Life insurance is not an easy talking point for anyone. No one likes to think about worst-case scenarios. However, planning ahead can make life’s challenges more manageable down the road. So, it’s a discussion we should all have at some point. And there’s no time like the present.
What Is Life Insurance?
Put simply, life insurance is a contract between you and a life insurance company that delivers a tax-free payment to your loved ones after you die. You pay a monthly premium and in return your insurance provider ensures your beneficiaries (family, friends, charities) are covered.
Life Insurance Terminology
Here’s a quick vocabulary lesson to help you navigate the insurance space with confidence.
- Premium: The amount of money you pay in exchange for coverage.
- Coverage Amount: Also known as face amount, death benefit or payout, this is how much money goes to your beneficiaries if you die during the coverage period.
- Beneficiaries: Those who will receive the coverage amount.
- The Term: The length of time your policy will be in effect for — usually 10, 15, 20, 25 or 30 years, but you can also choose to be covered for your entire life.
- Filing a Claim: The process by which your beneficiaries can claim the coverage amount if you die.
- Underwriting: The process by which the life insurance company collects personal information that determines your premium.
What Affects Your Premiums and Costs?
The amount you’ll pay depends on three main factors:
- Your personal characteristics (age, health, gender, etc.)
- The type of life insurance you choose, primarily between term and permanent (more on these below)
- The coverage amount/size of your policy
Are There Different Kinds of Life Insurance?
Yes, and they provide various benefits and terms to address a variety of needs and preferences. The most common options are:
Term Life Insurance
Term life insurance lasts for a set period of time, such as 10, 20 or 30 years. If you don’t die during the term, your coverage ends.
Permanent Life Insurance
Permanent life insurance (also known as cash-value) includes investment components that can last for the whole life of the insured.
What Type of Life Insurance Policy Is Right for You?
Deciding between a term and permanent life insurance policy depends on your needs and budget.
How Do I Determine How Much Life Insurance I Need?
Ultimately, how much you should buy depends on your goals and budget. And it’s important to understand that many factors (your savings, debt, mortgage payments, etc.) need to be considered in setting the amount of your policy, so be sure to consult a life insurance professional when making this decision.
Do I Need Life Insurance?
Ask yourself — would your absence cause anyone financial strain? If the answer is yes, you need life insurance.
The Top 5 Reasons You May Need Life Insurance
- 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.
- You have kids
- Anyone with children should consider life insurance, whether they earn a salary or not. It can pay for childcare and future expenses like college in your absence.
- You have a mortgage or other shared debt
- If you have a loan that someone else has co-signed — such as a mortgage, personal loan or home equity line of credit — they may be required to make the full payments when you die.
- You run a business
- Life insurance can be particularly important for small business owners. It can protect your family from having to assume debts from your business in your absence.
- Your life insurance through work isn’t enough
- If you have access to a group life insurance policy at your workplace, you should take advantage. However, the death benefit included in this policy is likely not enough to cover your beneficiaries’ needs.
None of the above apply?
If you’re not in any of these groups, you may not need life insurance now, but you’ll want to reevaluate when major life changes happen, including when you take on debt. Buying life insurance when you’re younger can also help you lock in a better price.
Secure Your Loved Ones’ Future With Life Insurance
We can’t always predict the future, but life insurance is a smart way to make sure the people who depend on you financially are covered in your absence.
Ally is working with Ladder to offer an innovative approach to life insurance with an easy online application process and a broad range of policies.