A life insurance policy is a contract signed with an insurance company. In exchange for the regular premiums you pay over time, life insurance will pay the beneficiaries of your choice (usually children, spouses, or other family members) after your death.
If someone depends on you financially, this is an important safety net. Life insurance expenses can be used to repay debts such as mortgages to replace your income or provide college tuition funds.
Types of life insurance
There are two main types of life insurance:
Term life insurance has a limited validity period, such as 10 years, 20 years, or 30 years, and does not generate cash value.
If you die within the time limit, your beneficiary will be paid. When the term life insurance expires, you can purchase a new policy or re-evaluate your options.
Permanent life insurance costs more than term insurance, but it also provides other features, such as the value of cash you can borrow, which will increase over time.
Whole life insurance is the most famous form of permanent life insurance. Other types include universal, variable and variable universal.
Life insurance rates
The cost of life insurance depends on many factors, including your age, health, and the validity period of the policy.
Below are the average annual life insurance rates for healthy men and women of different ages and different policy periods.
2020 average life insurance rates
|Age at purchase||Policy amount||20-year term||30-year term||Whole life|
|The average three lowest-priced annual premiums in each category of physical health for men and women. Source: Quotacy.|
Who needs life insurance?
If someone depends on you financially, NerdWallet recommends using life insurance. This includes parents, mortgaged homeowners, business owners, etc.
For many people, the best option is term life insurance, which lasts for a limited time. Others may need permanent insurance, which will not expire as long as the premium is paid.
|Who?||How life insurance can help||Best option|
|Breadwinner||Life insurance can help make up for your lost income so that your family can continue to pay for daily expenses.||Term life insurance can cover your working life.|
|Stay-at-home parent||Life insurance will pay for services provided by parents for free (such as childcare services).||Full-term life can cover your child’s young age.|
|Divorced parent||A policy could cover support payments paid by divorced parents.||Term life can cover the years of support payments.|
|Parent of a special-needs child||Life insurance can ensure that children receive financial support after their parents pass away.||Permanent life insurance provides a payout no matter when you die.|
|Business owner||Life insurance can repay corporate debts, help the heirs of the business to pay off estate taxes, or provide funds for sale and purchase agreements so that business partners can buy out your shares.||Choose long-term life or permanent life according to the problem to be solved.|
Term life insurance is sufficient to meet the needs of most families. It costs less than an entire life, and you can choose a term that matches the year people have relied on you financially.
At the end of the semester, you may no longer need life insurance: your house will be paid off, your children will grow up, and you will have some money in your bank.
However, if you want to provide the heirs with money to pay the estate tax, you can use whole life insurance and other forms of permanent insurance.
If you want to spend retirement savings but still leave an inheritance or money to cover final expenses such as funerals, then permanent life insurance may also be useful.
How to buy life insurance
Life insurance is not a product you often buy, so you may not know where to start or how to get a life insurance quote. This is the way to get the required coverage.
Determine how much life insurance you need
When calculating the amount of life insurance purchased, please consider the needs and priorities of your family.
Are you in debt? Will your family have to pay for daily living expenses instead of your income? Do you want to provide a college education for your children?
Although you may buy some life insurance at work, you usually need your insurance policy in addition to the life insurance provided by your employer.
The insurance policy provided by your employer may not be sufficient to meet the financial needs of your family and usually ends after you leave your job.