“Life” insurance is sort of a misnomer, if you think about it. With car insurance, renter’s insurance, or home insurance, you pay monthly premiums so that if something bad happens to your property, it can be replaced and you can move on with your life.
With life insurance, you also pay a monthly premium in case something bad happens. But of course, you cannot replace a life, which is so much more than just money. So it really should be called “household income” insurance. That’s what life insurance is really about – if something happens to an earner in your family, life insurance steps in to fill part or all the financial gap created by their untimely passing.
Here’s how it works: if you are essential to keeping your family’s finances stable, you take out a policy on yourself, benefiting your partner, children, business partner, or someone else. Or you take a policy out on someone else, with their permission. You can do this through work (though the policies through work are often small) or privately through a certified agent. And you can decide how long you want the coverage to last – 20 years perhaps if it is benefitting your children, longer if it is benefitting your spouse. The cost of the monthly premium depends on the size of the potential payout, and on how old and healthy you are.
If you pass away, the life insurance company pays out money to the beneficiaries of your policy, either in a lump sum, or in regular payments. This allows your family to pay for a funeral, pay off any hospital bills, pay for the lawyer handling your estate, and support themselves in your absence while they work through their grief. They might pay off the mortgage so they don’t have to worry about moving, pay for childcare while your partner goes back to work, or just use it to put food on the table if you were the main breadwinner.
Life insurance isn’t just for the traditional working dad with a stay-at-home wife. It’s beneficial in many more situations. Here’s when you should have a policy:
- If you have any children. A life insurance policy can put money in a trust to pay for their living expenses, healthcare, grief counseling, and schooling until they graduate from college and are ready to support themselves.
- If you are part of a dual-income couple. You may think you don’t need a policy if your partner has a job as well. But you have probably intertwined your financial lives based on a dual income. You might have mortgage payments that are too much for just your partner to handle, or perhaps your income is higher and your partner relies on it to pursue their own, lower-paying career. At the very least, funerals can run into the tens of thousands of dollars, and a life insurance policy will relieve one source of stress at a time of grief.
- If you work and your partner doesn’t. This is the most obvious situation. If you pass away, your family can use the life insurance payout to replace your income while your partner hunts for a job. It’s especially helpful if you are a high earner and you think it’s unlikely your partner could be hired at the same income level after some years out of the workforce.
- If you are a stay-at-home parent. You don’t technically provide an income, but you are definitely providing for your family. If you pass away, your partner will have to pay for childcare, which costs thousands each year. Without your chef skills, your adrift partner will be paying more to order in food for the family, and he or she will appreciate the ability to hire a home cleaner. Finally, they would appreciate having funds to give you the funeral you would have wanted.
- If you have a large amount of private student loan debt. Maybe you don’t have kids, a spouse, or a mortgage. But if you have a large amount of private student loan debt, the lender will not forgive that debt even if you pass away. (Federal loans, by contrast, are typically forgiven after the death of the borrower.) Instead, they will require the co-signer – your parents, most likely – to pay for the debt. Do your parents have the extremely healthy finances to do that? If not, a life insurance policy ensures they won’t be devastated both emotionally and financially by your passing.
- If you are supporting your parents or another family member. An insurance policy on you benefiting them will ensure they wouldn’t be left in a lurch.
- If you co-own a business. A life insurance payout to your partner ensures they can buy out your half of the business and continue to run it, instead of your spouse or other surviving family member being stuck with half of a business they don’t understand or want to run.
You should not get a policy when all of the following is true:
- You are single.
- You are childless.
- You have no large debts or liabilities.
- You are not supporting anyone else financially.
So, how do you go about getting life insurance? You could go through work, but as mentioned, those policies are often small and/or limited. And if you switch jobs, you will have a gap in coverage. Instead, you can ask your CERTIFIED FINANCIAL PLANNERTM (CFP®)if they are certified to help you find a policy, or if they can recommend an agent. Once you have chosen an agent, work with them closely so they understand your goals and find the best policy that fits your life stage and your budget.