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Course: Financial Literacy > Unit 6
Lesson 5: Life insuranceCost and benefits of life insurance
Learning about life insurance can help you find the right coverage to ensure your family's financial security in case something happens to you. Knowing more about this insurance helps you make the best decision to safeguard your loved ones' future.
What life insurance does and why it's important
Life insurance is a contract between a person (the insured) and an insurance company. The insured pays a regular amount of money, called a premium, to the insurance company. In exchange, the insurance company promises to pay a certain amount of money, called a death benefit, to the insured's beneficiaries (such as family members) if the insured dies. This money can help the beneficiaries pay for expenses like housing, education, and living costs.
Having life insurance can give you peace of mind knowing that your loved ones will be taken care of financially if something were to happen to you.
Who needs life insurance?
Most people who have dependents or people who rely on them financially should consider life insurance. People who frequently need life insurance are:
- Parents with young children
- People who have taken on large debts, such as a mortgage
- People who have people that depend on them
- People who want to leave a legacy for their loved ones
People who don't have others depending on them, like single adults with no kids or retirees with enough savings, may not need life insurance as much.
What happens if you don't have life insurance?
Dying without life insurance can have a big impact on your loved ones. They might have to pay for your funeral and other end-of-life expenses out of pocket, which can be costly. Most importantly, if you are the primary income earner, your family members may struggle to pay bills and maintain their lifestyle without your income.
Why are there so many life insurance policies?
You might have come across various names such as term life, universal life, variable life, and so on, which can make it seem like life insurance is overly complicated and difficult to understand. The reality is that many insurance companies choose names for their policies that may not necessarily explain the type of policy it is. The good news is that life insurance can only be one of two forms, regardless of the name: either term or whole life.
Terms life vs. whole life
A term life policy and a whole life policy are two different types of life insurance, but their names can tell you the difference. Term life covers you for a specific term of time: as low as
Term Life Policy:
- This policy is like renting a house. You pay for a specific amount of time (the term), and if something happens to you during that time, your family gets the money (the death benefit).
- It's usually cheaper than a whole life policy.
- The term can be
- If you're still alive at the end of the term, the policy ends and you don't get any money back.
Example: Let's say Rico buys a
Whole Life Policy:
- This policy is like buying a house. You pay for the rest of your life (or until a certain age), and your family gets the money when you pass away.
- It's usually more expensive than a term life policy.
- It lasts your whole life, as long as you keep paying the premiums.
- It builds cash value over time, which you can use or borrow against while you're alive.
Example: Let's say Samara buys a whole life policy with
Here's a table that compares term and whole life policies:
| Term life policy | Whole life policy | |
|---|---|---|
| Coverage | Specific time (term) | Whole life |
| Cost | Cheaper | More expensive |
| Cash Value | No | Yes |
| Length | Lifetime |
In summary, term life policies are cheaper and cover you for a specific period, while whole life policies are more expensive and last your entire life, with a cash value that builds over time.
What does it mean to be insurable?
Being insurable means that an insurance company is willing to give you a life insurance policy. You know how health insurance companies can't say no to people with health problems? Well, life insurance companies are different – they can say no. The things that decide if you're insurable are your age, how healthy you are, what you do for work and fun, and how you live your life.
This important to consider - you can become uninsurable for life insurance if you develop health issues or even change jobs. This can happen fast, so it's important to buy life insurance now to protect your loved ones.
How much does life insurance cost?
The price of life insurance can change depending on a few things. Let's look at some of the factors that can affect the cost of life insurance.
Age
The first thing that can change the cost of your life insurance is your age. Think about it like this: the younger you are, the less likely you are to get sick, have an accident, or die. This means that life insurance companies usually charge less for younger people. So, if you're a young adult, it's a good idea to start thinking about getting life insurance. Remember: the earlier, the better.
Health
Your health plays a big role in how much life insurance costs. If you're in good shape and don't have any serious medical conditions, life insurance companies will see you as less risky. This means they'll charge you less for your policy.
Job
Your jobs is a big factor - a firefighter might be at a higher risk of getting hurt than someone working at a bookstore. Life insurance companies take this into account when figuring out how much to charge for a policy. If you have a risky job, you might have to pay a little more for life insurance.
