, if anyone depends on you financially then you likely need life insurance. Consider these typical scenarios where people should seriously consider life insurance:
- People who have children – The cost of raising children until they are adults is extremely expensive. To ensure they can still be properly taken care of, consider life insurance.
- People who have debt – No-one wants to pass on their debt to their family after they pass away, life insurance can help you settle outstanding debts.
- People who want to lock in cheaper premiums – Even if you are young and you don’t have any dependents, you make want to buy life insurance early so that you can lock in a lower premium than if you waited until you were older.
- People who own a house with a partner – If you pay a mortgage then you will want to seriously consider a life insurance policy. The death benefit will help your partner to keep up with their mortgage payments.
- People who own a business – If your business would fail without you, then you might want to factor your employees or business partners in to a life insurance policy.
- People who care for others – If you care for an elderly parent, or a special needs sibling, then buying life insurance can ensure that they are still taken care of after you’re gone.
Some seniors (like those over the age of 65) wonder if they should bother getting a life insurance policy. However, in most cases, the answer is that they should consider a policy.