Sometimes, getting to a good place with your finances means thinking about things you’d rather ignore. Like, well, death. And what will happen with your finances once you’re gone. But it’s an eventuality that everyone has to consider, especially where our family and other dependents are concerned — and that’s where life insurance comes in.
If you opened this article, you probably have a general sense of what life insurance is for: It’s a promise of money for those you leave behind if you die. But you might be surprised to learn that it can cover a lot more than that. And that getting it might be a good idea, even if the only one you’re financially supporting is yourself.
What is life insurance, exactly?
Life insurance is insurance that hinges on either the death of the insured, or the end of a set period of time. It’s designed to ensure that the people who relied on you in life will be OK after you’re gone, and that your financial obligations don’t become someone else’s burden.
Life insurance comes in several different flavors. These are the main three:
Term life insurance covers you for a set period of time. It covers your beneficiaries if you die within that time period (the “term”) — and that’s it. The policy expires once the term is over, or you may have the option to extend it (aka renew) at a higher monthly payment (aka premium). It’s common to buy “level” term life insurance, which means your premium would stay the same during the term and then can change once the term expires.
Whole life insurance is a form of permanent life insurance. It covers you until you die, no matter when that may be. It usually costs more than term life insurance, and the payments will often stay the same (a “scheduled fixed” type of premium), although not always. A whole life insurance policy’s premiums not only go toward the cost of your policy, but also build up a “cash value” — an amount housed in a tax-deferred account that grows over time, and that you can borrow against. (It may even pay dividends, depending on the company.)
Universal life insurance is another type of permanent life insurance, with elements of both term life insurance and whole life insurance. Like whole life insurance, it includes a cash value that grows in a savings-like, tax-deferred account, and you can borrow against it. But like term life insurance, it also comes with flexible premiums, which will likely increase as you get older.
Do I actually need life insurance?
By now you might be thinking, “This seems more complicated than I have the bandwidth for. Do I really need this? Can it wait?” I get it: It can definitely be overwhelming (and discouraging) to deal with a future financial hypothetical, especially one that you won’t be around for!
But if any of these criteria apply to you, it’s definitely worth considering.
If you have children or other dependents. The first thing you probably learned about life insurance is that it’s for people with kids or a spouse who want to make sure they’re supported even after they’re gone. This is true, but it goes beyond children: Life insurance policies can help cover the needs of other dependents you may not have thought of yet, like siblings, parents, friends — even pets! — and be used for big costs like college, living expenses, and mortgage payments.
If you (or your loved ones) don’t have much savings. Allow me to be a little blunt on this one: If you don’t have much money saved when you die, someone else will likely have to foot the bill for your funeral and burial expenses, which can average $7,000–10,000 in the US. You can make sure your memorial costs are taken care of with life insurance.
If you have private student loans, or any type of loan with a cosigner. Not-so-fun fact: While federal student loans are forgivable upon the borrower’s death, many private loans are not. If you die before you pay off a private student loan, your estate — that is, whatever savings or assets you had when you died — must be put toward the balance you still owe (which means less, or nothing, left over for your loved ones). Also, if you have a cosigner, whether the loan is federal or private, that cosigner will be on the hook when you die. Life insurance can ensure those debts don’t get passed on to the beneficiaries of your estate.
If a life-threatening disease or illness runs in your family. If this is the case, do your research ASAP. If you wait until you potentially start showing symptoms, your premiums will be much higher — if you can even get covered at all. One silver lining here is that you’re in the position to start estimating any expenses that could arise. Hospital bills, funeral costs, and the like can add up in the wake of a person’s passing. Life insurance can help cover those costs.
If you’re a business owner. What will happen to your business if something happens to you? Your employees? Clients? Partnerships? Who will take over the business? A life insurance policy can take care of any and all costs and expenses that stem from the transition.
If you have a large estate. If you have a lot of assets that will need to be divided upon your death, a life insurance policy can help offset the cost of executing an estate plan.
Basically, life insurance can cover pretty much anything that you might want or need to pay for in the event of your death. It’s a way of clearing your balance(s) for others, and of ensuring the people who care about you can mourn your loss without having to also worry about the money part.
Is there anything I should know about life insurance before taking out a policy?
Regardless of what kind of policy you get, most life insurance will require a medical exam to help them calculate your premiums, based on your physical health. Yes, this can be super intrusive, and yes, the metrics around “insurability” can be just as messy (and unfair) as any health insurance coverage. But the provider will probably cross-reference your application and exam with your existing Medical Information Bureau file, so definitely be honest.
Another (frustrating) word to the wise: If you have a uterus and are considering having kids, apply for a life insurance policy either before you get pregnant, or after you’ve given birth (wait a few months for your body to normalize). Medical evaluations will take into account stats like your weight and blood pressure, which can fluctuate wildly from your typical levels while you’re pregnant. And unfortunately, insurance companies are going to calculate your premium based on the results at the time of the exam, which means that, yes, being pregnant at that time can negatively impact your long-term insurability.
