Buying life insurance as an adult is one of the smartest decisions you can make. And contrary to popular belief, it’s not only for people who are married or who have kids. Life insurance can be a financial lifesaver for adults in almost every personal and financial situation. And the younger you buy it, the more affordable it can be.
How Does Life Insurance Work?
The basic premise of life insurance is simple: You pay a certain amount of money to an insurance company, and in return, the company commits to paying a death benefit to the beneficiaries listed on your policy. You have to decide on the amount of the death benefit when you purchase your policy — it’s not something that can be changed on the fly.
The amount you pay in monthly premiums for your policy depends on many factors, including your gender, how old you are, where you live, your health status, how much coverage you want, and more.
Insurance companies use a system of underwriting to determine how much each individual’s life insurance policy will cost. For example, if you and your friend both want to purchase a $1 million term policy from the same insurance company, the amount you pay in premiums will be different because there are so many factors that underwriters must take into account.
Types of Life Insurance
There are two basic types of life insurance: term and permanent.
Term Life Insurance
Term is usually the more popular option because it’s more affordable. Also known as “pure” life insurance, a term life insurance policy does just what the above describes: provides coverage to your beneficiaries in the event that you die within a certain number of years, or term. As long as you pay the monthly premiums on a consistent basis during the term, the policy is valid and you have coverage.
Just as you need to decide how much coverage you want before buying the policy, you also need to decide on the length of the term. Most term policies range between 10 and 30 years, but you can find those that offer as little as 5 years of coverage and as much as 40 years of coverage. Bear in mind, length of term is one of the factors that underwriters take into account when calculating our monthly premiums. The longer the term, the more you’ll pay in monthly premiums.
Most people buy term life insurance to get them past a certain milestone. For example, parents of young children may buy a 25-year policy that will last until their youngest graduates college. A small business owner who has a 5-year loan might only want a 5-year term policy, to ensure that if he dies, the outstanding debt won’t get passed on to his loved ones. The same is true for anyone with a mortgage. Most people who take out mortgages also buy life insurance for the same amount of time as the mortgage. This way, they prevent a sizable debt from passing on to their loved ones.
If you need help deciding how long your term life insurance should be, you can contact Sproutt insurance advisors. They can also help you figure out how much coverage you need.
Permanent Life Insurance
Permanent life insurance is the second main category of life insurance. Permanent is an umbrella term that includes several types of policies like whole, universal, variable, and more. The two basic characteristics of a permanent policy are:
- No expiration date, i.e., it lasts your entire lifetime
- A cash savings component that can act as an investment
Due to the innate features of permanent life insurance, it’s virtually always more expensive than term. With whole, the most common type of permanent life insurance, the monthly premiums are split three ways: one portion goes toward covering your death benefit, another portion goes toward the savings component, and yet another, smaller portion goes toward administrative fees.
There are pros and cons of both term and whole life insurance (you can read a comparison between term & whole policies here). For many people, term is the only option since whole is too expensive. If your financial situation allows you to consider a permanent policy, it’s always best to consult a financial or insurance advisor about the best type of policy for your personal situation.
Reasons to Buy Life Insurance
Life insurance isn’t something that’s relegated to a specific group of people — there are very few cases in which we would recommend someone not to buy it. Even the healthiest adult, unfortunately, can encounter sudden health issues or accidents that lead to their untimely death.
For most adults, whether single, married, with children or without, in great health or with serious health issues, life insurance is a necessary purchase. Below are 7 reasons to buy life insurance.
Replace Lost Income & Cover Daily Expenses
If you’re the main breadwinner in the family, can you imagine what would happen if you died unexpectedly? How would your family manage the sudden loss of income, how would they cover their daily expenses? Life insurance is crucial in this case — it can act as a replacement for lost income so that your family can maintain their standard of living while coping with a devastating loss. Life insurance can also provide a cushion to give your family time to come up with a new, sustainable financial plan to reflect their current reality.
If you’re not the main breadwinner of the family, but you do bring in a portion of the household income, the financial loss would still be felt if you died unexpectedly. However much you earn annually, life insurance can act as a replacement for that. When you buy life insurance, take into account how much time your family will need that replacement income — one, two, three years, etc.
Cover Outsourcing of Household and Care Responsibilities
A common life insurance myth is that if you’re a stay-at-home parent, you don’t need life insurance. This is absolutely not true. While stay-at-home parents may not bring in an active income, all of the duties they perform at home — cooking, cleaning, shopping, childcare, chauffeuring kids, helping with homework, etc. — are worth thousands of dollars a month. In this situation, life insurance should cover the cost of all these things should something happen to this parent and their responsibilities need to be outsourced.
The same is true for an adult child who takes care of an elderly parent. In many families, there is often one child who has the primary responsibility of caring for an elderly parent, either due to proximity or family situation. A child who makes appointments for their parents, takes them to the doctor or to social clubs, cooks and cleans for them, etc. should have life insurance even if they don’t have children of their own. Life insurance will enable the elderly parent and/or siblings to afford private care should the primary caregiver die.
Pay Off Debt
Debt coverage is one of the most common reasons to buy life insurance, especially term insurance. If you have a mortgage, car loan, student loans, or significant credit card debt, a life insurance policy will ensure that the debt doesn’t get passed on to your loved ones.
