Once you start a family or share property with someone, part of adulting means making sure that if anything happens to you, they'll still be able to pay the bills. This usually entails buying life insurance. Life insurance can be difficult to understand, so I’ll try and explain it without the financial jargon.
What exactly is life insurance?
You pay a monthly premium and in the event of your death, a sum of cash is paid to the "beneficiary." It's designed to cover any financial responsibilities you're leaving behind that will still exist, such as a mortgage, household expenses, and funeral expenses (which seems morbid, we know).
The idea is that your death (and therefore the loss of your income) should not have a significant financial impact on anyone else.
Who needs it?
Generally, anyone who has dependents (the fancy word for a spouse or kids you support financially) or personal debts needs life insurance. A life insurance provider will analyze how much you need based on your personal situation.
Here are a few scenarios:
- You and your spouse own a home and you both contribute to the mortgage. If you pass away, they may not be able to cover your part of the mortgage. Life insurance can prevent them from having to move out right away or go into debt.
- You're financially supporting your family. If you pass away, you want to be sure that the financial needs of your children or spouse can be met. Life insurance can help your family maintain their lifestyle until they can support themselves.
Term vs. Whole – What the heck are they?!
There are 2 major types of insurance, term vs. whole. They are very similar to the concept of renting vs. buying a home.
Term insurance is more common and affordable. It only lasts a certain “term," similar to renting a house. In example 2 above, if your children are 8 and you want to support them until they’re 18, you could buy term insurance which lasts 10 years. Like a lease, you can always renew your insurance and make it last much longer. You also have the flexibility to change the amount of coverage if you need to (say you have more kids or get a bigger home).
Whole life insurance is permanent insurance which lasts your whole life, similar to buying a home. It is used more commonly for estate planning or as an investment. Generally people start out with term and eventually may switch to whole as they get closer to planning their estate. Since this is an insurance primer, we won't delve into that too much here.
How do you make sure you’re getting the right amount and good value?
You can now get life insurance online, instead of through a broker. Our friends at PolicyMe will give you honest recommendations and scan the market to make sure you are getting the best price.
You can also do homework yourself on how much (if any) you need. We're big fans of PolicyMe’s insurance calculator.
If you're not sure whether you need life insurance, it can never hurt to check (especially when you can do it from your couch!) 🛋️