What is life insurance? Most people learn about life insurance from two places. The first is from a person selling life insurance. The second is from a murder mystery on TV. It seems like every TV writer has decided that life insurance must be the motive when a spouse is involved. Yikes.
The one thing that’s certain is that neither option is the best place to start learning about life insurance!
Today, we’ll be telling you what life insurance is all about! Complexity is often cited as a main reason why someone hasn’t considered getting life insurance. For that reason, we are going to break things down and keep it simple, because this isn’t a topic that needs to be complex.
There are several different types of life insurance, but today we are just focused on explaining the general terms.
It might surprise you to hear that not everyone needs life insurance. Let’s get started to see if it’s something you should be considering.
Why Does Life Insurance Matter?
Planning for our deaths isn’t our idea of a good time. We are guessing it’s not yours either. Death is painful to think about, and no one ever feels ready to think about it, or plan for it. But we learned the hard way why life insurance is important.
To give you an example of why life insurance can be so important, we want to share more of our personal story with you.
Our dad passed away from brain cancer when we were just 7 years old. Only 11 years old, our older brother became the man of the house. Our dad was able to leave some savings for our mom (enough for a car), but nothing that would replace his financial contributions to the family. Our parents’ life savings were spent on his cancer treatments trying to save him.
Because of our dad’s lack of life insurance, we grew up in poverty (thank goodness we qualified for free lunch at school growing up!). Losing the main breadwinner in the family only added to the emotional devastation of losing our dad.
This isn’t meant to scare you into getting life insurance, because you may honestly not even need it. You also shouldn’t feel bad for us — money isn’t a replacement for love, and we grew up in a home FULL of love.
Thankfully, through a lot of hard work, and many lucky breaks we were able to defy the odds and climb out of the financial hole we were born into.
The point of life insurance is to protect your family so they don’t have to think, worry, or stress about the financial impact of losing a loved one. They’ve already lost too much. Relying on luck for your family to beat the odds isn’t wise!
What is Life Insurance?
At its most basic level, the point of life insurance is to help to your loved ones when they can no longer rely on your salary or income any longer.
Life insurance is a product offered by a company to guarantee financial compensation upon the death of an individual. If the insured person passes away within the legal terms of the contract, the beneficiary(ies) will receive a monetary payout specified in the contract. This life insurance payout is typically in a single lump sum payment.
In case you are wondering, the proceeds from a life insurance payout are usually NOT taxable.
Who Gets the Money?
The individual who purchases the policy typically decides who the beneficiary(ies) is/are. They are usually a spouse, children, or dependents, but it can be anyone and they do not need to be related to you. Some people might even assign a non-profit organization they are passionate about as a beneficiary! There is a lot of flexibility here. We recommend reviewing this yearly to make sure it is up-to-date and reflects your wishes.
What Does Life Insurance Cover?
The money can be used on absolutely anything! Some will usually go toward existing bills (funeral costs, medical bills, credit card debt, loans, mortgage, etc.). This is important so your family doesn’t deplete their emergency fund paying for all of the unexpected costs.
Another common use is to help to cover future expenses (groceries, daycare, college, etc.). The insurance should cover the lost wages of the deceased so that those remaining can maintain their quality of life. It’s important for the beneficiaries to create a budget and stick to it so that the payout lasts as long as possible!
Does Everyone Need Life Insurance?
No! But many people who do need it, don’t have it.
In general, you should purchase life insurance if other people depend or rely on your wages or earnings for their everyday needs. As you get married and begin to have joint financial obligations (e.g. a mortgage), it is important to NOT leave your spouse (and other dependents) behind with no financial support.
If you’re not married and don’t have children then you probably don’t need life insurance.
If you are financially free you also don’t need life insurance. Financial freedom can be defined as having enough money and assets so that you no longer need to work for money. You may still have a job and be working, but you can stop at any time and be okay. At this point you are essentially self-insured, and your family will be taken care of even if you are no longer around to provide for them. This is what we are all working toward, so don’t worry if you aren’t there yet. That’s what life insurance is for.
For some people with complex estate planning situations, certain types of life insurance might make sense, but for 99% of people this isn’t relevant.
Having a loved one die is tragic. The emotional toll shouldn’t be compounded by financial struggles for your family. As we mentioned earlier, our father died from cancer when when we were 7 and it was devastating.
Should I Get Life Insurance if I Am a Stay-At-Home Parent?
Life insurance may be a GREAT idea for a stay-at-home parent who is taking care of young children. The reason is that if the stay-at-home parent were to die, the cost of childcare could increase tremendously and could cause great financial strain. However, if the income of the remaining parent is enough to cover the additional cost of the childcare and the future financial demands of the full family, then life insurance is not necessary.
When to Get Life Insurance
The best time to get life insurance is as soon as you need it (get married, have kids, etc.).
It was not financially feasible for our father to get life insurance as he was diagnosed with a brain tumor within days of our parents getting married. No one could have seen it coming. This has been a cautionary tale for our family.
The reason it was no feasible for him to get life insurance is that most insurance companies use medical underwriting, which is just a fancy term for using medical and health information to decide how much coverage, if any, they’d like to offer you.
This is why you should get life insurance as soon as need it. Getting ready to pop the big question? Start looking at rings and term life insurance quotes at the same time. You never know when you could get sick, so don’t wait. Our parents did not expect our dad to get brain cancer, but life isn’t predictable or fair. Don’t wait until it’s too late. The younger you are, the healthier you are and the cheaper it will be.
But remember, that all life insurance policies are not created equal. Some may even do more harm than good.