Learn about life insurance basics in today’s blog post and get your questions answered.
There are probably some things you’ve heard about life insurance that aren’t completely clear. What is life insurance? What’s the difference between whole life and term life? How much coverage do you need? These are all great questions! We’re here to give you a better idea of who needs life insurance and what you can expect from it.
What is life insurance?
Very basically, life insurance is similar to other types of insurance (car, home, and health for example) in that it protects your family in case something unexpected happens—in this case, it would be your death. In exchange, you pay a monthly premium (meaning a monthly payment). Should you die, your beneficiary(s) would receive a sum of money (called a benefit) to help them deal with the financial implications of your death and maintain their standard of living.
The amount of life insurance you have can greatly impact those you leave behind. Of widows and widowers whose spouses died prematurely (between the ages of 30 and 55), only a quarter felt their spouses had adequate coverage.¹ Life insurance provides a way to cover your financial obligations so that you can protect your loved ones and they don’t have to dip into a rainy day fund.
What’s the difference between term life insurance and whole life?
Term life insurance means that you pay a fixed premium (or monthly amount) for a predetermined amount of time—for example, 10, 20 or 30 years. You are fully covered for that time period but must re-apply for continued coverage once that term is complete.
Because of its temporary nature, term life policies can provide a substantial amount of coverage for 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 their family is young and money is tight.
Another reason why term is popular among young families is because parents typically need more coverage while the kids are at home. Once the kids are grown and moved out the house, the amount of insurance needed is typically lower, since fewer people depend on your financial support.
Whole life insurance means that you are covered for your entire lifetime without the need for renewal but will have a higher fixed premium. It also has a savings component.
Depending on the product, the savings component can be anything from an interest bearing account to securities. The savings component grows tax-deferred and it can be borrowed from the policy.
Whole life is often more expensive, because you are essentially “overpaying” in the early years to fund your coverage in later years.
This enables the insurance company to charge a level premium that doesn’t increase as you get older.
What can the life insurance benefit cover?
Remember the life insurance benefit is the sum of money your beneficiary(s) get paid upon your death. Your loved ones can use the benefit for both their immediate and long-term expenses. The immediate expenses might include funeral costs, estate settlement costs, medical bills, and outstanding personal debts. Long-term expenses for your loved ones might include living expenses, mortgage payments, or school and college tuition costs for your children. The amount of coverage you choose will influence how much money your family will have at their discretion.
How much life insurance coverage do I need?
How much insurance you need depends completely on your personal situation. To help you get an idea of what that might mean for you, think about your obligations: do you want your insurance to cover only the immediate costs for your loved ones, or do you want to cover more of the long-term costs they might face? Decide what your priorities are (along with what you will comfortably be able to afford) and use that as a starting point.
You can also use a term life insurance calculator to determine how much you might need.
If we are asked how much life insurance coverage someone should own without any information about their situation, our rule-of-thumb is about five times their annual income. That should provide an amount of money that would give your family flexibility and some comfort without breaking the bank today.
How much does it cost?
Cost is the reason most Americans give for not owning life insurance, according to the 2015 Insurance Barometer Study. Yet, 80 percent of consumers misjudge the price for term life insurance, with Millennials overestimating the cost by 213%, and Gen X-ers overestimating the cost by 119%.¹
What does brightpeak offer?
brightpeak offers term life insurance. We chose to offer you term life insurance because it is simple and affordable. You pay a fixed monthly premium that prepares you and your family for the unexpected. We want you to be able to protect the ones you love in the future without sacrificing their present needs.
There are a couple ways you can get started. You can send us an email or call us toll-free at 855.348.3091 and a financial professional will be happy to help!