Maybe you have a little extra cash flow or maybe someone just told you it’s a good idea—whatever the reasons you have for considering buying life insurance, it’s a solid choice for many people and it’s far cheaper than other types of insurance, like health insurance or vehicle insurance (depending on your coverage).
Life insurance is a contract you make with a life insurance provider. You pay monthly premiums and in exchange, your beneficiary—loved ones—will receive financial support in the form of a payout if you die. Burial costs and the loss of a source of income can be a burden for families, so many individuals choose to buy life insurance.
Let’s take a look at the steps involved and how you can get the best life insurance rates.
Step 1: Decide if You Need Life Insurance
Buying life insurance is a sound move if you have anyone who relies on you financially, like aging parents, a spouse, children who will be needing education expenses covered, and so on. The idea is that it’s meant to replace your “value” when you die, like your salary.
Life insurance is designed for younger people and families to buy into and can get much more expensive to purchase as you get older since you become riskier to insure. There’s less of a need for life insurance once you’ve reached retirement age since your dependents are likely now financially independent and you’re now living off your retirement savings.
Even at retirement, however, some people will choose to hang onto their life insurance simply as a way to pay for their funeral costs and burial expenses, which can be costly.
Step 2: Decide What Type of Life Insurance to Buy
There are several types of life insurance, but the two main ones to know about are term life insurance and whole life insurance.
Term life insurance
Term life insurance is the most common and affordable. You make fixed-rate payments and receive coverage for a pre-specified period of time. Most providers offer coverage for 5, 10, 15, 20, and even 30 years, which can be renewed when expired. You can also select the policy amount, such as $250,000, $500,000, or more.
If you die within your term policy, your beneficiary will receive this payout—also known as the “death benefit”.
When shopping for term life insurance, you want to think about the number of years your dependents will be relying on you so they’re covered in the case that you die.
For example, if you have a newborn baby and anticipate upcoming childcare costs and a college education down the road, a 20-year life insurance policy would cover that entire period of time. At the end of the 20-year term, you can decide if you’d like to renew your policy or let it expire, but ideally, your need for life insurance will end when your term ends.
Whole life insurance
Whole life insurance falls under the umbrella of permanent life insurance, like universal life insurance. It’s a policy that covers that never ends and covers you forever. It also comes with an investment component where the cash value increases over time in a tax-deferred account. This means that you won’t have to pay any taxes on the gains while it accumulates.
Here are a few more quick facts about a whole life insurance policy:
- The premium you pay is fixed, even as you age
- You can borrow money against the account or even abandon your policy for cash (but you’ll no longer have coverage. A personal loan may be a better choice if you’re in need of quick funding.)
- The rate at which the cash value of the account grows is guaranteed
- Some policies earn annual dividends
Some people look at whole life insurance as a type of investment, but many financial experts generally believe it’s only a good idea if you need lifelong coverage and if you’ve already maxed out other retirement accounts, like a 401(K) or Roth IRA.
Whole life insurance is much more expensive than term life insurance and