Please ensure Javascript is enabled for purposes of website accessibility

3 Things You Need to Know About Life Insurance

By Maurie Backman - Jan 31, 2020 at 8:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you aren't covered, consider these facts.

If you feel a bit in the dark when it comes to understanding life insurance, you're far from alone. According to a study last year from nonprofits LIMRA and Life Happens, fewer than 6 in 10 Americans have life insurance, and half of those who do don't have enough.

Some don't buy it because they're convinced they don't need it, others may shun it because they're confused about the details, or view it as an unnecessary expense. If you're one of them, here are three key things you need to know.

1. It's not just for the rich

It's easy to view life insurance as a product for the rich. After all, if you're a moderate earner, what good does it do you to regularly pour your hard-earned money into a service you hope never to benefit from?

Actually, the answer to that question could be "a lot." If you don't have life insurance, your loved ones could land in dire financial straits if your vital financial contribution to your household disappears. Not only do you not need to be wealthy to warrant getting a life insurance policy, you could need it more if you're not. The real question you need to ask yourself is if there are people in your life who depend on your income.

Man. boy, and dog walking outdoors

IMAGE SOURCE: GETTY IMAGES.

2. It doesn't have to be expensive

Many people avoid life insurance because they think it's unaffordable. In reality, coverage might cost a lot less than you'd expect.

There are two main types of life insurance: permanent life insurance (also called whole life) and term life insurance. With the former, you're covered indefinitely -- as long as the premiums keep getting paid -- and your policy gradually accumulates a cash value that you're can withdraw from or borrow against if you choose to. The downside to these policies, though, is that they can be very expensive, which can lead to people getting less insurance than they actually need. In addition, while they are marketed as both insurance and an investment, their value as an asset grows relatively slowly.

Term life insurance, on the other hand, tends to be far more affordable. As the name suggests, these policies only provide coverage for a limited period of time (typically 30 years, though there are other options), and they have no cash value -- unless the policyholder dies during the coverage period, their return on investment is zero (other than peace of mind). But the premiums for these policies are much lower.

In both cases, the more modest the death benefit (the amount your loved ones collect upon your passing), the lower the premiums you will pay. Choose not to secure a $2 million death benefit, and you won't be charged for one.

3. You may need it even if you don't earn an income

It would be easy to assume that if you don't earn money, you don't need a life insurance policy for yourself. But if your contribution to your household comes in forms other than financial, recognize that covering for your absence could be an expensive business.

Consider the case of a stay-at-home parent who watches over three young children during the day while their partner works. If they were to pass away unexpectedly, how would their partner continue to hold down that job? They would have to start paying for child care, the costs of which can be astronomical, especially for multiple kids. A housekeeper or cleaning service might start to feel like a necessity. And that's just the beginning -- according to the latest Salary.com study on the topic, a stay-at-home parent's work, if done by paid employees, would be worth $162,581 a year. (The job does come with an awful lot of overtime.) Someone will have to handle all those tasks. So don't assume don't need life insurance just because you happen to do work that doesn't come with a paycheck.

There's a lot of misinformation about life insurance circling around, but the reality is that getting yourself covered is one of the most important financial moves you can make -- right up there with building an emergency fund and saving for retirement. And remember, the younger you are when you apply for a policy, the more likely you are to snag a low competitive rate on your premiums, which is reason enough to get moving as soon as possible.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.