Do I need life insurance to protect my family?

Life is precious and fun and full of ups and downs. It’s also limited. While it’s not something we like to think about a whole lot, making sure those we love are protected and cared for is something we all want. One way to help accomplish that is to open a life insurance policy that will pay out to your dependents and loved ones if something happens to you. 

While we understand this topic can be challenging to think about, knowing your life insurance options can play an important role in your family’s financial wellbeing. And that can bring you peace of mind. 

There are different types of life insurance, and some of them have features not normally seen in other types of insurance products. With so many options to look at, we want to help you to understand them. In this blog, we’ll help you answer the question: Do I need life insurance? We’ll also look at the types of insurance policies available and answer other frequently asked questions. 

What is life insurance?

Life insurance is a contract between the policyholder and a life insurance company in which the insurance company will make a financial payout, or death benefit, to the designated beneficiary in the event that the insured person dies. 

In exchange for this, the policyholder makes premium payments to the life insurance company. The cost of these payments depends on a number of factors, including your age, your health, your occupation, the type of policy and the amount of life insurance you want. 

The payout to your beneficiaries is usually tax-free if collected in full and immediately. If your beneficiary elects to delay the payout or take it in installments, any interest generated during that period would be taxable at their normal income tax rate. If the proceeds went to an estate, estate taxes would have to be paid.

Do I need life insurance?

There are many reasons you might want to buy life insurance, but most of them have to do with making sure your loved ones are taken care of when you’re gone. 

This could mean making sure: 

• Your family members don’t get stuck with your existing financial obligations.

• They have the funds to pay for funeral expenses, estate taxes, and other final expenses.

• They continue to get the financial support they currently rely on you for or expect to rely on you for in the future. 

Life insurance could serve as income replacement and cover general living expenses, or it could be used for child care costs, college tuition, paying off student loans, wiping out credit card or loan debt, paying the mortgage, or any other financial matters.

Some small business owners might get life insurance coverage to benefit a business partner or the business as a whole. Likewise, businesses may take out a policy on key people, like an executive or partner. 

Answering the question “Do I need life insurance?” depends on what you want to leave behind financially and whether you feel your loved ones or business will need help when you’re gone.

What types of life insurance are there?

There are many types of life insurance policies to choose from. Which one might be right for you depends on your financial needs and how much you want to spend. Here are some of the options you’ll see when you’re shopping around. 

Term life insurance policy

The most common type of policy is known as a term life insurance policy. In this type of life insurance policy you choose a term to be covered for. Coverage periods are usually one, five, 10, 20, or 30 years. Over that time, you’ll make a monthly payment that will usually stay the same throughout the policy. The younger and healthier you are when you open the policy, the cheaper you can expect your payments to be. 

With term life insurance, you’re only covered for the length of the term you choose. If you outlive your term, the insurance policy runs out and you may have the option to renew, but the rate will likely change due to age. 

If you do make a claim, the payout to your beneficiaries would be the same whether it happened in the first year or the last. 

Permanent life insurance policy

A permanent life insurance policy — or whole life insurance policy as it's also called — is not only good for a period of time. Instead, it covers you for life, just as the name suggests. 

Whereas in a term life policy, you can outlive your policy, in a whole life policy, as long as you make the payments, the life insurance plan will have to pay out eventually. This means the insurance premiums are usually more expensive than a term life insurance plan. 

There are different types of permanent life insurance policies, including the traditional whole life insurance policy and the universal life insurance policy.

Traditional whole life insurance

Whole life policies are both insurance policies and investment vehicles. Just like a term life policy, whole life policies have a face value. This is the face amount the policy pays out when a claim is made. For instance, if you have a $1 million policy, the face value of the policy is $1 million. But unlike a term life policy, a whole life policy also builds a cash value over time.

The cash value is an amount from your payments that is put into a savings or money market account, which grows tax-free. While you can’t withdraw these funds, you can borrow against them. Interest will accrue during this time, but it's usually a modest rate, and you generally don’t have to pay it back. 

If you decide never to pay it back, when your beneficiary makes a claim, they will get the face value minus whatever you borrowed and the interest. So if you have a $1 million policy, but you borrowed $100,000 and accrued $50,000 in interest, the payout upon your death would be $850,000. 

This type of policy gives people more options in their later years, but the terms aren’t always the most attractive. For instance, while the cash value continues to grow tax-free, usually the interest rate you earn on your money is lower than you’d get elsewhere. 

It’s a good idea to talk to a financial advisor if you’re considering this or any other life insurance product. 

Universal life insurance

This is also a whole life policy, and it's a lot like a traditional whole life insurance policy. But with a universal life insurance policy, you can make adjustments as your financial needs change. 

You can lower or raise your premium as you go, and it will change the face value of your policy. You can also use your cash value to pay part of your premium, but this would lower the face value of the policy.

Variable life insurance policy

Also an entire life policy, the difference with a variable life insurance policy is that you have more options to invest your cash value into stocks and bonds. If they do well, it can increase the face value of your policy, but it could also decrease. It’s also important to note that these accounts may come with substantial fees for trading and management. 

How do I get life insurance?

Getting life insurance could be as easy as talking to an insurance agent, but it's a good idea to be prepared before you walk in. Having some idea of the reason you want the insurance, the amount of coverage you need, and how long you need that coverage can ensure you get the right policy for you.

Because your health can be a factor, it's likely you’ll need to get a medical exam and answer some questions about your health. But if you’re not in a hurry, you can talk to the insurance company first to be sure you get everything they need in the fewest doctor visits possible. 

The most important thing to keep in mind when getting life insurance is to shop around at different insurance agencies. Prices can vary substantially. This may be a fixed payment you’re making for 30 years or longer. Even a few dollars per month in savings can add up over time.

How much life insurance do I need?

How much coverage you need depends on a lot of personal factors like how many dependents you have, how high your current and future bills are expected to be, and how far you want the money to go once you’re gone. If you have a specific goal, like paying off your mortgage, make sure your policy is large enough to do that. 

A common suggestion is to look at your annual income and multiply it by five to 15 times to figure out the right-sized policy for you. Talking to your financial advisor can help you determine your life insurance needs.

How much does life insurance cost?

There are many variables that determine life insurance rates. A general rule is the younger and healthier you are when you buy the policy, the cheaper it will be. Policies vary a lot but are often less expensive than many imagine. 

For context, in 2023, a healthy 40-year-old man can get a 20-year, $250,000 term life insurance policy for about $19 per month, while a healthy 40-year-old woman could get the same policy for about $16 per month. 

Remember, in most policies, the payment remains the same for the life of the policy.

Life insurance and education can protect your loved ones.

Answering the question, “Do I need life insurance?” may not be the most fun thing to think about, but the right policy could help your family through difficult times. Some whole life policies could even widen your financial options as you go into retirement by allowing you to borrow cash when needed. 

Before you buy a policy, it's a good idea to figure out what your financial goals are so you know how large your policy needs to be and how long of a term you’d like to buy. Talking to a financial advisor can help you make the right decisions for you and your family. 

While life insurance may be a great way to make sure your family has what they need, protecting your families financial well-being starts with helping them to build financial literacy. Greenlight gives you and your loved ones the tools you need to learn and practice money skills like saving, budgeting, and investing — and planning for the future. 

Ready to learn about the world of money? Sign up for Greenlight today!