When I say life insurance what are the first things to come to mind?
It’s for older people, it’s for rich people, it’s unnecessary for someone as young as me, what the [insert choice word here] is life insurance.
To you, the life insurance skeptic I say those are all fair enough points (especially the last one so read further on), after all most of us haven’t the slightest idea of how life insurance could help us. We’re young, healthy, and obviously invincible so why would I need it?
Well, you are right… sort of.
It Can Happen
This may come as a newsflash but we aren’t invincible. Life has been known to throw a curveball or two so it’s best to be prepared, ya know just in case the worst were to happen.
Meeting your maker, assuming room temperature, biting the big one, taking a dirt nap, kicking the bucket… that sort of pleasant thing to think about.
The Ultimate Unselfishness
Life insurance doesn’t help you at all. If you die what do you care if the insurance company pays money. I don’t know about you but when I’m dead, money will not be too high of a priority.
So I guess the question isn’t how life insurance can help us (because we’re dead, who cares). The question should be rephrased to something like:
“How can life insurance help those we love and care about?”
Boom, now we’re talking! It doesn’t help us per se; it helps those we care about most once we’re gone.
Happy, Happy, Joy, Joy
Here are some fun questions you’ve probably regularly thought about on some sunny afternoon. You know, like those really happy days when you find yourself seriously contemplating your own mortality and what happens after you die…
Which I’m going to go out on a limb and guess never happens.
What happens to my loved ones if I were to die? Would they be able to financially support themselves? How would my spouse take care of my child without my help? How would our mortgage get paid? These are just a few of the questions that life insurance can address.
Tough questions to ask? Sure.
Important questions to ask? You better believe it.
Are all these questions something life insurance can help with? Ding ding ding, we have a winner.
The Ideal Candidates
Let’s face it, during your early adult years when your young, single, wild and free your death would not necessarily create a financial hardship for anyone. If you’re in this scenario then life insurance has probably not been on your radar.
So who exactly are the people who should look into purchasing life insurance? Well for starters, definitely those who have people that are financially dependent on them such as:
- Cosigners that have a loan jointly
- Couples where one partner contributes more to household finances
- Couples that own a house where the mortgage may be more than a single income can afford
- Couples with children (considering life insurance should be a priority at this time)
This is not an all-encompassing list of who needs life insurance but I think you get the idea. If you or your significant other have people (children, older parents, spouse) who are financially dependent on you it’s a good idea to look into a policy.
The Major Players of Life Insurance
- The Life Insurance Company: They issue the life insurance contract, collect your premium payments and pay the beneficiary when the insured dies.
- The Policy Owner: The person that purchases the insurance contract on their own or somebody else’s life and pays premiums to the insurance company.
- The Insured: Typically the policy owner but can be someone else. When this person dies the insurance company pays the beneficiaries named in the contract.
- The Beneficiary: The person (or people) that receives the life insurance payment from the insurance company when the insured dies.
- The Contract: The Legally binding agreement between the insurance company and the policy owner. Basically ensures beneficiaries get paid when the insured dies.
- The Premium: The policy owner’s payment to the insurance company in return for coverage.
- The Term: The time period that a life insurance contract will pay out to beneficiaries when the insured dies.
- The Benefit: The money the beneficiaries receive from the insurance company when the insured passes away.
By no means is this a complete list but they are definitely some basic ground rules to help us get started.
The Two Main Types
Life insurance, when broken down to its most basic forms, is pretty easy to understand.
There are two different types of life insurance that you can purchase, term life insurance and cash value/permanent insurance so let’s dive a little bit deeper.
Term Life Insurance
Just as the name implies, term life insurance gives you insurance protection for a specific time period or “term.” This time period can range anywhere from 6 months, 10 years, 20 years and 30 years.
Term insurance has no cash value meaning that once you make your premium payments to the insurance company, POOF, they are gone forever.
You are paying simply for the life insurance coverage; no more, no less.
It’s like car insurance but with your life!
Okay that may be a slight oversimplification but honestly the two are pretty similar.
You pay monthly premiums for auto coverage and if you get in an accident, the insurance covers the cost of repairs and injury. Same thing with term life insurance; just take out “car accident” and insert “your death,” not morbid at all right?
You pay monthly or annual premiums for coverage and if you die during the term of the policy, the insurance company pays whomever you named as beneficiaries of the policy (usually a spouse, children, relatives, etc.).
The insurance provides your family with important funds to pay for any living costs or debt that will become much more difficult to pay once you’re gone.
Sounds simple enough right? Well let’s complicate things a bit by throwing in the second type of life insurance shall we?
Cash Value/Permanent Insurance
Cash value life insurance has a cash value component. Duh, you probably figured that one out. But what does having a cash value mean?
Well unlike term life insurance where premiums are paid just to have insurance coverage, in a cash value policy premiums paid accumulate in a savings-like account. So not only are you paying for the life insurance coverage but you are also accumulating money with the premiums paid to the insurance company.
Is there a trade-off for this accumulating tool you may ask? How astute of you and yes there’s a trade-off, it’s that cash value life insurance premiums tend to be much higher than a term-life policy.
So if building a cash reserve within your life insurance policy is especially appealing to you just be ready to pay a “premium” (pun intended) for this feature.
The Other Differentiating Factor
What also makes cash value life insurance different from term life is that coverage is permanent meaning that a cash value policy lasts until you “kick the bucket” as they say. That is, as long as you continue to pay your premiums.
Now keep in mind that there are many different types of permanent/cash-value life insurance policies that we will get into another day, for now we focus on the basics.
Term vs Permanent/Cash-Value
[table]Features of Policy,Term Life Insurance,Permanent/Cash-Value
Ability to choose length of policy,Yes,No
Coverage for life,No,Yes
Lower annual premium,Yes,No
Payout upon death of insured,Yes,Yes
Builds cash value,No,Yes[/table]
So What’s Your Point Jake?
Once again, I’m glad you asked. My point is this. No matter how young, healthy or financially sound you are there is a place for life insurance if your current life circumstances call for it.
If you have a child, significant other or other family that financially depends on you wouldn’t it be great knowing that on the off-chance something happens to you, they would be taken care of?
That right there is called peace of mind and serenity. It’s one of the main benefits life insurance provides for you and your loved ones.
These policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jacob Dahlstrum and not necessarily those of Raymond James.