A Quick Guide to Life Insurance

Years ago, I saw a clever slogan from a life insurance company that said “YOLO. Literally.” This funny saying highlighted an uncomfortable truth – death is certain. If anyone is depending on you for financial support and would be affected if you were no longer here, life insurance should be at the top of your to do list. You don’t get life insurance because you’re going to die, you get it because your loved ones are going to live. Before you take out a life insurance policy, it’s important to understand the purpose of the policy, the best option for your needs, and the basics of how these policies work. Here’s a quick guide to help you get started.

• How much life insurance do you need? The purpose of life insurance is to provide financial support for your spouse, children, or anyone who depends on you in the event of your death. To determine how much you need, you should consider your financial obligations. This would include your income that would need to be replaced, any debts you’d like to pay off, and future needs such as college expenses or funeral costs. From there, subtract any existing savings and investments that could be used for this purpose. The gap is the amount of life insurance you need. There are many ways to calculate your insurance needs as well as a few rules of thumb (if you’re not up for calculations). This article explains several methods in detail. If you’d like a quick and easy calculator, check out this one.

• What type of life insurance do you need? For most young professionals, level term insurance makes sense. Term life insurance covers you for a period of time or term, such as 10, 20, or 30 years, and with a level term policy your premiums remain the same every year. At the end of the term, the insurance expires and you stop paying premiums. This type of insurance is ideal because it only covers you for the period of time you need it. Term is also simpler and more affordable than permanent policies that have an investment component.

• What if you’re single with no kids? Generally speaking, there’s no need for life insurance if no one depends on your income and would be financially impacted by your death. If you anticipate the need for insurance in the future, it doesn’t hurt to get insurance while you’re young and healthy. There are several other reasons why a single person might consider life insurance. This article from Haven Life explains seven in detail.

• What about group life insurance? Many employers offer a base level of term life insurance as a company benefit, sometimes at no cost to you. While the death benefit can vary, it is often one to two times your current salary. If you need more coverage than the base benefit your employer provides, I suggest looking for an individual policy outside of work. That way, a job change does not impact your life insurance coverage. One exception is if you’re unable to qualify for life insurance because of health issues. Most group insurance provides some level of coverage without proof of good health, so if you have a health condition, get as much insurance as possible through your employer. 

One final note: When you’re shopping for term insurance, look for a policy that is convertible. This feature allows you to convert a term policy to a permanent policy at a later date without going through the health qualification process again. Having a convertible feature can provide some protection if your health declines during the term and you later have an ongoing need for insurance coverage.