3 things you should know about life insurance if you're buying a policy for the first time
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- Shopping for life insurance can be confusing if you don't speak the "language."
- Financial planner Spencer Betts says there are a few basics to know before making a decision.
- Start with the term "beneficiary" — that's the person who gets the payout if you die.
In 2021, Deloitte reported that 102 million Americans, or 40% of the adult population, either don't have life insurance at all, or don't have enough coverage to meet their family's needs if they die.
Life insurance is a contract between you and an insurer where the insurer promises to pay your beneficiary, such as your spouse, children, or siblings, after you die.
It can be terrifying to choose a life insurance plan for the first time, since it involves thinking about the needs of your loved ones after you die. But financial planner Spencer Betts says understanding three key points can help you choose the right life insurance plan for you.
1. The beneficiary listed on your life insurance policy will get your benefits, not your next of kin
When choosing your life insurance plan, you can choose one or more beneficiaries. A beneficiary is the person who receives the payout from your policy after you die; it will not go to your next of kin if they're not listed on your policy.
Betts says, "Realize that this is a legal contract. If you get married or divorced, you need to make sure you update that document. The life insurance company does not take any sort of discretion on who to give the money to. Whatever is written on that form, that's where the money has to go."
2. Know the difference between term life and whole life insurance
Term life insurance typically lasts for 10, 20, or 30 years. If you die during that period, your beneficiaries will get your payout. It's the most affordable kind of life insurance, although premiums may increase over time depending on your policy.
Whole life insurance, on the other hand, is a type of permanent life insurance that covers you for your entire life. Whole life insurance premiums do not change over time, and the policies have an investable cash value component that you can access during your lifetime.
However, whole life insurance is more expensive. Says Betts, "Term life insurance on somebody who's between 40 and 60 is very inexpensive because there's a very small probability that you're going to die; 99% of all term policies end without a beneficiary getting paid out. Because whole life lasts your entire life, it's usually way more expensive."
3. Life insurance coverage from your employer ends when you leave your job
Many people are offered life insurance as a part of their employer's benefits package, but, says Betts, it's important to understand that those types of life insurance policies end when you leave your job. This is important to know if you're relying on life insurance to cover the cost of your funeral expenses or help out your family in case of an untimely death.
He says, "If you quit on the first of the month, it might cover you through the end of that month, but it won't cover you after you leave the company. It's similar to other types of insurance that we buy, like automobile or homeowners insurance. If you stop making payments, you're no longer covered."