Overview of Life Insurance

Life Insurance is a huge industry.  Most people will purchase it at some point in their life yet they don’t really know anything about it.  They rely on their agent to guide them through the process.  The agent is supposed to do what is best for their client but this is not always the case as they also have targets to hit.  To ensure that people have the optimal coverage and product, they should have an understanding of life insurance.

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Why Purchase Life Insurance

 

Life insurance, as with any insurance, is to remove risk.  This risk is risk of death and having dependents, typically family, have financial distress due to a reduced household income.  In short, a person purchases life insurance to ensure that their dependents do not have to change their lifestyle because your income disappears if you die.

Knowing this definition, there are a few takeaways from this:

  • Life insurance is only really necessary when you have dependents
    • If you are single, have no kids and have no debt you do not need life insurance
  • Life insurance is only really necessary when you are dependant on your wages (i.e. working years)
    • If you are retired you do not need life insurance
  • You only need to be insured for this income and not anything further
    • You can be over insured

Types of Life Insurance

 

There are two basic types of life insurance, whole life, and term.

Whole life, as the name implies, is life insurance for your whole life.  When you purchase the policy, you are given a price to pay every period and this is the price you pay until you die.  Upon your death, your dependent will be given a sum of money equal to the policy amount.

With term insurance, you are insured for a specific term.  If you die during this period then your dependent receives a cash value equal to the policy amount.  At the end of the term if you are still alive then you are no longer insured.  You have the option of purchasing a new policy or remaining uninsured.

 

Which Type Is Right For You

 

Both types have their pros and cons.  For the most basic coverage, term insurance if the way to go.  If you purchase life insurance the above bullet points are extremely important.  A young single person should not own term life insurance (there are very specific instances where they could own it and it be advantageous, but generally no).  The main plus of term is it is going to be the cheapest overall cost of insurance.  The other plus is costs rise over time.  In theory, your income should be increasing over time, making the stain on your income initially more barrable.

 

Whole life insurance is a more expensive cost of ownership.  The reason is you know that there will be a payout at some point.  But the fact that you are building equity is a positive.  This is a more complicated financial product it has further reaching implications on your financial picture than just risk mitigation of early death.

 

Generally term insurance is going to be the product that most people should be purchasing.  The reason is it is the simplest form.  You do not need to understand all the financial implications that whole life insurance has, which is critical if you are going to purchase this kind.