“Life insurance? Do I look like I’m turning into my parents? You’d tell me if this vest was too Mr. Rogers, right?”
Grandpa-style isn’t for everyone, but life insurance is. Don’t scoff, you knew where that sentence was going.
If you’re young and healthy, you’re probably wondering why on earth you’d need life insurance. “It’s pricey! I’ll never reap the benefits! Serious diseases don’t run in my family!” Truth is, life insurance is a major component of an estate plan- and now that you’re getting married or thinking about starting a family, it’s something you need to consider.
Life insurance works like your home or car insurance- you sign a contract with an insurance company and pay them a monthly premium. In exchange, the insurance company pays out a lump sum if you pass away while holding the policy. Depending on your needs, that lump sum can vary- you’ll want to account for funeral expenses, repayment of any debts, and loss of your salary for a set time period.
Unlike many other insurance terms, these policies are exactly what their names suggest:
Term Life Insurance: A policy that covers a specified time period- like 10, 15, or 20 years- and generally features cheaper premiums than whole or universal life insurance. Once that period is over, you can always renew, though the renewed premiums can be pricey. You can also ‘ladder’ policies- buy a 30-year policy to start, for instance, and ladder on a 10 or 20 year policy to extend your coverage or give yourself a cushion when your children are living with you.
Whole Life Insurance: A whole-enchilada policy that provides lifetime- or as insurers call it, permanent- coverage. A portion of your premiums go into an interest-earning, tax-deferred account, and you have your choice of receiving cash dividends from this account, building the interest, or applying dividends to your monthly premiums. Not a bad feature, right? That’s also why whole life insurance is the most expensive kind, but you have greater peace of mind having it. If you miss a payment, however, you risk losing the entire policy.
Universal Life Insurance: A more flexible permanent insurance policy. Just like whole life, universal features a tax-deferred investment component along with your insurance. But after you make your first premium payment, you have the option to increase or reduce your death benefit as well as change up your premiums over the lifetime of your policy. You can pay more up front or skip payments if you run into financial trouble.
Whichever policy you choose, you’ll also designate an irrevocable or revocable beneficiary. An irrevocable beneficiary can’t be removed from your policy. You might be thinking, “This is what puts the permanent in permanent life insurance!” And an irrevocable beneficiary sure is permanent- so you better be sure your beneficiary is ride or die. Life insurance is a topic that also gets hashed out in a prenup for this reason. Most policyholders who choose an irrevocable beneficiary usually name their children.
With a revocable beneficiary, you can switch up who receives your life insurance benefits after you pass away- useful for most families since, well, life changes. As with other aspects of estate planning, you can name a contingent beneficiary in case your OG beneficiary passes away before you do.
Life insurance is not just a part of responsible adulting; it's part of being a responsible partner and parent. Or as Mom or Dad hollered at your some point during your teenage years, "It's not all about you!" And if you heard "Take that sweater vest off and go to your room," maybe they were right about that too.