Learning Life Insurance Basics – Easy Edition

Learning life insurance basics? Probably the most obvious question I get asked is, why do I need life insurance¬†at all? What do I have that is so important that needs to be insured? If you have nothing, have no family, and no-one cares about you, then I guess the answer is you don’t need life insurance. But most of us, have someone who cares about us, or even depends on us.

Children are an obvious group that would need their parents to have life insurance. No-one would want to leave their kids with nothing. But this happens every day. Lots of young people and young parents don’t have life insurance. But what they do often have is a mountain of debt from college or just the expense of living. So, instead of leaving their kids with assets, the kids get left with nothing.

Who needs life insurance?

  • young parents – to protect their children
  • 30-45 age: to protect their ability to maintain quality of life after illness or accidental death of a spouse
  • 45-60 ages: to protect their assets while saving for retirement
    • an early death of a spouse can wipe out the assets of the still living

What is Term Life Insurance?

Covers for a set amount of time. 10, 20, and 30 year terms are common. What this means is that it will cover you for that amount of time. If you die within that period, say during a 20 year term, your beneficiary would get the face amount of the policy. If you do not die within the term period, all money paid into the policy is lost. This is both good and bad, you are still alive, but the money you put in is gone. Its a trade-off, smaller premiums, but you get no money back.

What is Whole Life Insurance?

Whole life insurance can cover you for your entire life or your ‘whole’ life. The premiums are usually level meaning they stay the same. This type of insurance also collects interest and gains value. This insurance is also more expensive than a traditional term life policy. These policies gain a small level of interest, usually 1-3% on average.

What other types of Life Insurance are There?

There are more complex types. Variable Life, Universal life, Variable Universal Life, and a few obscure other types we won’t go into. These are more involved life insurance policies, that are typically used by those who need them. For example; the universal variable policy gains interest based on what activity in the separate account does. Both its premiums and its value can fluctuate based on what that account is doing or how well it is doing.

Variable Universal products require that you know something about investing and will be a more hands on approach to life insurance. You will have to manage the accounts that are tied to it. With this, you get more flexibility, but also they are a lot more involved than a term life or whole life policy.

Term and Whole for the masses

For most of us a term life insurance or whole life insurance policy is where we will find what we need. The more complex products such as those I mentioned above are better handled by those who want to have their hands on the investment accounts. Term life insurance is the catch all for most of us. It offers the most face amount for the smallest outlay of monthly premium. Its simple, cheap, and effective for the vast majority of consumers. To read more about whole life  or term life check out this article that explains it in more detail.