What is life insurance?
Life insurance is designed to help protect your loved ones financially if something ever happens to you. It helps cover funeral expenses, college tuition, mortgage payments, and more. That way, your family doesn't have to worry about money during an already tough time.
Different types of life insurance
There are two main types of life insurance: term life insurance and whole life insurance.
Term life insurance typically lasts one to 30 years and covers your loved ones if something suddenly happens to you within that timeframe. Whole life insurance lasts, well, your whole life. It also comes with a savings account called "cash value" which grows a certain percentage each year.
What type of life insurance should I get?
Term life insurance is the most common life insurance policy. It's especially good to have if you're a young family who's still paying off debts (mortgage, kids' schooling, car payments). A term policy can help pay for these debts if something happens to you and is also 3- to 10-times cheaper than a whole life policy.
Whole life insurance can be good to have if you have a lifelong dependent — say, a special needs child who will always be reliant on you for their care. It's also a good option if you want to spend your retirement savings but still have an inheritance to hand down to your family.
When to get life insurance
When it comes to buying life insurance, the general rule is: the earlier, the better. Premiums tend to be lower for younger people and stay the same throughout the policy period.
A life milestone is also a good time to think about life insurance. Like when you buy a home: a new mortgage is a great reason to get covered. If the unexpected happens, your family won't be left with the bulk of mortgage payments.
How much life insurance do you need?
How much life insurance you need depends on your family. Choosing your coverage boils down to a number of factors, such as your:
- Annual salary and how many years your family may need it
- Remaining mortgage balance
- Children's future college tuition
- Living expenses (credit cards, auto payments, etc.)
And all of these can be subtracted by the savings you already have. Like, say, existing college funds, your 401(k), and other savings accounts.
Questions? We've got answers.
The best way to save on life insurance is to buy it when you're young and healthy. You'll likely get a lower premium which stays the same throughout the policy period.
Also important is to frequently re-evaluate your needs. Once you pay off the car, say, you may no longer need the same amount of coverage. Same goes for things like your mortgage or your kids' college tuition. Plus, as your savings grow, you can probably start decreasing your coverage ... and your premium.
Let's put it this way: you're never too young to buy life insurance. But for most young people, student loans and other debts are top of mind, not life insurance.
But life insurance should become top of mind when you have a family. And if you're a young family, term life insurance might be right up your alley.
Here are some factors to think about when gauging your life insurance term.
- The length of your mortgage term
- When your last child will graduate college
- When your partner or spouse plans to retire
- Car payments
- Student loans
- Your own savings
Ideally, life insurance should reflect all of your debts. Then, as you pay them off, you can begin reducing your coverage.
Each life milestone warrants revisiting your life insurance. Taking out a mortgage on a new home is a perfect example: a policy that covers the remaining balance on your mortgage helps ensure your family doesn't have to bear the costs alone if something unexpectedly happens to you.
The long and short of it: review your life insurance policy frequently. Once that mortgage is paid off ... once you have a lot of savings in the bank ... it may be time to begin reducing coverage (and your premium).