What is life insurance?

Life insurance helps protect your loved ones financially if you pass away while your policy is in force. You can tailor your life insurance policy to help sustain your dependents’ current lifestyle, housing and education to name a few typical expenses, using a “death benefit” (a lump sum of money). How does this work? When you purchase life insurance from an insurance company, you designate one or more beneficiaries.

These beneficiaries (often family members) are the people who will receive a tax-free death benefit upon your death. That being said, in order for the death benefit to be payable, you must keep up with your premiums. These premiums will vary depending on how much life insurance you purchase, as well as your health, age and general lifestyle at the time the policy is issued. Some policies allow you to make additional deposits over time to build up a policy cash value, and some also include built-in cash values.  You can use these cash values to cover policy costs, which provides flexibility to stop and go with your future out-of-pocket premium payments.

Do you need life insurance?

The short answer is, “it depends”. Life insurance may seem like a morbid topic, but it is just as important as (if not more than) home insurance, car insurance and travel insurance. Your mid 20s are a great time to start thinking about purchasing life insurance as the younger and healthier you are, the less expensive it will be. Life insurance may be right for your family if you:

• Would like to make sure that your spouse is financially stable if you pass away

• Have children, or you are pregnant with your first child

• Want peace of mind knowing that your family will be financially protected if you die

• Have personal debts that you do not wish to pass on to your beneficiaries

• Have a mortgage to pay off

• Own a small business and want to ensure a smooth transition

If you answered yes to any of these questions, you may want to purchase life insurance.

What’s Next?

Now, what kind of life insurance should you buy? Well, that also depends. There are two basic types of life insurance: term and permanent. Term insurance is very popular among young and healthy people, and you can purchase it for a pre-agreed upon duration of time. This type of insurance is attractive as the premiums are usually relatively low because as the name suggests, term insurance protects you from the financial impact of death for a set period instead of your lifetime. Term insurance is beneficial for young people with children or a mortgage. This is because the term they agreed upon will be as long as it takes for the children to be financially independent, or for the mortgage to be paid off. That being said, if you choose to extend the coverage period of your term insurance beyond the initial term, the premiums will be significantly higher (up to 10 times higher in some cases). Additionally, term insurance does not allow you to make additional deposits, nor does it include any built-in cash values.

On the other hand, permanent insurance covers you for your whole life. To reflect this, the premiums are higher at the outset but can be less costly over the span of your life. Permanent insurance is a great investment in the long run as your premiums rarely vary and any cash value being built-up grows on a tax-deferred basis. In addition, the cash value can be withdrawn (which may result in a tax liability) or be borrowed against throughout your lifetime. In many policies, all or a portion of any cash value is also payable at death, increasing the tax-free death benefit payable to the beneficiaries.

Layered Plans

If you’re still unsure about which type of insurance would be best for you, you’ll be happy to know that it is very common to purchase a combination. Purchasing both permanent and term life insurance is also called a layered plan. Many people do this as their financial situation and goals may change. Purchasing both is a way to ensure that coverage is tailored to their desired lifestyle over time. Additionally, a young family can require over $1 million in coverage to account for their children’s education, income replacement and other expenses, making permanent insurance nearly unaffordable for many. Layered plans allow you to buy a blend of permanent and temporary coverage within your initial budget. Further, they provide benefits and flexibility that allow you to shift your coverage from temporary to permanent as the policy values grow, as your needs change, and as your budget allows.