Is Life Insurance Worth It? What You Need To Know
Life insurance can be a valuable financial tool. We'll explain what life insurance is, how it works, who needs it, and the best kind of life insurance for your situation.
What is life insurance?
Life insurance is a contract that can be purchased from a life insurance company. The policy guarantees a sum of money to the insured's designated beneficiary upon the insured's death in exchange for the premiums the policyholder has paid over their lifetime.
How do insurance policies work?
There are several types of life insurance, and two common ones are term and whole life.
Term life insurance lasts for a pre-determined number of years and then ends. Terms are typically for 10, 20, or 30 years. If the insured dies during the term of the policy, the policy pays out to the beneficiaries.
Whole life insurance is a type of permanent life insurance. The policy accumulates a cash value that the insured can use to borrow against or to pay the premiums. Upon the insured's death, the policy pays a death benefit to their beneficiaries.
Who needs life insurance?
A simple way to determine if life insurance is right for you is to ask yourself if you have any dependents. Is there anyone who depends on you for financial support or physical care? If the answer is "Yes," then you do need life insurance.
For example, how would your dependents support themselves if you are the only or the primary money earner in your home and you die? And if you are the primary caregiver to children or a sick or disabled family member, who would take over those duties if you died?
If you don't have dependents, has a family member or friend co-signed a loan for you, perhaps a student loan or a mortgage? If you died, they would be required to pay back that loan.
Life insurance can provide income so your dependents can stay in their home and maintain the standard of living you provided when you were alive. If a caretaker dies, life insurance can help pay for the care they can no longer provide. And if someone co-signed a loan for you, they can use the proceeds from your life insurance policy to pay the loan off.
Best kind of life insurance
Term life insurance is considerably less expensive than whole life insurance. If you only need insurance for a relatively short period of time while your children are minors or still attending college, term may be the better option.
If you were to die while your children were not yet on their own, the policy would help them maintain the same standard of living you provided and pay for their educational expenses (depending on the amount of the policy, of course). Once your children are at an age when they're self-supporting, the policy ends.
The benefits of a whole life insurance policy are that it can leave an inheritance for your loved ones if you don't have a lot of assets to leave them otherwise and that you can access the cash value if you need to.
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