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Life insurance is a way to provide financial protection for your loved ones in their most exposed moment, when someone they love, dies. The most common reason for life insurance is to replace the income of the person who dies. Almost everyone has someone that relies on them financially in some way. Whether relying on them to bring home an income from their job, to be able to pay monthly living expenses, or to save for the future (kids' education, retirement, etc.), most people rely on a steady income for their household, that if no longer there, would result in them having to make significant changes to their lifestyle, or could even leave them in financial ruin.
A life insurance policy ensures that if you die while your policy is active, your loved ones will receive a lump-sum of money, known as a death benefit, that can be used to cover things like mortgage or rent payments, education costs, funeral arrangements, and more. If your death benefit is sized properly , it will be large enough that it will generate monthly or annual income sufficient to replace what you used to bring home from your job, and continue for the same period of time until you would have theoretically retired had you still been alive.
In its simplest form, every life insurance policy is made up of five important concepts:
There are two main types of individual life insurance - term life, or permanent life insurance. When choosing between the two, consider how long you want coverage, the purpose of the coverage, and how much you want to pay. Here’s a brief overview of each to help you decide which one may be the best fit for you and your family.
Term life insurance typically costs less and provides the most straightforward coverage. It’s active for a set period of time (your term), usually 10 to 30 years, and pays out a death benefit to your beneficiaries if you die while the policy is active.
You are able to choose the length of your term and the amount of coverage that would be paid out if you die before your term ends. If you die after your term ends, no death benefit is paid. It’s that simple.
That’s it — no frills, just straightforward financial protection for the people you care about. Term is the most common type of life insurance and it's a good option for many people.
Permanent (or "whole life") insurance pays out to your beneficiaries when you die, the same as term life does, but it has more features. For starters, it’s active for your entire life, so your beneficiaries are guaranteed to get a death benefit.
It also comes with a savings component called the "cash value," which can be used to supplement your nest egg and diversify your investment portfolio.
Permanent life insurance can cost 5-10X more than term life insurance, but if the premium is within budget, it can be a good option for anyone interested in insurance that accumulates cash value with a guaranteed minimum rate of return, and it provides coverage that doesn’t end for the rest of your life.
Life insurance is first and foremost to take care of your dependent loved ones: notably your spouse or partner, and your children. The payout will help them financially. It will help them continue the lifestyle the grew accustomed to while you provided a steady income from working. And it can help them pay off debt obligations or other expenses, as well as save for future needs.
Here are some of the most common reasons to have life insurance:
The most common reason for life insurance is to make sure that your dependents aren't financially helpless if they lose your income. Daily living expenses that rely on your current income, will continue to be affordable to your family even in your absence with an adequate amount of life insurance protection.
Burial costs are expensive. Many funerals can cost between $10,000 and $20,000. With life insurance, in the case of your passing, your family would not have to personally take on this financial burden.
Debt does not disappear, whether you are alive or not. In most cases, your debt (mortgages, car loans, credit card balances, etc.) may fall on your spouse or other family members – life insurance can alleviate that burden.
College is expensive, and without proper planning, your children may not be able to attend the college of their choice if you are not around to help them pay for it. Insurance proceeds would provide a security blanket that even in your absence, they can still pursue their academic dreams.
As a business owner and partner, life insurance ensures that one partner is not left with heavy financial burdens if the other dies.
If your net worth is high enough, to avoid having your family getting hit with a big estate and inheritance tax bill when you pass away, make sure to be covered with life insurance to cover these added costs.
When you shop for a life insurance policy, you’ll need to decide what amount of coverage to have — this is the amount of money your beneficiaries will receive as a death benefit if you die. As a general rule, many financial advisors recommend you get about 10 to 30 times your income in coverage, and they tailor the recommendation based on your age and how many years your family will need to replace your income - typically until the age that you would have retired. So think of the term as a bit of a sliding scale that adjust with your age and family situation.
To calculate a more precise figure, many financial planners use the "DIME" method, which totals up four key components, including:
That resulting number is typically a decent starting point, but you may need less or more depending on personal factors such as other savings or whether you’re supporting older family members. Steadyy's Needs Builder™ tool can help guide you through this process. Just click here to get started.
How much you pay for life insurance depends first and foremost on how much coverage you’re buying and how long you want to be covered. It also depends on how healthy you are, and how risky your lifestyle is, because that factors into how long the insurance company expects your life to be.
Buying life insurance gets more expensive as you get older, but there’s always a way to get coverage that fits into your budget.
Getting life insurance as a younger person is the best way to get the most affordable policy. It also protects you from any health changes that could increase your rates.
Other factors, like working in a dangerous occupation, having serious medical conditions that run in your family, or smoking, can impact your rates, too.
We can advocate on your behalf with various insurance carriers that we work with and will work hard to to get you the best rates for your profile.
Simply put, you need life insurance if someone else is depends on your income. Usually, this means your children and/or spouse., but it could also be important if you are caring for an aging parent.
Life insurance isn’t usually on a twentysomething’s list of financial priorities. And that’s okay. Maybe. If you’re happily single and childless, you can probably hold off on life insurance (for now). But for many others, particularly for those in their 30s, 40s or 50s, if you have a spouse or kids, or even if you're just starting out, and marriage or a family is on the horizon, you need to start thinking about how to protect your family if the unthinkable happens. The risk for them of losing you is more than just emotional. There are financial consequences if they lose you too.
You should assess whether you have the right amount of life insurance coverage anytime something major in your life changes. And you should reassess at least once every couple of years. It's usually a good practice to evaluate your situation around tax-filing season. Or around New Year's Day. Or when you get your annual review on your job performance and any promotions, raises or bonuses. Just set a habit to review your income, spending habits, lifestyle, goals, and needs and make sure that you have proper protections in place for your loved one.
Getting married soon? Probably time to start thinking about life insurance. Newborn on the way? Think about how to secure their future. Buying a new home (with a big mortgage)? Check you financial plan, including life insurance.
Also, keep in mind that your needs change as your lifestyle changes too. Do you want your spouse or children to maintain the lifestyle they have grown accustomed to? Did you recently get promoted or change jobs, such that it brings with it an increase in salary or bonus? Your spending habit will likely change. So confirm that your life insurance protects the lifestyle that your spending pattern gives your family. Kids headed off to college? Check again. Approaching retirement? Re-assess.
Generally you need to have enough coverage to leave your family a nest egg that amounts to between 7-20x your current annual income. But this is fluid. Its like a sliding scale. It is constantly changing based on your age, because you either have a lot of years to replace income if you're a ways off from retirement. Or it could be lower because you're closer to retirement. It also changes depending on how much you have saved, or your family situation. If any of these change, check your life insurance coverage and make sure you have a proper amount.
You are just minutes away from the financial security your loved ones deserve.
