If youâre like most American adults, chances are high that youâve heard of life insurance and know that itâs something you need. But what is it exactly, and how does life insurance work?
Life insurance is a way for you to leave money to people you care about in the event of your death.
At its basic level, it’s an agreement between you and a life insurance company. You agree to pay them and in turn, they provide you with insurance coverage. You can think of it like a subscription service: as long as you pay premiums, you’ll be covered.
Covered for what? Well that really depends on you. Maybe you want to make sure your spouse will be able to pay the mortgage, no matter what happens to you. Maybe you want your kids to afford college. Or you might simply want to make sure your people will be ok paying day to day bills if you’re not around to provide for them.
No matter your goal, the right kind of life insurance should be a simple and affordable way to reduce the risk of getting there.
Since there’s little to no chance they can support themselves on their own, they’re often the #1 reason to get life insurance. And that’s not to mention that even when they’re screaming and fighting over toys, the last thing you want is for them to go without. So regardless of your answers to any of the other questions here, if you’ve got kids, this may be a good time to get life insurance.
Terms to Know
Premiums: The amount of money you pay in exchange for coverage.Â
The coverage amount (also known as face amount, death benefit, or payout): The amount of money that goes to your people (beneficiaries) if you die. You set it in advance when buying a policy, and it passes to them tax free.Â
Beneficiaries: The people who will receive the coverage amount.
The term: The lenght of time your policy will be in effect for â usually 10, 15, 20, 25, or 30 years, but you can also choose to be covered for your entire life, depending on the type of insurance that's right for you.
Filing a claim: The process by which your beneficiaries can claim the coverage amount if you die.
Whether youâre married or merely living together, romantic relationships are much more than just romance. You share responsibilitiesâmaking dinner, walking the dog, watering the plantsâand you share expenses. Depending on how much of those expenses are shared, losing one personâs income could cause a financial hardship.Â
How Does Life Insurance Work?
Life insurance works like a subscription model: as long as you pay premiums, youâll be covered. That means your beneficiaries should receive money (tax free) if you die, but itâs worth noting that claims can be denied for various reasons, like fraud or material misrepresentation (basically, not being honest on the application or the claim).
The amount youâll pay in premiums depends on three big factors:
- Your personal characteristics (age, health, gender, etc.)
- The type of life insurance you choose, primarily between term and permanent
- The coverage amount/size of your policy (how much money you want to leave your beneficiaries)
Question #4: Do you have debt?
That responsibility doesnât stop there, though. You donât want credit card balances, college loans, and the aforementioned mortgage to be your legacy. But like it or not, they wonât be magically erased after you die. Your survivors will probably be taking on whatever debt you hadnât paid off.
In this sense, debt is the first order of business for life insurance. While creditors may give your survivors some leeway in paying off your debt, the compassion of collection agencies will only get them so far. Regardless, the hassle and stress that come with handling debt isnât something youâll want on their plates.
If you answered yes to any of these questions, the time to think about life insurance may be now. Any of these four factors on their own likely means significant expenses for your survivors. Even if youâve got a sizable chunk of assets to pass along to them, theyâll still be missing out on your normal income. Besides, having the money they need means they wonât have to make financial decisions in the short term that may harm them in the long term.
None of the above? Earlier is still better
So what if you answered no to all of the questions? You still might want to get life insurance, and itâs all about two factors that go hand in hand: your youth and your health.
The not-so-secret secret about life insurance is that all other things being equal, the younger you are, the lower your premiums may be. After all, it makes sense. A 25-year-old will likely outlive a 20-year term policy. A 65-year-old? Not quite as likely. You can expect life insurance to be priced accordingly.
But you arenât throwing money away by getting a life insurance policy at 25. Youâre locking in a significantly lower premium that will come in handy as the need for that policy grows. As anyone whoâs lived past their mid-20s will tell you, life changes can come at you fast and furious.
Marriage, kids, and a mortgage might not be in the cards for everyone, but if you wait until they appear, youâll pay more for life insurance. Thatâs all the more reason to get life insurance sooner rather than later. Think of it as insurance against the rising cost of insurance.
Then thereâs your health. As your health risks rise with your age, so too will your premiums. Again, itâs a straightforward risk/reward measurement for the policy writer.
Say youâre a healthy female non-smoker, 5â 6â, 130 lbs., with a preferred plus rating, and looking for $1,000,000 of coverage for 20 years. According to our life insurance coverage calculator, youâll pay $34.50 per month if you start a policy when youâre 25. Wait until youâre 45, and you pay $91.80 per month, 166% more. In other words, starting a life insurance policy earlier is one of the few things in life youâll find that has the potential to protect you from the effects of aging.
If, on the other hand, you feel like there are too many unknowns to commit to life insurance right now, thereâs another approach. Instead of using your age as a guideline, you can always decide when you hit a milestone. In other words, evaluate your life insurance needs when you buy a house, get married, or start having kids. Nothing helps put your long-term needs into focus like these kinds of life-altering changes. And for the already insured, theyâre a great time to reassess your coverageâsomething Ladder helps you do easily thanks to our flexible coverage, which allows you to automatically decrease or apply to increase your coverage whenever you want, as many times as you want, with no fees to do so. Your premiums will decrease or increase accordingly.
So is now the right time for you? Start your life insurance application with Ladder today to get the personalized, flexible coverage you need.
Ladder offers term policies in New York (policy form # MN-26) that are issued by Allianz Life Insurance Company of New York, New York, NY. Term policies are issued in all other states and DC by Fidelity Security Life Insurance CompanyŸ, Kansas City, MO (policy form No. ICC17-M-1069, M-1069 and Policy No. TL-146). Ladder California license number OK22568.
