We all have a high-level understanding of what life insurance is. You pay for “coverage” in the instance that you pass away unexpectedly and your beneficiary is paid out the amount of your life insurance plan. I also think we all understand why life insurance is important – if people rely on you financially, and you’re no longer around, they get some sort of financial stability in the form of your life insurance coverage.
However, most of the CGS audience is on the younger side and don’t really have people that rely on them for money. That doesn’t necessarily mean that life insurance is not needed. I’m going to walk you through the two types of life insurance coverage, along with reasons why you may need life insurance right now. Not everyone needs life insurance at their current stage of life, but that likely changes over the course of time.
The Two Types of Life Insurance (Whole-Life and Term)
What is whole-life coverage?
According to Investopedia, “Whole life insurance provides coverage for the life of the insured. In addition to providing a death benefit, whole life also contains a savings component where cash value may accumulate. These policies are also known as permanent or traditional life insurance.”
In simpler terms, whole-life coverage is a form of life insurance that covers you until you pass away. As long as the premium payments are covered up until death, your beneficiaries will receive a payout. There is another benefit to this coverage as well, the savings (or cash value) portion allows you to invest built up cash. The policy owner can withdraw or borrow against that saved up cash value. Any cash value, along with anything borrowed, at the time of the policy owner’s death is taken back by the insurance company.
What is term coverage?
According to Investopedia, “Term life insurance, also known as pure life insurance, is life insurance that guarantees payment of a stated death benefit during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate.”
That basically means that your life insurance lasts for a specific amount of time. Once that time has come, and the policy-holder is still alive, they can cancel or renew. If they cancel, all of the previous premium payments will be lost.
Because term life insurance doesn’t have a cash value component, and because it only lasts for a specific amount of time, the premiums are usually less than whole life coverage. Investopedia also states, “Term life insurance is attractive to young couples with children. Parents may obtain large amounts of coverage for reasonably low costs. Upon the death of a parent, the significant benefit can replace lost income.”
Why You Need Life Insurance Right Now
Life insurance is ultimately designed for you to take care of those who need you, in the event you pass away. It eases the financial burden that your dependents need to take on after your passing. Certain life scenarios would warrant having life insurance. Some of those situations include:
- Parents with young children – if your loss of income would result in financial hardship for the remaining family members, life insurance would help.
- Adults who own property together – In the event of your passing, life insurance would help cover your half of property expenses, so your partner isn’t left to pick up the slack.
- Wealthy families – there is such a thing called “estate tax”. If you fear your family paying the estate tax with your passing, life insurance could help cover the cost.
- Businesses with key employees – If the CEO or another key employee of a business would pass away, and their passing would leave the business with severe financial hardship, the business can take out a life insurance policy on that key employee.
- Student loans with co-signers – This situation came from previous CGS client and licensed life insurance agent Sharnel Young. Sharnel states “the student loans will fall to the co-signor”, so having life insurance can help cover that debt.
Why You May Not Need Life Insurance Right Now
As you can see in the examples above, life insurance is most appropriate when you have a person (or people) that depend on you financially. Young adults who are single and have no dependents don’t have a huge need for life insurance. Other than the fact that you could get a lower premium, there really isn’t a benefit to having life insurance as a young adult.
Related: Finance 101 – Insurance 101
I hope this article helped give more clarity into what to expect when looking for life insurance, and what you should consider before investing in it. Again, not everyone needs life insurance, but if you’re in a position to get it for a low cost (like through your employer), there’s very little harm in actually doing so. Do you have life insurance? What encouraged you to invest in it? Post your experiences and comments below to share!