More than 50% of Gen Xers, Millennials, and Gen Zers surveyed are either “not clear” or only “somewhat clear” about what life insurance can do for them, a survey reveals.
Here’s some more food for thought:
- According to Money.com, Millennials overestimate the actual cost of coverage by up to 500%
- 36% of people don’t have life insurance because they believe it’s too expensive
- Nearly 70% of Americans with life insurance don’t have enough
Life insurance is meant to give you peace of mind and ensure your loved ones will be protected in the event of your passing. However, life insurance can have living benefits as well. For instance, permanent policies build cash value you can use while you’re alive. The cash can help you pay for a down payment, your kids’ college tuition, and other expenses life throws your way.
In this article, we will cover:
- What is life insurance and do you need it?
- The benefits of life insurance policies
- The different kinds of term life and permanent life insurance policies
- What life insurance policy best fits your situation
- How to purchase life insurance
Like so much else, life insurance has evolved to best fit the needs of the people who need it. Let’s figure out what plan best fits yours.
What is Life Insurance?
Life insurance is a contract you make with an insurance company to provide you with coverage based on your monthly premium payment. The basic premise is that it gives you reassurance while you’re alive, and provides financial support for your loved ones when you’re gone. It makes a huge difference for you and your loved ones, both financially and emotionally.
Life insurance provides a death benefit for your beneficiary upon your death. Your beneficiary, usually a spouse or a child, receives a tax-free lump sum upon your passing, which they can use to cover funeral and burial expenses, maintain their standard of living, and much more.
Do You Need Life Insurance?
You should get coverage if:
- You have shared debts with someone
- You have any dependents
- Someone relies on your income (i.e. if you’re paying half the bills or a mortgage)
Even if no one is relying on your income, you should still consider getting coverage. You never know what life’s going to throw at you. If you get married, have kids, or start a business venture with someone, having a policy already in place gets you locked in at a lower rate. The average cost of premium increases by 4.5-9% each year you delay buying a policy, so getting life insurance in your 20s or 30s can save you a lot of money.
Also, if you happen to develop a health condition before getting coverage, getting life insurance can become more complicated.
Benefits of Life Insurance Policies
Here are the main reasons why you should buy life insurance
- Maintain standard of living: Your chosen beneficiaries can maintain their lifestyle, supplemented by your death benefit
- Pay off debts: Life insurance can pay for funeral expenses, medical bills, your mortgage, student debt, and other debts that your family may assume the burden of
- Leave an inheritance: Life insurance can double as an inheritance. Funds can also go to your favorite charities
- Pay for estate taxes: Your life insurance policy can pay off estate taxes so that your loved ones don’t have to dig into their inheritance
- Build wealth: If your policy has investment options, your beneficiary can continue to accumulate wealth
- Tax-free advantages: Your beneficiaries don’t have to claim a death benefit on their income taxes. They can also take advantage of certain tax breaks
- Secure a mortgage: Life insurance can help a beneficiary secure a mortgage. With a permanent policy, you secure a mortgage as part of a living benefit
- Borrow Funds: Depending on your plan, you can borrow money from your life insurance policy later in life if needed, which can help you supplement your retirement or pay off any debts
Term Life Vs. Perm Life
There are two kinds of life insurance policies: temporary insurance and permanent insurance.
Temporary or “term” insurance policies are issued for a set number of years, typically from 5 to 30. A term policy pays a death benefit to your beneficiary if you pass while the policy is active, but has no value after the time period expires. Luckily, most term policies can be converted into a permanent policy later on.
Permanent insurance covers you for the duration of your life or up to a certain age (usually 100). Because of this, permanent insurance pays a death benefit no matter when you die, as long as the policy is still active. Permanent insurance also builds a cash or loan value, which you can invest, withdraw, or borrow against.
Let’s dive deeper:
Term Life Insurance
Term life insurance offers lower premiums, making it more affordable for younger generations and families on tighter budgets. It also tends to be more straightforward than permanent insurance. However, term life insurance comes with a few setbacks:
- It has no cash value
- The policy expires at the end of the term
- You can convert it into permanent insurance, but this can only be done via the same insurer you purchased the policy from
- Health issues can complicate the conversion to a permanent policy. These issues can also cause your premium to increase
There are three types of term life insurance:
- Level Term Insurance: Your monthly payment (premiums) and the death benefit remain the same for the duration of the policy. The Insurance Institute of Information states that level term accounts for 97% of all term policies.
