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How does life insurance work exactly? Is it a complete waste of money or a lifesaving decision?
Life insurance is an exchange between you and an insurance company. Basically, you pay a monthly premium to the company, and in exchange, the life insurance company will provide a death benefit payout to all of your beneficiaries after your death.
Although I hope it’ll be a waste of money for you (you'll see why by the time you're done reading this article), allow me to walk you through every reason why life insurance matters, the types of life insurance available to you, and how to actually buy life insurance without falling into a trap.
Because yes, some agents will try and sell you overpriced policies with unnecessary charges. So understanding life insurance can save you nerves and money.
What Is Life Insurance?
Life insurance is a risk management strategy for adults of all ages and incomes.
A life insurance policy is insurance on your life that pays your family enough money to cover bills and living expenses if something happens to you.
Life insurance gives you peace of mind while you’re living, knowing that the people you love will be well-cared if you’re no longer there to help them.
How Does Life Insurance Work?
Think of life insurance as “love insurance” that cares for and protects your family if you or your spouse can’t be there to care for them.
Every month, you will make a payment to the insurance company called a premium. The amount of time you'll need to pay will depend on which plan you choose.
If you were to pass away while the life insurance plan is in place, then the insurance company will deliver a pre-determined lump sum of cash to your beneficiaries
How Much Life Insurance Should I Buy?
Don’t go overboard when purchasing life insurance. The goal is to cover expenses for your loved ones if something happens to you.
We recommended purchasing a term life insurance policy the equivalent of 10X your annual salary.
How Much Does Life Insurance Cost?
Life insurance rates vary according to your age and health, but let’s take a look at an example of what term life insurance might cost an average person.
For example, if you’re a 35-year-old man with no health issues, accidents, tickets, or license revocations, you can expect to pay about $25 a month for a one million dollar, ten-year term life insurance policy.
The Best Time To Buy Life Insurance
Many people put off getting life insurance when they’re young and healthy because they think “Nothing bad will happen to me.”
Death is an awkward topic that’s not much fun to think about, so a lot of people end up avoiding or putting off getting life insurance.
But you need life insurance at any age because, sadly, bad things can happen to good people — no matter how young or healthy you are.
Procrastinating can cost you money, though, or worse — leave your family unprotected at a time when they need help the most.
So, in short – you'll want to buy a life insurance policy as soon as early on as you can.
Waiting could put you and your families finances as risk when you're gone.
How Are Death Benefits Paid?
If you purchase the most simple, straightforward, and affordable type of life insurance (term life), your beneficiaries can usually choose one of three ways to get paid:
- One lump sum
- Monthly payments
Is Life Insurance Taxable?
According to the IRS, beneficiaries don’t normally pay taxes on life insurance proceeds. Any interest earned on that money, though, will be taxable.
Why Life Insurance Matters
Unless you have zero debt and your net worth is over five million dollars, you need life insurance.
Regardless of whether you’re 20 years old or nearing retirement, you want your loved ones protected if something happens to you.
Is Life Insurance Worth It?
I genuinely hope that your life insurance policy will be a waste of money — even still, it’s the only time that money-wasting is an excellent strategy!
Because if you or your spouse pass away unexpectedly, the surviving spouse faces a long list of unexpected expenses, such as:
- Funeral expenses
- Attorney fees
- Living expenses
- Time off work
- Private school or college tuition
- Extra time spent with kids to help them transition
Let’s see review different scenarios to get a better idea of how life insurance is beneficial:
Both parents work – the surviving spouse has to cover expenses with half the income.
Only one parent works – an untimely death can leave the surviving stay-at-home spouse with no income at all.
And after being out of the workforce, it can be difficult for an at-home parent to find work again. Reentry into the workforce may require education and training that takes months, sometimes years, to complete.
Married without children – your spouse may be left trying to navigate a whole different world, and potentially facing losing their home, car, or even health insurance.
Single parent – leaving children without the financial ability to attend their preferred schools or colleges, obtain full medical care, or participate in activities such as special events, school trips, and vacations that their peers are experiencing.
Single people with no dependents or spouses – even in this case, one should consider financial obligations such as who will pay for the funeral expenses and whether they have any cosigned loans or other debt that could fall back onto someone else.
How To Buy Life Insurance
If you know what you’re looking for, purchasing a life insurance policy is a simple 4-step process that won’t break the bank.
And if you choose the right type of policy and search for the lowest price, then paying for life insurance can cost you less than a dollar a day, if you’re healthy and under the age of 35.
Below, we’ll cover the three basic steps of purchasing life insurance. But if you need more insights, make sure you check our step-by-step guide to buying your first life insurance.
Step 1: Compare Quotes
Different insurance companies may offer a variety of rates for the same insurance policies, so you’ll want to shop around to ensure that you’re getting the best price.
I recommend using Policygenius insurance brokers to gather and compare life insurance quotes.
Their reputable service is simple, quick, and free – plus their agents are not incentivized to sell you certain types of policies (as many insurance agents are).
Step 2: Choose The Best Policy
Once you understand the different types of life insurance and the terms and pricing that go with them, all you need to do is make a decision on which policy to purchase and sign up for.
