We know that protecting our loved ones is important. We do things all the time to make sure our family is safe – wearing seat belts, safeguarding our homes, saying prayers. Did you know that life insurance is also an important part of protecting your loved ones? This guide will break down the basics of life insurance to help you make an educated decision on if it makes sense for you and your family.
What is life insurance?
If you are scratching your head wondering, “What is life insurance?” Don’t worry. It’s not as complicated as it sounds. Life insurance helps ensure that your spouse and children — or any other individuals who rely on your financial support — are financially protected in the case you die prematurely.
There are two main types of life insurance: Whole Life and Term Life. Term life insurance policies provide protection for fixed periods of time. For example, 10-, 20- and 30-year term policies at guaranteed rates. Whole life insurance typically has higher monthly premiums and covers you for the extent of your life or until age 100, whichever comes first.
The advantage of choosing whole life insurance over term life is that whole life policies have the ability to accumulate cash value. Life Happens says, “Permanent insurance provides lifelong protection, and the ability to accumulate cash value on a tax-deferred basis. Unlike term insurance, a permanent insurance policy will remain in force for as long as you continue to pay your premiums.”
You can learn more about the differences in this quick reference: Whole Vs. Term- Life Insurance.
Why choose term life insurance?
Because of its temporary nature, term life insurance policies can provide a substantial amount of coverage at a much lower cost than whole life insurance, especially for younger people.
This is often the best choice for young families who need a lot of protection while money is tight.
Another reason why term life insurance is popular among young families is because parents typically need more coverage while kids are still living at home. Once your kids grow up and move out, the amount of insurance you need is typically lower since your children are less likely to depend on you financially.
“Life insurance is meant to protect your loved ones in the case of a premature death. It should not be viewed as an investment,” says Integrity Wealth Solutions financial planner, Clint P. Thomas, MSF, CFP. “Therefore, term life insurance is preferable over whole life since it covers the individual over a certain period and then the expectation is that at some point life insurance will no longer be needed since debts are paid off, assets are built up in the portfolio, kids are out of college.”
Here are some other good reasons why people consider purchasing term life insurance:
- If you pay a mortgage
- If your spouse would not be able to replace your salary
- If your children need college funding
- If an aging parent or disabled family member relies on your finances or care
- To pay off student loans or other large loans (cosigned loans still need to be repaid)
- To cover funeral costs
- To leave money behind to your loved ones in times of uncertainty and grief
When you are in your 50s and 60s, you don’t have to worry about leaving behind your spouse with small children and a costly mortgage. So, while term life insurance does not gain cash value, it is also very affordable. You don’t have to rearrange your budget or make significant cuts to afford the monthly premium. But know that while term life insurance can cost about the same as four medium-sized lattes a month, your family may be in financial trouble if you forgo the coverage and something happens to you.
What happens when the term ends?
It is important to note that term life insurance can be renewed. You don’t have to worry about getting stuck without insurance once your term ends. Each insurance company has their own renewal policy, but term life insurance with brightpeak is renewable each year after your initial term of coverage ends. Your monthly premium will increase based on your age, not your health. You can renew your term life policy annually until you are 95 years old.
How are term life insurance premiums calculated?
When you ask an insurance company for a quote on a life insurance policy, you receive a pricing estimate for a monthly or yearly premium (the amount you pay).
An individual’s age and health influence eligibility for term life insurance, as well as the rates. For example, a healthy 20-year-old female would pay less than a 40-year-old male who smokes.
So how do insurance companies calculate your premium? It’s not exactly like putting a price on shoes or cars or ice cream. Every dollar and cent in your premium has a specific purpose.
It’s been calculated by a mathematical formula that takes things like your age, health and family history into consideration.
Your premium goes into a reserve that pays out benefits (the amount paid when the policyholder passes away) to families when they need it most.
To keep that pool of money at the right size to afford benefit payments for everyone that needs them, your premium payment is matched to the risk that you’ll need to use a benefit. So, people in really good health pay less than those in poorer health.
You could also think of it like a teeter totter: The goal is to keep premiums and benefits in perfect alignment so that we can protect as many people as possible.
How do you apply for term life insurance?
Applying for term life insurance is quick and simple. Some companies, like brightpeak, have an online quote and application that make the process easy. Just get a quote online, submit the application online and review and sign via email. Your application will be reviewed and your finalized price and coverage terms will be submitted for your final acceptance via email.
During the application process, you will be asked questions about your age, height, weight, blood pressure, cholesterol, current and past medical conditions and current and past tobacco use. These answers are used by underwriters to determine your insurability and rate. The healthier you are, the lower your rate.
