Breaking Down Life Insurance
We all want to protect our loved ones. But did you know that one of the best ways you can do so is with life insurance? Your life insurance policy provides dependents financial stability by safeguarding final expenses, lost income, mortgages, educational costs, and more if something were to happen to you.
Life insurance is admittedly a broad topic, and it can be a little uncomfortable to discuss—but it’s an important subject that can be understood with the right context. At Elephant, one of our goals is to make the confusing aspects of insurance easier to understand. Below, we’ll review some of the concepts behind life insurance, including who needs it and when you should consider purchasing it.
So, what is life insurance?
Basically, life insurance is income replacement. When you purchase a policy, you’re paying a premium to an insurance company—such as Elephant—with the understanding that they agree to pay the amount (a.k.a. a death benefit) to beneficiaries you’ve named if you were to pass away. Premiums can be paid out in one lump annual payment, semi-annual payments, quarterly installments, or monthly payments.
Term life insurance is a way to cover temporary expenses, including mortgages, childcare expenses, and student loan debts. Seen as temporary insurance, premiums are paid for a set period and provide benefits to a named beneficiary. Guaranteed level term life insurance is the most common due in large part to its long-term coverage at a low cost, and that it offers premiums that stay level for a period of time set in the policy.
Who needs life insurance?
Does someone depend on you financially? If you answered “yes”, you should consider an individual life insurance policy. Below are some of the most common situations to open a policy.
Married with no children
Married couples generally share financial obligations. If the unthinkable happens, life insurance helps your surviving spouse maintain rent or mortgage payments, pay off debts, and replenish lost income.
Married with children
In the event of a loss, life insurance allows your spouse and children to live the lifestyle they’re accustomed to. In this context, it’s important to consider your family’s financial needs—including living expenses—as well as future events such as college tuition and marriage.
As a single parent, you are the sole provider for your children. Purchasing a life insurance policy provides the peace of mind of knowing that your children are provided for if something should happen to you.
Stay-at-home parents are the primary providers of childcare, housecleaning, transportation, and overall home management. Not only is this hard work, these services all cost money. Therefore, it’s important to consider the financial implications of a stay-at-home parent. Life insurance for full-time homemakers can ease the financial burden that may result from a loss.
Did you know that beneficiaries may face a large estate tax payment after you pass away? The death benefit from a life insurance policy can help your heirs cover taxes or any other unexpected financial expenses that may arise in this situation.
Small business owner
Life insurance for businesses is designed to cover any financial losses that may result following the death of you, a partner, or a key employee. Typically designed so that surviving partners have the means to purchase company interests, this type of life insurance can also be structured as key person insurance—in which a business owner receives a benefit to help offset the financial impact of losing a key employee.
Life insurance is equally important for single people. Whether you’re providing care to an ailing parent, or wish to have the necessary funds set aside for burial, not having a dependent does not disqualify you from needing the benefits. In addition, purchasing a life insurance policy at a young age when you are healthy helps to lock in rates when they are typically lower.
When do I need life insurance?
It may come as a surprise to learn how often your life insurance needs change. Here are just a few scenarios that may impact your need for life insurance.
As we mentioned, married couples typically share financial responsibilities. That’s why it’s important to consider a life insurance plan after tying the knot. When purchasing your policy, consider one that covers the loss of a spouse’s financial contribution. But should your spouse have life insurance too? Generally, it’s recommended to include insurance for both spouses, as there are financial pressures on the family following the loss of a parent.
There’s no way around it. Growing your family also brings additional financial responsibilities. The purchase of a life insurance policy is just another way to protect your child’s financial future.
Your mortgage is one of your biggest financial responsibilities. Life insurance policies cover this expense, as well as maintenance, repairs, taxes, and household bills. Basically, by purchasing an appropriate life insurance policy, dependents can remain in the home you purchased.
Taking on debt
Did you know life insurance can help pay off outstanding debt? Whether it’s old, new, or future debt, your life policy can cover many balances—so loved ones are not left with the burden of paying them off.
Promotions tend to change more than bank accounts—they also influence spending habits. When your salary increases, your insurance needs may as well. Many experts agree that your life insurance policy should be 10-20 times your annual salary. So, to help maintain the lifestyle your family is accustomed to, you may consider increasing your policy.
Caring for aging parents
Life insurance can help maintain the level of care your aging parents have been receiving. It’s recommended that individuals who are financially responsible for aging parents calculate the cost of healthcare, long-term care facilities, and other expenses when determining a policy.
Did you know life insurance also protects businesses? To help ensure you’re adequately protected, consider reexamining life insurance coverage when your business becomes more profitable, hires key employees, or even acquires more debt.
Changes in marital status
Reevaluating life insurance after a divorce or loss of a spouse is a good idea. While you may find you now require less life insurance, this may not be the case if you have children—as they will remain your primary financial obligation. Regardless, it’s recommended you first guarantee your children are financially stable before decreasing your life insurance coverage.
Planning for college
Life insurance helps ensure your child’s college plans remain feasible, should a loss occur. Having the right life insurance policy in place can help with your child’s tuition, as well as room and board.
Planning for retirement
Retirement planning is an ideal time to reconsider your life insurance needs. As you examine your financial plan, take the time to make sure your loved ones are protected.
How much life insurance do I need?
Employer-sponsored life insurance is undoubtedly a great benefit. However, these policies typically provide one or two times your salary. While your scenario depends on your unique needs, it’s generally recommended that policies are between 10-20 times your annual salary. That said, salary is not the only important factor. It’s equally important to consider your family.
To help you determine how much life insurance you need, ask the following questions:
- How much money will my family need immediately for funeral costs and any outstanding debts?
- How much money will my family need to continue living the lifestyle they are accustomed to—as well as pay current monthly expenses, such as mortgage, rent, and any future expenses?
Should I replace my existing life insurance policy?
Life insurance rates have decreased, making now a great time to shop around for a more affordable policy. It’s recommended that you carefully compare your current life insurance policy with the one you’re considering as a replacement.
It’s recommended to keep the following factors in mind:
- Guarantee periods
- The insurance company’s financial strength
- Available riders
With a new life insurance policy, you also will have a new contestability period which begins when your new policy is effective and usually lasts for the first two years of the policy. It’s important to remember to not cancel your existing coverage until you’ve received confirmation that your new policy has been approved, payment has been received, and it’s been delivered to you (or put in force).
Through our quick and simple process, Elephant can provide the peace of mind of knowing your loved ones are taken care of should the unexpected happen. Contact us today to learn more.