The Beginner’s Guide to Buying Life Insurance

Thinking of buying life insurance?  You’re not alone. People have many questions when they are considering life insurance for the first time and Ladder is here to help. Check out our answers to some of the most common questions about life insurance in the guide below, so you can get informed and get on your way to finding the solution that is best for your family.

 

Who needs life insurance?

If you have a partner, children, or elderly parents who depend on you for financial support, then purchasing life insurance to provide them with a financial safety net and stability is a smart move. It’s also a good idea to get life insurance if you have any co-signed debt, such as student loans or a mortgage, that would transfer over to another person in the event of your death.  Many people assume single people don’t need life insurance, but if you expect to have financial dependents such as kids, elderly parents, or siblings, and you don’t want to leave them your debt, it’s a smart idea to buy life insurance.  Plus, buying insurance when you are younger and healthier can get you a better rate.

How does life insurance work and what does it cover?

At a basic level, you pay a monthly amount (called a “premium”) when you buy life insurance, in exchange for a life insurance contract (called a “policy”) which names people (“beneficiaries”) who will receive a payment (called the “benefit”) from the insurance company if you pass away before the end of the term (the “expiration date”).  Life insurance benefits are generally paid in full, tax-free, in one lump sum, no matter how long you’ve had your policy (as long as the term has not yet ended).  This payout can be used by your family to help them stay in their community of friends and cover living costs while they adjust to life without you. These costs might include things like paying rent or mortgage payments, paying for child care or other domestic help, paying for children’s future college expenses, and providing ongoing financial support for a partner, among other things. (We’ve also had people want to cover the cost of cryogenics).  The money can also be used to pay the estate taxes that a family must pay in order to inherit assets, or to settle any unpaid medical bills, taxes, or co-signed debt that would otherwise transfer over to your co-signer.

What kinds of life insurance are available out there?

There are many different kinds of life insurance products available today. They generally break down into two main categories: term policies and cash-value policies.

Term policies are a popular choice for many Americans because they are pure insurance.  They have low monthly payments and have a straightforward structure that pays out if you should you pass away within the term of your coverage. Term policies can typically be purchased for durations of 10 years, for to up to 40 years. Term life insurance is an especially great option if you want coverage mainly while your children are young (or while your aging parents might need extra help).

Cash-value policies (also called “whole-life”, “universal-life”, “variable-life”, “endowment-life”, and there are even more names) are more complex, because they involve both the pure insurance component of a term policy plus an additional investment component. They are usually many multiples more expensive than term policies for an equivalent amount of coverage. These kinds of policies last as long as you continue making payments, so they can last a lifetime. Payment can vary quite dramatically based on underlying investment performance as well as the ‘cost of insurance’ or ‘mortality experience’ involved, which can also change over time.  For instance, the cash-value that starts to build in a policy, starting usually in years 3-5, can then be borrowed back from the insurance company at modest interest rates. There can also be penalties or charges for withdrawing cash in the earlier years.  

Some people don’t mind paying higher monthly payments for a cash-value policy and like a bundled insurance/investment product. However, many people like keeping their insurance and investment products separate, and prefer using the money saved by purchasing a term policy for other purposes –  for instance, creating a life full of memories with their families, or saving for retirement or an awesome trip.  

How much life insurance do I need?

The easiest way to tackle this question is to consider how much debt you have (eg. mortgage, loans, credit card balances) and how much financial support you’d like to provide for your family (eg. funding for housing, living expenses, school tuition) — then subtract your current savings and assets.  This gives you the total amount of money your family would require to maintain its current lifestyle if something were to happen to you. This is the coverage amount you need.

The amount of life insurance a person gets depends on that person’s financial situation and risk tolerance.  If you are a two-person household, it’s a good idea to talk to your partner about how much life insurance coverage each of you should buy, and who covers which expenses in the household.  That way you’ve clearly identified how much coverage each person needs, such that if something happened to one person, the other would have adequate financial support to cover basic living expenses for the family.  An extremely helpful way to assess how much life insurance you might need is to use a quick and free needs calculator and see what feels right for your budget and life situation.  For more information on this topic, check out this post on our blog.

How long should my term life insurance last?

There are a few factors to consider when determining for how long you should have life insurance coverage (also called the “term” or “policy length”).  If you have a mortgage, start by looking at when your mortgage term will come to an end.  Also look at what year your last child will graduate college and when you plan to retire. It makes sense that your policy should last at least through all these events.

You’ll also want to consider your own savings. If you are a big saver, you may need insurance for a shorter term, as you may eventually have your own money to rely on instead of needing insurance coverage for your family if you pass away.

