Life insurance isn’t always top of mind for most people. In fact, it can be daunting to think about or seem too far off. Who wants to spend time thinking about their own mortality, anyway? But it’s never too early to start thinking about your financial future—or, more importantly, the financial future of your loved ones.
Take time to demystify and understand the basics of life insurance, and learn why it might be in your best interest to start searching for a policy now.
How do you define life insurance?
Life insurance provides security and peace of mind while you’re alive, and future financial support for the people you love when you pass away. Of course, there is more to it than that, but let’s keep things simple for now.
Do I need life insurance?
Technically, yes. Anyone can benefit from having life insurance. Especially if you have people who depend on your income for living expenses or future expenses like college tuition and retirement. Also, consider any significant life changes you’ve experienced recently—such as purchasing a house or having a baby—and that will likely increase your need.
Here are some common categories of people who are more likely to answer yes to this question:
- Married or partnered couples
- Married or partnered couples with children
- Single parents
- Empty nesters
- Business owners
But even if you’re a single twenty-something with no kids, we still recommend looking at life insurance policies. You’ll find incredibly low and affordable rates at this age that you’ll probably never see again. Plus, it doesn’t hurt to start early and lay the foundation for your financial future.
How does life insurance work?
Life insurance is a contract between you and your insurance company. They provide you coverage in return for timely payments called premiums. And when you die, your listed beneficiary (i.e., your spouse) files a claim to submit proof of your passing (death certificate) and receives a death benefit—or a tax-free lump sum payout.
It’s important to note that a child beneficiary needs a custodian of the policy to file a claim. And if you didn’t name a beneficiary, a court would appoint one. Your family’s licensed insurance agent can help contact your insurance company and complete the necessary paperwork to file a claim.
What are the different types of life insurance?
Many different life insurance policy options exist and can be broken down into two basic categories: term life and whole life. Also known as temporary and permanent policies.
Term life insurance
As the name implies, with term life insurance you pay your premiums for a finite amount of time (usually 10 to 30 years). It’s simple and far more affordable than whole life insurance; carries no hidden fees, exclusions or investment risk; and you can cancel the policy with no penalties. If you die while the policy is still active, your named beneficiary will receive a death benefit.
Most people opt to go this route since it’s more straightforward and less expensive than whole life insurance. Plus, some term life policies may allow you to convert to a longer term policy down the line if you decide you need more protection. The only con is you’ll have to purchase a new policy when it expires if you still need the insurance.
Whole life insurance
Whole life insurance remains active for your entire lifetime. It’s considerably more complex than term life insurance because it’s measured in cash value that grows over time at a rate your insurer controls. Because it accumulates cash value, you may tap into it to put money down on a house, supplement retirement income, pay emergency expenses and more. Restrictions may apply as you begin to make withdrawals and interest on these loans.
But, whole life insurance is also up to 15 times more expensive than a term life policy. A 45-year-old male non-smoker, for example, might pay over $400 monthly for a $250,000 whole life policy compared to less than $40 a month for a 20-year term $250,000 policy1.
You may find whole insurance isn’t worth the extra cost unless you want to minimize your estate tax, build cash value or have long term dependents outside the scope of term life policies.
How much coverage do I need?
This really depends on where you are in life’s journey and who depends on you financially, and for how long. A couple with young children will likely need more coverage than a couple without children. But, if you’re one to do the math, we recommend calculating your life insurance needs like this:
- Add up all immediate, ongoing and future expenses your loved ones will become responsible for upon your death.
- Add up the financial resources and income your family already has without you.
- Then, subtract your resources from your expenses.
The difference should tell you how much life insurance you should buy. Of course, this amount may change as your circumstances change (children get older and become more financially dependent, etc.).
What does life insurance cost?
As illustrated in our whole life and term life comparison, your premium payment can vary—anywhere from less than $20 a month to $600+1. It’s also dependent on four main factors: age, health, type of policy and how much coverage buy. The younger and healthier you are, the cheaper it will be (looking at you, young twenty-somethings!).
Interested in getting life insurance?
Now that you’ve got a better understanding of what life insurance is and how it works, it’s time to start searching for a policy that fits you and your family’s unique needs. Contact a AAA Insurance agent to receive a quote and learn more about your life insurance policy options today.
1. Gambhir, Nupar, and Amanda Shih. “Term Life vs. Whole Life Insurance: How to Make the Right Choice.” Edited by Patrick Hanzel, Policygenius, 28 Mar. 2022.