Most people learn about life insurance from one of two places. The first is from a person selling life insurance. The second is from a whodunit where the motive ends up being a life insurance payout. Yikes!
Neither is the best place to learn, but fortunately, you’re in the right place now.
Today, we’ll be telling you what life insurance is all about! There are several different types of life insurance, but today we are just focused on explaining the general terms so that you feel comfortable deciding whether life insurance is something that could help protect you or your loved ones.
Confusion is often a big main reason why someone hasn’t gotten around to 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.
Let’s get started to see if it’s something you should be considering.
Why Does Life Insurance Matter? A Personal Story.
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.
My dad passed away from brain cancer when I was a 7-year-old child. He had a rare form of brain cancer that took him from us when he was only 46 years old. My dad was able to leave my mom enough money to buy a new car but little else. As the primary breadwinner, his absence tore a hole through my core, and also through my family’s financial stability.
Before you start thinking that my parents should have done more to prepare financially for his death, you should realize that they spent their life savings on his cancer treatments trying to save his life.
My dad didn’t have life insurance. He was initially diagnosed with cancer when he was only 32, which meant no life insurance company would ever touch him or consider issuing him a policy.
Because of my dad’s lack of life insurance, I grew up in poverty. My mom never recovered from the financial blow.
I still feel incredibly fortunate that I was able to get free lunch at school every day.
My story isn’t meant to scare you into panic-buying life insurance. But it does provide a cautionary tale of what can happen when a catastrophe strikes you when you least expect it.
Through a lot of excruciatingly hard work and the guidance of so many other people, I was able to break the cycle of poverty. When I got into the best business school in the world for college, one of my first emotions was relief that I was never going to be poor again and my family would be okay. Years later, when I purchased a term life insurance policy for myself at age 31 from Haven Life, I felt that same sense of relief.
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.
What is Life Insurance?
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 will receive a monetary payout specified in the contract. This life insurance payout is typically in a single lump-sum payment.
At its most basic level, the point of life insurance is to help support your loved ones when they can no longer rely on your salary or income after your untimely death.
Who Gets the Money If You Die?
The individual who purchases the policy typically decides who the beneficiary is. Most people will designate their spouse, estate, or children, but it can really be anyone you’d like to receive the payout.
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.
Are There Restrictions On What A Life Insurance Payout Can Be Used For?
No! 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.).
Ideally, 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 Life Insurance Cover Suicide?
Life insurance policies typically have suicide clauses built into them to address this.
The typical policy will not pay out death benefits if the cause of death is found to be a suicide within the first two years of the policy being active and in force. Some states limit this to one year, so it can vary.
Does Everyone Need Life Insurance?
No, but most people who are married or have children (or other dependents like aging parents) will likely want to have coverage.
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 or anyone else relying on your ability to work, then you likely don’t need life insurance. However, that’s not always true since some people will still plan to work and donate a substantial sum to a charity that they are passionate about.
What If I Have Saved Up Enough Money To Retire And My Family Would Have Enough Money If I Died?
If you have true financial freedom and no longer need to work for money, then you might also not need to have life insurance coverage.
At this point, your family is essentially self-insured, and your loved ones will be taken care of even if you are no longer around to provide for them. However, even some people who don’t necessarily need life insurance, still decide to purchase a policy in order to feel like they are leaving something for their loved ones. Or they may think it will help their grieving family better cope with the tremendous loss. As the famous quote says, money can’t buy happiness, but it’s a lot more comfortable to cry in a BMW.
For some wealthy people with complex estate planning situations, certain types of life insurance might make sense, but for 99% of people, this isn’t relevant.
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 for that 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 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 have anyone in your life who depends on your ability to work (spouse, have kids, etc.).
If you wait until you are sick to get life insurance, you either won’t be approved or you won’t be able to afford the premiums. That means that the best time to get life insurance is when you are younger and healthy!
In order to get life insurance, companies will review your medical history to determine how much a policy will cost you and whether they even want to cover you.
This is why you should get life insurance as soon as you 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.
Where Can I Get Life Insurance?
We often get asked for life insurance recommendations and we typically say Haven Life, Bestow & Sproutt. Before I purchased my policy, I received free quotes from each one and it literally took like 5 minutes. No medical exam necessary, which I appreciated. So, what are you waiting for?
Camilo is a personal finance expert and the Co-Founder and CEO of The Finance Twins. I was raised in poverty by a single mother and had to learn everything about personal finance on my own. I have been featured on Forbes, Business Insider, CNBC, and US News. Earlier in my career, I worked as an investment banking analyst on Wall Street at JPMorgan Chase & Co., and I have an M.B.A. from Harvard University and a B.S.E. in finance from the Wharton School of the University of Pennsylvania.