Life insurance is one of the most important ways in which we can protect the people we love. Many people don’t think about getting life insurance until they’re in their 40s and 50s, but that’s not because they don’t need it earlier. The struggle younger people often face is being able to afford this type of protection.
Who Benefits from Your Life Insurance?
Anyone who provides financial support for a partner, children, parents or even friends needs life insurance. This is why you’ll often see new parents getting their first life insurance policy. There are all sorts of family dynamics that might rely on your income to stay afloat. Who are just a few of the people can you protect with life insurance?
- Older parents you support
- Children, whether you’re married or not
- A stay-at-home parent
- A partner you live with
- Your spouse
- A special needs child
- A sibling you’re helping pay for college
- Your business partner
- Someone you cosigned a loan or other debt with
- The person who would be paying for your funeral
- Even a charity you help support
How Does It Work?
Life insurance is pretty simple. With a term life insurance policy, you simply select your beneficiary — the person you want to receive the benefit. The “term” part of term life insurance means that the policy is effective for a certain amount of time. This is similar to most other types of insurance where you pay monthly for your plan, like car or pet insurance. If you pass away while your life insurance policy is active, your beneficiary is paid the full benefit in a lump sum. They can choose to spend or save it however they see fit, so you don’t need to worry about limitations on what it can be used for.
Common Uses of Life Insurance Benefits
Like we mentioned above, there aren’t any limits to how life insurance benefits can be used. However, there are some common things people pay for using that money. Keep in mind that this isn’t a complete list. Every person has different needs and a unique situation.
- Rent or a mortgage
- School costs
- Assisted care for parents
- Necessities for children
- Regular bills
- Funeral expenses
- Hospital bills
- Support for special needs children
- Paying off shared debt
- Business expenses
- Child care and daycare
- Charitable contributions
When Would Your Life Insurance Payout Happen?
Your life insurance payout only triggers upon your death. It’s crafted specifically to protect you and your loved ones when you’re gone. That’s why it’s important to make sure your beneficiary knows about your policy.
Choosing a Policy Length for Term Life Insurance
Think about how your loved ones would pay for things if you passed away. The first costs are often for a funeral service, but it goes so far beyond that. If you shared a mortgage or rent with your partner, they’re likely going to struggle without your income. That’s true whether you’re dating or if you’ve been married for 10 years. If there are kids in the mix, they may have lost their primary caregiver.
So, term life insurance is meant to protect you during those times in life when your loved ones need it most. If you were to pass away today, who would be left struggling financially? When considering a term length for your policy, you just need to think about who you’d like to protect. Common term lengths are 10, 15 and 20 years.
For families with children, they often want to make sure that they have coverage to the point where their kids can be financially independent. Remember that even if you weren’t planning to help them pay for college, you may still have wanted to co-sign student loans for them. If you’re not around for that, you might want to extend the length of the policy to cover those extra few years.
Many people have built a life together with a partner or spouse and want to protect them from having their life completely upended. If you have a mortgage, think about how many years are left on it. Couples will sometimes plan to have a term life insurance policy that ends around the time when they tap into their retirement savings.
If you’ve gone into business with someone, think about how they’d be able to manage it alone.
Choosing the Right Amount of Coverage
Now that you know who you’re protecting with this life insurance policy, you can think about how to choose the amount of coverage. A quick calculation is to take the term of the policy — let’s say 10 years — and multiply that by your annual salary. That gives you an idea of what you might need to replace if you’re not around to support your loved ones. Remember, you can list multiple beneficiaries for your policy as well. That way, you can continue to support the different people who may need it.
If your loved ones relied on certain benefits through your job, such as health insurance, you’ll want to make sure to add that in. A fee-only financial advisor can help if you have any questions.