For example, if you have a 20-year mortgage, you should buy a life insurance policy that will cover both the length of the mortgage and the outstanding payments due. Or, if you have student loans that will take you 10 years to pay off, you should buy at least a 10-year term policy to ensure that, if you die, the debt won’t get passed to your parents, siblings, partner, or kids.
You Own a Business or Need a Loan
Small business owners may need life insurance for any of the above reasons, but they also have the added responsibility of caring for their business partner and/or employees. There are many types of life insurance that can help business owners in different situations, including key person insurance, a buy-sell agreement backed by life insurance, and more. These business-oriented insurance policies are often purchased separately from other policies that are designed to protect close family members.
Another reason small business owners need life insurance is that many lenders require it before they grant loans. Notably, the Small Business Administration (SBA) usually requires loan applicants to take out a life insurance policy that is collaterally assigned to the bank providing the loan.
Provide a Financial Future or Inheritance for Your Loved Ones
Your loved ones may not have immediate expenses or debt to pay off, but many parents want to leave their children enough funds to pay for important expenses, like college or a wedding. Many people buy term life insurance that will last until their children reach those milestones as a way to ensure that, even if they die early, their children will still be able to pay for these expenses.
Others use whole life insurance as a way to pass on a portion of their inheritance tax-free. The IRS doesn’t usually require the recipients of a life insurance death benefit to report it as taxable income, which makes it a valuable estate planning tool.
Supplement Retirement Income
Whole life insurance comes with a cash value component that can be used during the policyholder’s lifetime. Many people who reach retirement age can withdraw portions of the accumulated cash from their policies and use it as a supplement to their retirement income and enhance their quality of life.
This extra source of income is even more crucial if the policyholder has deteriorating health and requires long-term care or alternative medical treatment that isn’t covered by health insurance.
Finance Funeral Costs and Burial Expenses
The average cost of funeral and burial services ranges between $7000 and $12,000, a hefty sum of money. Small whole life insurance policies are often purchased specifically for the purpose of covering these end-of-life expenses and preventing them from being shouldered by loved ones.
In these situations, whole insurance is preferable over term, since whole lasts an entire lifetime while a term policy may end before the policyholder dies, defeating the very purpose of the purchase. While whole life insurance is usually more expensive than term, when the death benefit is relatively small, the monthly premiums are much more affordable.
Who Should Purchase Life Insurance?
Life insurance should be considered an essential purchase for any adult who has family or loved ones who depend on them financially, or who would pass on significant debt to loved ones in the event that they die unexpectedly. This includes:
- Parents of young children – Who have children that are financially dependent on their salary for basic things like food and shelter
- Parents of older children – Whose children depend on them to pay for college, and other things
- People who are married – Whose spouses would take a financial hit if the other died
- People who are single – Who have children, brothers, sisters, parents, etc. who would benefit from a life insurance payout
- People with debt – College students who have significant student debt, people with mortgages or business loans, anyone with outstanding significant debt that would pass on to their loved ones
- People who don’t have money to cover funeral/burial expenses – Life insurance is often purchased to make sure the cost of burial/funeral expenses doesn’t get passed on to loved ones
How Much Life Insurance Do You Need?
With so many reasons to buy life insurance, making the decision to go ahead with the purchase is easy. What’s harder is deciding how much coverage to get. The amount you need is largely connected to your reason for buying it in the first place — do you need it to replace lost income, get your children through college, cover outstanding debt, pay for funeral costs, etc. Your financial goals will determine this.
If you need life insurance for only one reason, it can be relatively easy to calculate how much coverage to buy. But many people buy life insurance for multiple reasons. For example, if you need life insurance to cover both your mortgage payments and children’s college education, you’ll need to add the cost of both together. And what if you also want to leave enough to cover daily expenses? As you can see, these calculations can get complicated.
Since you’ll be dealing with relatively large figures, we recommend contacting a Sproutt insurance advisor to help you arrive at the right amount of coverage. Buying life insurance is important, but it’s equally important to get enough coverage so that your policy achieves its purpose.
How to Choose the Best Life Insurance Policy
When it comes to choosing the best life insurance policy, there’s no one answer that’s right for everyone. What’s good for your parent, sibling, friend, or neighbor may not be suitable for you at all. The key to determining which life insurance policy is best for you is to assess your situation and your needs. Getting help from qualified, unbiased experts can help ensure that you make the right decision.
While you can always buy more than one life insurance policy, it’s best to aim for the most accurate, affordable coverage as possible your first time around. This is due to the simple way life insurance works: the younger you are when you buy the policy, the lower your premiums will be.
So you can buy a policy at age 30 and then another at age 40, but the second one will be more expensive. The best thing would be to anticipate your future needs as best you can at age 30 so that you can get the most affordable coverage possible (and you can see the average life insurance rates per age here).
Once you figure out which type of policy is best for you, you can shop around for competitive rates. In the past, people were limited to local insurance companies or to getting recommendations from family and friends.
Today, the internet has given us so many more options. While you can always do the legwork of getting different quotes from different insurers, a more efficient option is to choose a trusted insurance platform like Sproutt to gather quotes for you.
Based on the information you provide, Sproutt’s algorithms gather quotes from trusted insurers around the country. If you have any questions, you can contact a Sproutt insurance advisor via phone or email and get unbiased advice. Sproutt is not affiliated with any insurance company, so you know you’re not speaking to a salesperson — you’re speaking to someone who’s trying to get you the best life insurance deal for your particular circumstances.