You probably won’t think about life insurance much as a young adult. Many individuals only decide when they marry, buy a home, or have children. Now they have a reason to think about what will happen to their family if something should happen to them. It’s natural to want your spouse and kids to have financial security and for them to stay in their home if you should die unexpectedly.
There are two main types of life insurance; term and whole life. Which type of policy you ultimately select will depend on a variety of factors, including your finances, how long you want coverage to last and whether you want to use your policy as an investment vehicle that builds cash value.
Term Life Insurance
Term policies are the more affordable option. You choose the length of your coverage, usually anywhere from five to 30 years. If you pass away during the term, your beneficiary receives the full monetary value of your policy. If you outlive the term, your beneficiary gets nothing when you die.
Term policies are ideal for people with shorter term financial obligations that they don’t want to burden their family with if they should die too early. For example, many individuals choose term policies so their spouse can pay off the mortgage and cover daily living expenses with just one income. People who choose term policies often assume if they survive the term, they will have already paid off their home and the surviving spouse will have a sufficient income from social security and any pension plans they have.
Whole Life Insurance
Whole life coverage lasts until you die as long as you keep paying the premiums. No matter when you die, your beneficiary receives the same death benefit. It’s the more expensive option because the insurance company knows you die at some point, unlike term policies where they bet that you will not die during your coverage term. Unlike term policies, whole life insurance policies build cash value, which you can borrow against or cash out.
Whole life policies are ideal for individuals who want to provide an inheritance for their children. It’s also ideal for people with children who may have a disability that requires lifelong care. A person with a younger spouse may also want to ensure their husband or wife is financially comfortable after they pass. Philanthropic individuals may also choose to leave all or part of the death benefit to their favorite charity.
There are other types of life insurance policies, including accidental death insurance which only pays if you die in an accident or lose a limb. Most lenders also offer mortgage or other loan life insurance policies. You don’t choose your beneficiary with these policies; all benefits go to the lender to pay off your obligation.
An insurance agent and/or a financial planner can help you choose the right policy that meets your specific needs and fits into your budget. You should also review your policy after any major life change, such as buying a vacation home or having another child, to ensure your survivors’ needs will be met.