Policy
Do you need insurance for a specific length of time? It's usually cheaper than whole life insurance, which lasts your whole life. When you're shopping for life insurance, think about which type is best for you and your budget.
Coverage
Finally, the more life insurance coverage you want, the higher the cost will be. For example, a policy that pays out
Now you know some of the factors that affect the cost of life insurance. Keep these in mind when you're shopping around, and you'll be better prepared to find the best policy for you and your loved ones.
Want to join the conversation?
Please expand this section to go deeper into how people utilize the cash value in whole life policies.(8 votes)
Take this request to https://support.khanacademy.org/hc/en-us/community/topics, where you'll find the place to request new features. In this space, you're only posting requests to other learners.(10 votes)
Would it be easier to just do it yourself? Sort of like an emergency fund, every paycheck or something you set aside money and draw it out after you die.(1 vote)- Yes. You can do that. However, if you die before there's much money in that account, your heirs may have nothing after they pay for your funeral.
Life insurance is practical for so long as there are possible funeral expenses (which are not cheap) and things like mortgages to pay off.
If you assume that any medical expenses incurred before your death should be paid off, and any funeral expenses should be covered, and that outstanding loans should be paid off, then you might look into life insurance.(4 votes)
- Why do we have to expect the times when we have to make sense and understand money orders and exspectations?(1 vote)
- I haven't the faintest idea what you are asking. Rewrite your question so that I can understand it, and I'll take a stab at responding to the "why" part of it.(3 votes)
This might be kind of messed up to think about, but it's something I am wondering about: What if there's a family with like 6 kids, and 5 of those kids all have their own life insurance plan, one of them does not have any life insurance. Could those 5 kids "die" and have their life insurance benefit be transferred to the one kid who did not have any life insurance? Could you not create some sort of a sadistic scheme to have multiple people die and then swoop their life insurance over and over again?(1 vote)- This kind of thing has been done. Persons who have taken out life insurance policies have designated "beneficiaries", the persons who will receive the payment in the event of the policy holder's death. The money paid goes to the beneficiary, anyway. It doesn't go to the person who has died.
If the 5 siblings who have taken policies have named sibling 6 as their beneficiary, then the payment could, presumably, go to her. If, however, sibling 1 has named sibling 2, and then sibling 2 has named sibling 3, and so on down the line, the combined payments following the deaths of #s 1-5 would only go to #6 if #5 had named her in his policy.(3 votes)
- can life insurance pay for collage(1 vote)
- If you have a "whole life" policy with some cash value, you can borrow some of that to help pay for college.
If you are the beneficiary of the life insurance payment of someone who has died, you can use that money however you wish. Paying for college would be a wonderful tribute to someone who loved you that much.(1 vote)
If a person goes missing for ten years and we don't know if he is alive or dead so does his family get the life insurance if he has one ?(1 vote)- This would depend on the conditions of the policy. I would venture, though, that if the missing person has not been making life insurance payments for 10 years, the policy might have lapsed.(1 vote)
- Hi,
Can you please explain what cash value is?
My other question is, what happens if you decide to switch insurance company?(1 vote)- With a cash value life insurance policy, a portion of each premium you pay goes toward insuring your life, while the other portion goes toward building up a cash value. The cash value portion of your policy accrues tax-deferred interest.
A new policy means a new medical exam, which could lead to a higher premium. If you switch life insurance providers, you'll face a new two-year contestability period.(1 vote)
Please expand this section to go deeper into how people utilize the cash value in whole life policies.(1 vote)- Take this excellent suggestion to the page you'll find here: https://support.khanacademy.org/hc/en-us/articles/227013768-How-do-I-request-new-features-or-content(1 vote)
If I'll take 30 years term life insurance and I'm still alive after 30 years, I can't get my money back, right? So, where does my money goes?(0 votes)- No. Term life insurance is a contract between you and a life insurance company with a "term" (amount of time) attached to it. You are, effectively, making a bet with the company, saying "I bet you that I will die before the end of this "term" of time. If I die, you'll pay my heirs this much money." So, if you win the bet, you're dead.
If, however, at the end of the term, you're alive, then the insurance company has won the bet, and keeps the money.(2 votes)