What is life insurance, anyway?

It’s the greatest gift you can give your family. Life insurance is more than a policy with a payout—it’s peace of mind, financial security for the future, and reassurance that the people you love most will be taken care of when you are no longer there to provide for them. Life insurance is highly customizable, and policies offer different benefits and coverage amounts to meet your unique needs.

Why do I need life insurance?

Getting clear about your motivation is an important part of finding the policy that’s right for you. Here are some of the most common reasons why people invest in life insurance.

I have a mortgage.

A home loan is a big responsibility. Even if multiple people contribute to the monthly payments, the loss of one individual could put the others (and any dependents) at risk of losing their home. Life insurance in the form of mortgage protection is essential coverage for yourself and anyone with financial interest in your home loan. People often take out separate life insurance policies in the amount of their mortgage, so other life insurance benefits can be used to support your family. Our mortgage protection calculator can help determine how much coverage you really need to protect your home.

I have a child, or one on the way.

It’s hard to think about not being there for your child, but life insurance is a guarantee that they will be financially secure in the event of your passing. It allows your spouse or the child’s caregiver to meet their needs and support them through adolescence; it can also cover education costs and enable them to pursue higher education. As any parent or parent-to-be knows, the greatest peace of mind comes from knowing your kids will be okay.

I have outstanding loans or debts.

Over the course of our lives, most of us accrue some debt, whether it’s student loans, credit cards, car loans, business loans, or personal loans. Unfortunately, these loans don’t disappear when we die, which means your next of kin become responsible for repayment. Life insurance removes this burden by settling your debts for you.

I want to make sure my family can continue to live their lifestyle.

Our income allows us to live a lifestyle we’re comfortable with. When multiple members of the household contribute to monthly expenses, we calculate our needs based on their combined income. If something were to happen to a contributing household member, life insurance ensures that our loved ones can continue living the life they’re accustomed to. This can help with anything from buying groceries and paying utility bills to creating an estate.

I care for someone with a disability.

People who care for loved ones with special needs often worry about what might happen when they’re no longer there. Life insurance can make sure that your loved one continues to receive safe, quality care, whether that means hiring a new caregiver, moving to an assisted living facility, or making alterations to a home to accommodate their needs. It can also provide for their long-term financial security, medical costs, and more.

I’m self-employed.

Most employer life insurance plans provide insufficient coverage (see below), but they do offer some protection while they’re active. But if you’re self-employed, you’re on your own to build a retirement and benefits package. By choosing your own life insurance policy, you can be sure you’re getting exactly what your family will need.

I own a business or have a business partner.

Life insurance for business owners or principals—also known as key person insurance—can play an important role in your business continuation plan. Whether your business is big, small, or somewhere in between, it pays to have a strategy for the future. In the event of a partner’s death, the key person policy can be used to compensate their surviving family for their loss of income or stake in the business, hire temporary help or plan a successor, and settle business loans.

I want to cover my final expenses.

Depending on your location and preferred arrangements, funeral, cremation, or burial costs can range from around $7,000 to $20,000 or more. Life insurance is an easy way to ensure that your loved ones will not face financial stress while they’re grieving.

What are the different types of life insurance?

Life insurance policies fall into two major categories: term and whole life. The one you choose will depend on your needs, goals, and financial situation.

What is term life insurance?

Term life policies provide a guaranteed benefit and offer coverage for a designated time period—typically 10, 20, or 30 years. These policies are a great entry-level option because they include lower premium costs and flexible coverage amounts. If your needs change or your term is coming to an end, you can convert your policy to a more permanent option.

Here are some real-life examples of customers who chose term life policies.

Sam, 30, decided to get life insurance when he got engaged. Because he was in the process of saving for a home, he didn’t have a lot of money for monthly premiums, but he also wanted to be certain that his fiancée (and their dog!) would be secure if something happened to him. Sam chose a $100,000 20-year term policy that fit his budget, and says he plans to switch to a more permanent option when he has more assets to protect, like a home and kids.

Mila and her spouse recently bought their first home. They’re both employed and contribute to the monthly mortgage payments, but they realized that if something happened to either one of them, the other would not be able to make those payments on their own. Mila began looking into term life insurance, taking their mortgage amount and budget into account. She determined that a $250,000 30-year term policy for herself and her spouse would protect their home and provide peace of mind.

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What is whole life insurance?

As the name suggests, whole life insurance policies never expire—they remain active for your entire life, no matter how long you live. A whole life policy provides a guaranteed death benefit that can vary depending on how you contribute to it. They also accumulate cash value, so you can think of a whole life policy as something like a savings account. Your premium payments contribute to the policy’s cash value, so that value grows over time and can be drawn upon as needed before you die. The cash value offers a guaranteed rate of return, which is tax-deferred until withdrawal.

Universal life insurance is a type of whole life insurance. The big difference is that the policy’s cash value is tied to current interest rates, and you can make adjustments to both the death benefit and the policy limits. With a universal life policy, you can use your cash value to make premium payments as long as minimum requirements are met to keep the policy active.

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Why should I get a separate life insurance policy? I have one at work.

Employers may offer life insurance through the company’s group plan. These policies usually provide a fixed amount of coverage based on your salary—and that amount is almost always insufficient to cover your family’s long-term needs. Furthermore, most employer-sponsored life insurance policies are not portable: If you retire or change jobs, you lose your coverage. Since most of us plan on surviving past our current job, it’s important to choose a policy that will remain active no matter where your career takes you. Also, if you pursue life insurance after retirement, it may be expensive or harder to obtain because of advanced age.