When you sign up, you’ll choose one or more beneficiaries (the people who receive death benefits if you pass away).
You can pick anyone you want (minors need a designated trust or legal guardian), and you can usually change your designated beneficiaries later on without having to rewrite a new policy.
You should notify the beneficiaries of your life insurance policy, and provide them with a copy of your policy, so they know to file a claim if you pass away.
Most life insurance policies require you to get a basic physical exam, often paid for by the insurance company, before your coverage can begin.
Step 3: Make The Payments
Whether you sign up for a 10, 15, 20, 30-year life insurance term, or whole life insurance, the process is the same.
You make payments (usually monthly) for the length of your term, and if you die before the term is up, then your family receives a check for the amount of coverage you purchased.
If you die during the term of your policy, your family gets a big payment that helps replace your income, so they can avoid losing their home or struggling for basic necessities such as food, clothes, and bills.
If you don’t die during the term of your policy (assuming you didn't purchase whole life insurance), then your family does not get a payout from your life insurance.
Congratulations — you’ve just wasted your money in the best way possible!
How To Find A Life Insurance Agent
Knowing how to find a life insurance agent who won’t try to trick you into overspending makes all the difference. A good life insurance agent will:
- Care more about your peace of mind than lining their own wallets
- Take time to answer your questions thoroughly and research what they don’t know
- Help you find the best policy at the lowest price
Finding a good agent usually means asking people for recommendations of agents they know and trust.
But if you can’t ask for referrals, at Minority Mindset, we recommend the people at Policygenius for your life insurance needs.
Their agents aren’t incentivized to upsell you anything and are happy to answer all your questions!
Where To Buy Cheap Life Insurance
You can find the best rates on life insurance by shopping around and comparing quotes.
Thanks to the Internet, you can quickly get life insurance quotes from a reputable online insurance broker like Policygenius without having to worry about salespeople hounding you for months afterward.
Types Of Life Insurance
If you’re looking to build wealth, enjoy your money while you’re still alive, and protect your family in the event something should happen to you, then term life insurance is your best choice.
However, here’s a full list of the different types of life insurance you can choose from:
Term Life Insurance
Term life lasts for a set number of years (the “term”), and if you die during that time, the death benefit is paid to your beneficiary.
It can be anywhere from 5, 10, or even 30 years, depending on how long you want to protect yourself for.
Term life is popular and highly recommended life insurance because of its low cost and simple structure.
Whole Life Insurance
Whole life is a permanent, lifelong commitment that provides death benefits and some cash value if your payments are made on time, every month, for the rest of your life.
Its high monthly premiums (often $800/mo or more) pay for a combination of death benefits, cash value, and insurance fees.
If you stop paying into the insurance, penalties include high surrender fees, taxes, interest, and other considerations.
Nearly half (45%) of whole life insurance policies are surrendered within the first ten years, making whole life insurance a high-risk, low return investment strategy.
We wouldn’t recommend it as an investment for wealth building.
There are three variations on whole life insurance:
- Universal life insurance
- Variable life insurance
- Variable universal life insurance
Simplified Issue Life Insurance
Simplified life insurance policies allow you to skip the medical exam required for most life insurance policies.
You still need to fill out a health questionnaire, though, and people in poor health may be required to take an exam after all.
Simplified issue insurance may work well for healthy people who would rather skip the exam and save time on the underwriting process.
The drawback to simplified life insurance is that the policy prices can be considerably more expensive than regular term life policies that require medical exams.
Guaranteed Issue Life Insurance
Guaranteed issue life insurance allows you to skip both the medical exam and the health questionnaire.
This is an attractive option for many older people or others with declining health issues. If you’re young and healthy, though, you’ll get a much better rate by choosing standard term life insurance.
Final Expense Insurance
Final expense insurance is life insurance that covers only the expenses related to your funeral.
This type of insurance is often purchased by older people who can’t afford another insurance policy, or who outlived their term life insurance but want to make sure that their funeral expenses are covered.
Premiums for Final Expense Insurance tend to be high, and the benefits are very low — usually between $5000 – $25,000.
Group Life Insurance
Group life insurance policies are often provided through employers and are a nice benefit to taking advantage of if it’s offered for free.
Unfortunately, most group life policies don’t provide well for your family, only offering about 1-2 years’ worth of salary as a death benefit.
How Does Life Insurance Work – 9 Things To Know Before Buying
- Life insurance is for adults of all ages, even healthy ones.
- The best time to buy life insurance is today.
- Term life insurance is the best type for Minority Mindset thinkers.
- Term life insurance is affordable on almost any salary.
- Insure your family for 10X your annual salary.
- Death benefits are not taxed.
- Always compare life insurance quotes before purchasing.
- A life insurance broker can help you quickly gather and compare quotes.
- Life insurance is a risk management strategy, not an investment.
Understanding Life Insurance
Even though life insurance may not be the happiest subject, purchasing a life insurance policy doesn’t have to be a painful experience.
And by understanding life insurance before you talk to an agent, you can avoid overpriced policies and poor spending choices.
A smart life insurance policy won’t cost you a lot of time or money, but it will grant you peace of mind, knowing that the people you love will be well-cared for if something happens to you.