- Renewable Term Insurance: The beneficiary can extend the coverage term for a set period without having to qualify for new coverage again. You can extend your coverage without getting a medical exam, which is wonderful if you have a family history of medical conditions. However, your premiums may increase as you get older.
- Decreasing Term Life: Your premiums remain the same, but the death benefit decreases annually. Decreasing term life is the cheapest option, but often also the least desirable.
Permanent Life Insurance
Permanent life insurance is more expensive than term life, and the rates can vary significantly based on the policy type. However, you can also borrow against it or adjust your monthly payments and coverage amounts to fit your needs.
Permanent life insurance types include:
- Whole Life Insurance: Whole life insurance guarantees a rate of return on the cash value. Your premiums won’t increase, and your death benefit won’t decrease. You can take out a loan out against the cash value while you’re still living. If you don’t pay it back, that amount is deducted from your death benefit.
- Universal Life Insurance: Universal life insurance also provides cash value. It provides adjustable premiums and policy coverage, giving you flexibility when you need it. The cash value is tax-deductible, can be invested in securities, and can be used to fund premium payments.
- Variable Life Insurance: Variable life insurance gives you the opportunity to put your cash value in an investment account managed by the insurance company. These can be used toward your fixed premiums or added to the death benefit.
How Much Does Life Insurance Cost?
Life insurance policies can cost anywhere from a few dollars to hundreds monthly. The cost of covering depends on various factors, including:
- Age: the younger you are, the lower your premium will be
- Gender: women have a longer life expectancy than men
- Policy Type: term policies are cheaper, but permanent policies have their advantages
- Death Benefit Amount: the higher the amount, the higher the premiums
- Health: premiums may increase if you’re in poor health or are a smoker
- Occupation: hazardous jobs may increase your premiums
- Lifestyle: if you have risky hobbies like skydiving, your premium will be higher
Determining the Right Policy for You
Figuring out which life insurance policy best fits your needs can be difficult. In general, here are the best policies depending on your life situation:
Purchasing Life Insurance
First, consider why you’re buying life insurance and how much coverage you need. Here are a few helpful questions to ponder over:
- What is your current life scenario (from above)?
- What are the reasons why you’re buying life insurance (i.e. maintain standard of living, child care, etc.)?
- How many years of income do you need to replace?
- How much debt do you have? Do you want this covered as well?
- If you pass, what are your family’s expenses?
- How much do you currently have in savings and investments?
Like life itself, the answers to these questions will change over time, and that’s okay. Review your life insurance policy any time your answers may be different. Policies are flexible, so you can make adjustments as needed.
Research Insurance Companies
Different companies offer different rates, benefits, and features, so do your research to find which company is right for you. If you’re getting a term life policy that you plan on converting to a permanent policy some day, make sure that the company you’re researching has permanent policies you’ll like.
Also, make sure that you can afford the policy you’re taking out. Life insurance policies are meant to give you peace of mind, not stress your budget.
Lastly, the company you sign with needs a strong financial rating. Companies like Fitch Ratings and Standard & Poor’s Insurance Ratings Services are independent agencies that rate insurance companies to determine their security. Check an agency’s scores before entering a contract with them.
Tomorrow has a licensed insurance agent in every US state, and our insurance provider, Bestow, holds an A+ rating with the Better Business Bureau.
With Tomorrow, we’ve made life insurance easy and stress-free. By answering just a few questions, you can customize a plan that’s right for you and your loved ones. All it takes a few minutes, you don’t need a medical exam first, and our premiums start at just $16 per month.
With a plan from Tomorrow, you can rest easier today.
Check out some of our other posts to learn more about life insurance coverage:
- What You Need to Know About Graduation & Life Insurance
- 4 Cute Ways to Gift Mom a Life Insurance Policy
- 11 Reasons to Get Life Insurance Today
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