Insurance 101

Life insurance helps your family get by if you suddenly die. Simply, it is an agreement between you and a life insurance company. You pay them–the payment is called a premium–and they provide insurance coverage.

Simply, it is an agreement between you and a life insurance company. You pay them–that payment is called a premium–and they provide you with insurance coverage.

What is coverage? Think about those who depend on you. If something were to happen to you, what kind of day-to-day or future bills do they have to keep paying? The mortgage? College money for the kids? Having a good idea of these costs helps you figure out the amount of life insurance that is right for you.

Here’s what you need to know:

Term life insurance

• you need to choose how long you want protection for—5, 10, 20 years or to a specified age
• you may renew the policy without a physical exam for the number of years stated in the policy
• as long as you keep up the payments the insurance company will pay if you die
• it does not build or accumulate cash
• the cost goes up as you get older
• if you are still alive at the end of the term, there is no cash value

Whole life insurance

• you are covered throughout your entire life
• creates a savings account for you
• you gain earnings that are generally tax-deferred
• over time, you can build interest, and withdraw funds or borrow against this type of policy (but you will typically need to repay those loans back!)
• costs more than term life insurance; the premiums can be up to 10 times the cost of a term life policy

At its basic level, life insurance is based on how likely you will die in any given time-frame. This is known as your mortality risk.

Here is what impacts your life insurance cost:

Age: As you get older you are a higher risk to insurance companies, so your premium will be more expensive. If you are younger, you can lock in a lower rate for a longer amount of time.

Health: The healthier you are, the cheaper your payments are. Insurance companies will look at your family history and your overall health. Smokers usually pay more than nonsmokers.

Hobbies and lifestyle: Life insurance companies want to know what types of hobbies you have and whether you have a high-risk job or travel to dangerous places.

Gender: Life insurance companies will ask what gender you were assigned at birth. Research shows women live longer than men, so they generally pay less for life insurance than men.

Coverage Amount: You can expect higher coverage costs more.

Term: The longer you are covered, this amount of time is called term, the more you will pay. If you are covered for a longer time, like 20 years, you will pay more than if you had a shorter term, like 5 years.

Type of policy: Term life insurance costs less than whole (permanent) life insurance because it does not have a savings plan as part of it and it only covers you for a set amount of time rather than your whole life.

Having insurance with your employer is great. These policies are good if you need little to no life insurance. Just remember, if your job ends—if you quit or if you are let go—you will have zero coverage because the policy ends too.

We know you don’t want to think about death in your twenties. Life is fun for you now, but life also comes at you fast. Suddenly, you will be 35, living with your partner, and perhaps a kid or two.

If you have no debt, you probably don’t need life insurance. If you have co-signed any kind of debt, like college student loans, credit cards or a car loan with your parents or grandparents, then you are obligated to pay that debt off.

You learned that it is less expensive to have insurance when you are younger. As an older person, are you still caring for dependents, like children or grandchildren?

Here are some reasons to consider purchasing life insurance at your age:

• If your family owns large, liquid estates such as houses, cars and antiques, these may be taxed (estate tax)
• If you are an owner or partner of a small business and have employees
• If your spouse or domestic partner was the breadwinner and dies suddenly, a significant amount of income is lost

It is against the law to buy life insurance on someone without his or her knowledge.