What is Life Insurance and How Does It Work?
Life
Life insurance is a way for you to leave money to people you care about in the event of your death.
It’s an agreement between you and an insurance company. You agree to pay them and they provide your insurance coverage. As long as you pay the premium, you’re covered.
Covered for what? That's up to you. Maybe you want to make sure your spouse can pay the mortgage, no matter what happens to you. Maybe you want your kids to afford college. Or you might simply want your family to manage day-to-day bills if you’re not around.
Speak the Language
Do I Need Life Insurance?
Ask yourself: Would my absence cause anyone financial strain? If your answer is yes, let’s look at the 5 top reasons you may need life insurance.
1. You contribute a meaningful portion of your family's income
You can think of life insurance as a way of replacing your income if you die during your policy's term. If you support a spouse, kids, parents, grandparents, siblings, or others – or will in the future – and the loss of your income would affect their ability to pay for food, housing, childcare, or other necessities, life insurance would be a wise choice.
2. You have kids
Anyone with children should consider life insurance, whether they earn a salary or not. Even if you don't have lost income to replace, you probably provide care that your family would have to pay for in your absence. Life insurance can also contribute to college savings.
3. You have a mortgage or other shared debt
If you have a loan that someone else co-signed, they may be required to make the full payments when you die. Consider life insurance if a parent co-signed a student loan for you, for instance, or you co-borrowed a mortgage or any other loan with a spouse, partner, or sibling.
4. You run a business
Life insurance can be extra important for small business owners. You might have taken on business debt using personal assets, like your home, as collateral. In that case, life insurance can help pay off debts that your family might otherwise have to cover.
If you co-own the business, a life insurance policy that names your business partner as the beneficiary can be useful. It allows the co-owner to buy out your share from your heirs (at a price you decide on now). This can help prevent conflicts among parties later.
5. Your life insurance through work isn't enough
If you have access to a group life insurance policy at your workplace, the death benefit probably won't be enough to cover your beneficiaries' needs. Group life insurance is limited, typically nowhere near 10-15 times your salary, a rule of thumb often recommended by financial experts.
None of the above
You may not need life insurance now but when major life changes happen, including when you take on debt, consider adding it. Also, keep in mind that buying life insurance when you're younger can lock in a better price.
How much will I pay?
Life insurance works like a subscription: pay your premiums and you'll be covered. The amount you'll pay in premiums depends on three main factors:
- Your personal characteristics (age, health, gender, etc.)
- The type of life insurance you choose, term or permanent
- The coverage amount/size of your policy
When you’re ready to apply, you'll provide this information so the insurance company can determine your premium. That process is called underwriting.
Get your free quote for term life insurance – fast, easy, and 100% digital.