Lastly, cost is also a consideration when evaluating the length of your life insurance coverage.  Longer terms are a bit more expensive per month than shorter terms in level-price term life insurance, because the insurance company is guaranteeing the same price during the entire period. We believe it makes sense to get what you can now, then apply to layer in additional coverage with Ladder, as you’re able to, later on. There is no penalty for cancelling early so opting for a longer term can provide a lot of future protection flexibility for a very small cost.

How often should I revisit my life insurance needs?

Some companies suggest that once you select your life insurance policy, you should never have to think about it again.  At Ladder, we look at things a little bit differently and like to provide insurance that you can adjust as your life needs change, potentially saving you money.

Life is dynamic, and as it changes your coverage should change too, so that your life insurance addresses what you need at each stage of your life. So, for instance, if you have another child, purchase a home, or incur new debt, it could make sense to apply to increase your life insurance coverage a bit to account for these things. On the flip side, if you pay off your mortgage, a child graduates from college, or if you’re able to inherit/save a large amount of money and no longer need an additional financial cushion for your family, these are reasons to ladder down your coverage, and consequently, your monthly payment.

What happens when my term life insurance coverage ends?

At the end of your policy term (should you make all the monthly payments), your life insurance coverage ends. By this point you may no longer need life insurance and so you can stop both the life insurance and any payments.  If your children are grown, you’ve saved for retirement, and your biggest financial commitments are already behind you, you may no longer need the coverage.  But if you are interested in renewing your coverage you can price out a new policy or perhaps continue making payments by renewing your policy, (although these renewal payments could be significantly more expensive).

When’s the best time to get term life insurance?

The simple answer is sooner, rather than later.  When you are young and healthy, you are a lower risk to insure, so your monthly payments tend to be less.  Getting life insurance early helps you ‘lock in’ pricing when you’re young and healthy since term life insurance offers a guarantee that your monthly payment stays the same throughout the term of the life insurance coverage.  This could provide a more affordable life insurance payment that will last for the entire term of your policy and could actually save you money over time.

Also with Ladder, after you purchase your policy, you can apply to ladder your coverage up or down, over time, and based on your needs, as life evolves.

How much will my term life insurance cost each month?

Your monthly payment is the result of a custom calculation that takes into account your age, health, and sex, as well as the term and value of your desired policy. Take a few seconds to get a free quote to see how affordable it could be.

I already have life insurance with my employer – isn’t that enough?

You might think the life insurance provided by your employer is enough, but oftentimes it is not. Many people are surprised to learn that the life insurance included as part of their benefits package can be only 1-2 times their salary, while you may need 5-10 times your salary in coverage, or even up to 15-20 times your salary, especially if you’re a young family, just starting out.

In short, the life insurance that an employer provides is usually not enough for the long-haul, so it’s a good idea to take out a second policy to ensure your family’s full protection. Many people are actually surprised to discover that the life insurance through their employer ends immediately upon leaving their job. Having your own insurance, outside of the insurance provided by your employer, also provides you with the security of extra coverage should you leave your job, losing access to that particular benefit.

It’s also worth noting that most people don’t plan to retire from the same company they work for today, and not all employers offer life insurance benefits.  When you consider this, and also keep in mind how much more it can cost to purchase life insurance when you are older, it’s usually a wise move to choose to own your life insurance directly and to get it while you are young. Read more about this topic here.

Does my stay-at-home partner need life insurance too?

While your stay-at-home partner may not be working a full time paid job, the amount of work he or she is doing is invaluable, so life insurance can be a good idea.  Your stay-at-home partner likely provides all kinds of unpaid work that keeps your household running, and it can be expensive to hire external help for childcare, housework, and managing household finances, should you find yourself in the unfortunate circumstance where you need to. For these reasons, it’s a wise decision to insure both adults in your household, regardless of whether they bring in income, or not.

Convinced and ready to consider your life insurance options? Follow these simple steps:

  1. Understand how much coverage you need. The best way to estimate your coverage is to use a life insurance calculator and answer a few quick questions. It only takes a few seconds and it’s extremely helpful to see how cost effective life insurance can be.
  2. Get a quote. Request a free, no-obligation quote in seconds. It will show you how much you could expect to pay each month for coverage.
  3. Get covered. If the estimated monthly payment works for you, the process to apply for coverage can take less than 10 minutes.  Once you complete it, Ladder always gives you an instant decision. If you accept an offer, coverage will begin immediately and you can cancel your policy at any time, no questions asked.  Also worth noting is that Ladder’s life insurance is dynamic — so you can apply to ladder your coverage (and payments) up or down as life evolves and your needs change.  

Life insurance is an important piece of your family’s security.  Spending a few minutes now to set up the right coverage for your needs will enable you and those you love to focus on what you love most, so you can get the most out of life and all it has to offer.