How much life insurance should I get?
There are a couple of ways to calculate how much your life insurance policy should be worth. The most popular:
Your salary: The most common way is also the quick-and-dirtiest way, but for most people, it’s accurate — just multiply your current salary 7–10 times.
Capital needs: Add up every expense you deal with now. How many years of income replacement will your beneficiaries need? Then ask yourself: How much do you want to set aside for loved ones’ educations? Do you have debt to pay off? Would they need to pay someone for the unpaid work you do, like childcare, cooking, cleaning, or landscaping? How much will your funeral and burial cost? Add them to the total.
Human life value: Not the value of your life (which is priceless), but the value you’d bring in over the course of your life: Add up whatever you would have made in income (and again, the value of the unpaid services you perform for your family) from now until your retirement, and subtract the 20–40% you would have paid in taxes.
How do I choose a life insurance policy? What should I be looking for?
As with any insurance, choosing a life insurance policy can be fraught. There are a lot of options out there, with different criteria and rules to contend with. It can help to use a site that lets you compare different policies alongside one another. Here at Ellevest, we like to point people to Policygenius — a women-led online marketplace that allows you to compare all kinds of insurance policies, including life insurance, based on your specific needs and circumstances.*
The life insurance decision-making process might be stressful (and uncomfortable), but it doesn’t have to be confusing. Knowing all your options will give you control over the process. And like all the financial health decisions you’ve made, once it’s done, you’ll feel much better about the future — both your own, and that of the people (and pets) you care about.
Ellevest is a paid partner of Policygenius. Policygenius Inc. (DBA Policygenius Insurance Services in California) (“Policygenius”) is a licensed independent insurance broker. Policygenius receives a commission from insurance companies for the insurance policies it sells. Products may not be available in all states.
Ellevest may receive compensation from third party partners for referring you to such partners for non-investment consumer products or services. This marketing partnership gives Ellevest an incentive to refer you to these partners instead of businesses that are not partners of Ellevest. This conflict of interest affects the ability of Ellevest to provide you with unbiased, objective promotions about the products and services of its business partners. This could mean that the products and/or services of other businesses that do not compensate Ellevest may be more appropriate for you than the products and/or services of Ellevest’s business partners. However, you are not required to purchase the products and services that Ellevest promotes.
Ellevest is not affiliated with these third party partners and does not provide, nor does it guarantee, any third-party product, service, information or recommendation. Claims provided herein were provided by these third party partners and have not been independently verified by Ellevest. The third parties providing these products or services are solely responsible for them, as well as all other content on their websites. Ellevest is not liable for any third party’s failure with regard to those advertised products, services and benefits. These advertised products and services may not be FDIC insured or bank-guaranteed, may be subject to a different privacy policy than Ellevest, and may not be available in all states. You should check individual offers, products and services to become familiar with any applicable restrictions or conditions that may apply.
© 2021 Ellevest, Inc. All Rights Reserved.
*Ellevest is a paid partner of Policygenius. Policygenius Inc. (DBA Policygenius Insurance Services in California) (“Policygenius”) is a licensed independent insurance broker. Policygenius receives a commission from insurance companies for the insurance policies it sells. Products may not be available in all states.
Ellevest may receive compensation from third party partners for referring you to such partners for non-investment consumer products or services. This marketing partnership gives Ellevest an incentive to refer you to these partners instead of businesses that are not partners of Ellevest. This conflict of interest affects the ability of Ellevest to provide you with unbiased, objective promotions about the products and services of its business partners. This could mean that the products and/or services of other businesses that do not compensate Ellevest may be more appropriate for you than the products and/or services of Ellevest’s business partners. However, you are not required to purchase the products and services that Ellevest promotes.
Ellevest is not affiliated with these third party partners and does not provide, nor does it guarantee, any third-party product, service, information or recommendation. Claims provided herein were provided by these third party partners and have not been independently verified by Ellevest. The third parties providing these products or services are solely responsible for them, as well as all other content on their websites. Ellevest is not liable for any third party’s failure with regard to those advertised products, services and benefits. These advertised products and services may not be FDIC insured or bank-guaranteed, may be subject to a different privacy policy than Ellevest, and may not be available in all states. You should check individual offers, products and services to become familiar with any applicable restrictions or conditions that may apply.
The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person.
All opinions and views expressed by Ellevest are current as of the date of this writing, for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.
Information was obtained from third-party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.
Ellevest Membership fees are as follows: Ellevest Essential is $1 per month, Ellevest Plus is $5 per month, and Ellevest Executive is $9. Other fees as described in Ellevest’s Wrap Fee Program Brochure and the Ellevest Membership Terms and Conditions Agreement will continue to apply.