Now for the big question that’s been on your mind: Do you need a physical exam first? It depends on your insurance provider. For brightpeak’s Term Life Insurance, most applicants don’t. However, you would most likely need a physical exam and be asked to provide more health information if:
- You are over 50
- Have significant, pre-existing health conditions
- Applying for a large amount of coverage
- Are in top physical condition and want the best rate possible
Group or employer life insurance
But what about life insurance provided by an employer? If your company offers free life insurance, then sign up for this free benefit — but don’t stop there. Many companies offer their employees a certain amount of insurance for free, with coverage of $25,000, $50,000 or the employee’s base pay.
Unfortunately, this is often not enough, especially when you have a young family relying on your paycheck. Founder and CEO of AboveBoard Financial, Wallis Wilkinson Tsai, says, “Life insurance provided by your employer is often too little coverage, and it’s unlikely you will be at your current employer for as many years as you should have coverage.”
Usually, you can purchase supplemental insurance through your company’s benefits, but this insurance does not travel with you if you move jobs — unless your company allows you to pay an expensive premium price to take your policy with you. So, if you want to fill in any gaps in coverage AND make sure you can take that coverage with you if you change jobs, an individual term life policy might be worth checking out.
Read more: Is Employer-Sponsored Life Insurance Enough?
How much coverage do I need?
Answering this question depends on what your current financial situation is today and what foreseeable expenses will need to be covered 10 to 20 years down the road.
When deciding how much coverage to purchase, ask yourself these questions:
How long do I need coverage? If you just got married and are starting a family, you will need at least 20 years of coverage to ensure that your children are provided for until graduation.
How much can I afford? Find the balance between buying enough coverage and having a monthly premium that fits in your budget. Technically you can sign up for an insurance policy that will leave your family millions, but that is going to come at a high cost. The more coverage you purchase, the more expensive your premium (the amount you pay) will be.
What will my family need? If something were to happen to you today, there would be a lot of financial expenses placed on your family’s shoulders. Your family is not just losing your paycheck. They are losing a valuable family member, and it would be unfair to expect your spouse to downsize or to find a new job while dealing with the grief of your loss.
Here are some other common considerations when determining how much coverage you may need:
- Covering end-of-life expenses. Things like funeral expenses can cost on average $11,000 or more. If you don’t have enough accessible savings to tackle that amount, you should consider an insurance policy that covers at least those costs.
- Giving your family the resources to adjust to the financial loss of your paycheck and the emotional loss of not having you around. Your spouse might have to get a new job, figure out childcare adjustments or change the housing situation. Having enough money to take care of expenses while making that plan can be essential.
- Keeping your family living the same lifestyle that they currently enjoy (with the help of you and your paycheck). If you want to prevent a situation where your family would need to transition to a more affordable living situation without your paycheck, a larger life insurance policy can replace more of your income for a longer period of time.
- Funding a college education for your children. If you have kids and would like to send them to college (without student loans) if you pass away, a life insurance policy can be sized to meet that goal.
Many experts recommend purchasing insurance that will cover five to ten times your income. However, this number might not be what is right for your family’s situation. For example, if you make $85,000 a year, and you purchased a policy that covered six times your income, your loved ones would receive $510,000. Seems like enough, right? Let’s look a bit closer:
- If you want your two children to go to college debt-free, that will cost on average $28,000 each for their undergrad degree.
- Your spouse would need money for funeral expenses, which can cost as much as $11,000.
- You want to pay off the mortgage — which on average can cost $180,018.
- If you wish for your spouse not to have to worry about work for at least five years, while still living comfortably, you would need five years of your income, or $425,000.
That totals $644,018, which means your family would not have enough money if you passed away.
When is the best time to buy term life insurance?
With the right life insurance provider, you can protect your family while still protecting your budget. Term life insurance can provide a large amount of coverage for a small monthly premium. Term life insurance rates vary depending on your age and health, and the younger you are, the more affordable your term life insurance is going to be.
Now is the time to lock in your insurance rate, since it’s only going to go up. You can lock in a low monthly premium for 30 years. If you do that at 25 years old, you will be paying that same low monthly premium even when you are in your 40s and early 50s. You won’t have to think about the price of life insurance until your term is up at 55.
Proper planning with life insurance
Choosing the right life insurance company for your family is crucial. The goal of brightpeak financial is to help young Christians grow stronger financially so that they may live with confidence and generosity. Buying life insurance isn’t about having less faith. As Christian Personal Finance says, “The act of buying insurance in itself doesn’t show a lack of trust in God; instead, it demonstrates proper planning.”
Just as you wouldn’t drive your car without a seat belt or travel in the desert without water, you shouldn’t go through life without financial planning and the right insurance.
Get your free quote now.