Life Insurance Basics

Life insurance basics 101: Understanding life insurance

A part of life insurance basics 101 is knowing when to choose the right term or permanent life insurance products.

Young and married with small children: younger families might need more death benefits or face amount from a life insurance basics policy because the need for income replacement to cover the expenses of younger children is much greater at this point. Also, if a spouse that stays home to take care of the children were to die, there would be an additional expense for the surviving spouse to pay for the remaining children’s daycare services and expenses.

A term plan is typically the best option and is the least expensive option to get the most coverage. Longer-term policies like the 20-year or 30-year plan can be the most suitable for young families.

Young and married with no children: If you and your spouse work and household expenses are shared equally, you may need life insurance on both. Depending on your lifestyle, it could be very hard to maintain the same standard of living if one of you happens to die. According to a Kiplinger Magazine article, a small coverage may be enough to meet your needs. Since term policies can allow you to get the basic coverage you might need, you can pick plans with a lower death benefit to get a more affordable rate.

Single-Parent: like young couples with children, single parents who have younger kids may also need a large death benefit policy. Studies show that most single parents are women, and the average salary single mothers earned as of 2019 was $48,098.3. This income is far less than the average wage for married couples with children under 18, about $102,308 (2019).3 With less money among the majority of single parents, it’s more than likely that there wouldn’t be enough savings used for income replacement if a parent dies.

The life insurance basics 101 step in this situation is to get a low-cost term life insurance policy that can provide the most financial protection. The lower cost of term insurance makes it a practical choice for single parents.

Recent empty-nester: so now the children are gone off to college, but that doesn’t mean your life insurance basic needs end. You may need to support those children through their college years to help them pay for tuition, room and board, books, or even extra clothing.

By chance, your household runs on two incomes, and you still have major debts to pay off; like a mortgage, you may need income replacement protection. Depending on one’s age, you may also have a while to go before having enough retirement savings.

At this stage in your life, a policy that has a death benefit your spouse could use to cover expenses if one of you dies would be beneficial. At this point, the policy can also build cash value to supplement your income may be the most suitable. Depending on your needs, you could also choose to go with a term plan to convert to permanent insurance or go straight for a permanent policy immediately.

For example, if you’re 55 and looking to have cash value in a policy by the time you’re 65, then a permanent plan may be best because it takes that long to build up cash value.

If you do not need a supplemental income as fast, you could get a 10-year convertible term plan. So by the time you’re 65, you could have a whole life policy, and when you reach 75, you could have cash value in the policy. One thing to keep in mind when converting a term plan is that insurance companies usually only allow you to do this before you turn 65.

If you need a policy to help supplement your income, then the cash value from a permanent plan may meet your needs. Please keep in mind that it takes some time to build cash value. So depending on your age, you may want to weigh the odds of whether or not you will be around long enough to use this feature.

You could also choose a type of permanent insurance, final expense insurance, typically offered as a whole life policy. This type of coverage was designed to cover your burial and funeral expenses, not your long-term financial needs. Life insurance 101 basics.