For many people, especially those with spouses and children, buying life insurance can be an important part of being financially responsible and making sure their family is provided for should the worst happen. The first step in determining whether you need life insurance, and what type to get, is to educate yourself. This page will walk you through what you need to know.
If you want more help with life insurance, consider working with a financial advisor.
Life Insurance Definition
Life insurance works like any other insurance product — you pay a premium now in exchange for the promise of money later — in this case, upon your death. You’ll pay a predetermined amount of money each month for a predetermined amount of time, and then when you die, your family gets a predetermined cash payout.
There are a several types of life insurance you buy, but there are two basic ones you should know about:
- Term life insurance: this type of policy lasts for a specific amount of time. Generally it’s around 10 years, but it could be as few as five or up to 30. Your beneficiaries only get the payout if your death occurs during the specific period of your contract.
- Whole life insurance: this type of policy, on the other hand, is permanent. You pay an annual premium and for as long as you pay each period, you have a death benefit for your family whenever you die.
Should You Get Life Insurance — and Which Type?
Not everyone needs life insurance, so the first step is to decide whether or not it is appropriate for your situation. It depends largely on whether or not you have family members or rely on your earnings to live their lives.
If you have children, chances are you will want to get life insurance. Unless you are independently wealthy or have a spouse who makes sufficient money to support the family, you’ll want to provide your family with money if you pass away. If you don’t have children but you are the only breadwinner in your marriage, you’ll also want to consider getting insurance.
Then there is the question of which type of insurance you should get. If the primary purpose of your insurance is to take care of minor children, term-life insurance that expires around the time your children are no longer your dependents makes sense. If, on the other hand, you have a spouse who needs your support, whole life insurance is probably a better bet.
How to Buy Life Insurance
There are a few ways to buy life insurance. The first and likely most common is to go directly to an insurance broker, who will ask you a number of questions about your medical background, which will help determine what your premium payments are.
You can also buy insurance online. SmartAsset has a page with live insurance quotes, so that is a good place to start.
The last option is to use a financial advisor who is also an insurance agent. This professional will operate just like any other insurance broker but can also create a financial plan and manage your other investments. If this is the route you go, keep in mind that this advisor will not be bound by fiduciary standard when serving as an advisor; rather, he or she will only be bound by the suitability standard. As long as this professional’s recommendation to you is suitable, the person is in the clear. This advisor — called a “fee-based” advisor — will have financial incentive to recommend to you the policy that makes him or her the most money, even if it isn’t the best option for you.
How Much Life Insurance Should You Buy?
The last question, of course, is how much life insurance you should buy. While an advisor can help you decide what payout is appropriate, the most important thing is to consider your family’s lifestyle and how much money your family will need to continue that lifestyle if you were to die. You should also take into account funeral costs, which your family may want to cover with the life insurance payout.
To get started figuring out how much life insurance you should buy, consider using SmartAsset’s free calculator.
The Bottom Line
Life insurance is a key part of many financial plans, but it isn’t always easy to determine exactly how to use it. You’ll want to consider which type of insurance works for you and how much you’ll need. A financial advisor can help you, but remember that the person may be paid commissions and have incentive to sell you the product that will earn him or her the most money.
Life Insurance Tips
- A financial advisor can help you make the right decisions about life insurance and other financial planning considerations. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re worried about paying for care when you’re older, you can get a hybrid long-term care insurance/life insurance product. Your premium will pay for care when you’re older and provide a death benefit to your family.
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