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Understand how life insurance works as we break down the truth about the type, term, and coverage you really need.
You take out insurance to cover your iPhone, your car, your health, and your home — but what about your life?
By the time you finish reading this article, you’ll understand all the life insurance basics you need to know before purchasing a policy for yourself.
If you’ve ever wondered how life insurance works or been confused about what type of coverage to purchase, this article is for you!
What is Life Insurance
Life insurance is insurance on your life.
If you die, you don’t want your family to struggle with lost income, mounting debt, or the uncertainty of wondering if they can afford food and housing.
Life insurance helps you protect your loved ones long after you’re gone.
We know life insurance can be an uncomfortable topic.
Thinking about your death can be unsettling, we know. Putting off life insurance can have far worse consequences, though.
Buying life insurance can be confusing if you don’t understand it.
There’s a handful of decisions you’ll need to make before purchasing coverage:
- What type of life insurance should you buy?
- What size policy should you purchase?
- What length of policy should you choose?
We help you with all these questions below so that by the end of the article, you’ll understand how insurance works and what you need to know before you call an agent.
Some Insurance agents are pushy.
Some insurance agents are indeed more concerned about putting money in their own pockets than helping you find the best coverage for your family.
The good news is that you can avoid hard-sell tactics by finding a good insurance agent.
A good insurance agent shares information with you and helps you get the best coverage at the lowest price, instead of pushing you to buy the policy that pays them the highest commission.
How To Find A Good Life Insurance Agent
Finding a good insurance agent makes a big difference when purchasing life insurance.
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.
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!
Do I Need Life Insurance?
Unless you have zero debt and your net worth is over five million dollars, you need life insurance.
Whether you’re 20 years old or nearing retirement, you want your loved ones protected if something happens to you.
Is Life Insurance A Waste Of Money If I’m Young And Healthy?
So, yes, we hope that your life insurance policy will be a waste of money — it’s the only time that money-wasting is an excellent strategy!
Life insurance does return one nice benefit while you’re alive, though.
Knowing you’re responsible enough to care for your family, even after you’re gone, gives you and your family a peace of mind that you can’t buy anywhere else.
Should I Choose Term Life or Whole Life Insurance?
Not all life insurance is good life insurance.
There are two basic categories of life insurance:
- Term life insurance (good)
- Whole life insurance (bad)
What Is Term Life Insurance?
Term life insurance is a time-based insurance policy that only pays benefits if you die within the time period that the policy is active.
For example, let’s say you buy a 30-year term life insurance policy for $30 a month with a one-million-dollar death benefit.
- You pay $30 a month for the next 30 years
- Your $30/month rate is locked in for the length of your policy
- Your beneficiaries get a check for one million dollars if you die during those 30 years
If you don’t die, you wasted your money in the best way possible.
What Is Whole Life Insurance?
Whole life insurance is a lousy investment strategy masquerading itself as “life insurance.”
Whole life insurance policies are contracts you pay into for the rest of your life that provide a set amount of coverage for life (even if you die 70 years later).
For example, if you buy whole life insurance worth a million dollars, you will be paying $827 a month for the rest of your life. That’s like paying a second mortgage.
As long as you pay your premiums and don’t surrender (cancel) your policy, your beneficiaries receive a check for one million dollars when you die.
Whole life insurance is a terrible choice because the policies:
- Are very expensive: whole life insurance can cost you over $800/month
- Pay you very low returns (about 1 ½% a year)
- Charge high surrender fees to withdraw your money while you’re alive
Nearly half (45%) of whole life insurance policies are surrendered within the first 10 years, and all those policy-holders lose money on their investment.
Why You Should Always Choose Term Life Insurance
Life insurance should be a risk management strategy, not an investment.
If you want to make investments, invest in assets that give you better returns (like we recommend in our free money management eBook).
When it comes to life insurance, though, choose term life insurance with low rates and a good payout. This way, your family is protected while you're building your assets.
Term life insurance is a responsible and affordable risk management strategy that protects your loved ones financially when you die.
How To Buy Life Insurance
Here are the basics you need to know to get started:
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?
The monthly or annual fees for term life insurance vary.
For example, a 30-year-old man in good health might pay about $30 a month for a million-dollar term life insurance policy.
What term should I choose?
Term life insurance is time-based, so you typically choose from a 10, 20, or 30-year policy.
Keep in mind that when you purchase the policy, you’re locking in the price for the entire term of the contract. Life insurance gets more expensive as you get older, so choosing a 30-year policy, for example, helps keep your price low for a long time.
We recommend choosing a minimum 10-year term life policy.
What’s the next step?
Before you talk to an insurance agent or sign up for insurance online, you should have a good idea what type of life insurance policy you want to buy.
Here’s what you need to decide before purchasing life insurance:
- What type of insurance to buy (we recommend term life)
- How much insurance to buy (we recommend 10X your annual salary)
- What policy term to buy (we recommend a minimum of 10 years)
Preparing to talk with an insurance agent makes buying life insurance easy, quick, and stress-free.
Be sure to bookmark this page so you can return anytime you need a refresher on how to buy life insurance!
Life Insurance is Essential for People of All Ages
No matter how old you are or how good your health is, term life insurance is a responsible choice that will protect your loved ones and give you peace of mind.