Life insurance is one of the most important financial instruments you can buy to protect your family if you die. When you purchase a life insurance policy, you can rest assured that if the worst happens, your beneficiaries receive a sum of money (called a death benefit) to cover expenses like the cost of your funeral, the mortgage on your home, any outstanding debts you might have, and even regular living expenses. Understanding the basics of life insurance helps you decide what type of policy makes the most sense for you.
There are two basic types of life insurance: term life and permanent life. Although term life insurance is simple and inexpensive, it will only cover you for a specified period of time, ranging from 10 to 30 years, often with the option to renew it after the term expires. If you die within that time, your beneficiaries will receive the death benefit, but if the term expires and you’re still alive, the policy generally ends without any payout. Term life is a good option for people who want coverage for a certain period, such as while raising children or paying off a mortgage.
With permanent life insurance, you can stay covered for your entire life and the premiums include a savings component called cash value that grows over time. These permanent policies, such as whole life or universal life, are more expensive than term policies, but you get additional benefits, like borrowing against the cash value as you age or even using the cash value for future financial needs. Premiums for permanent life insurance tend to be higher than term life insurance, but they remain level over the policyholder’s lifetime.
The amount of life insurance you need depends on your income, how much debt you have, how much you need to live on, and your own future financial goals. Some financial experts say that you should purchase a policy equivalent to 10 to 15 times your annual salary, but this can change based on your situation.
If you have any children or anyone else that might be financially dependent on you, or who would struggle to pay off your debts or meet other expenses if you died, then you should have life insurance. Your dependents will face financial hardship if you die, so you need to make sure that they are covered – and that you don’t leave them with any financial worries.
