Life Insurance 101: Making it Simple
Insurance in general can be very complicated, but we don’t think it has to be! In this article we plan to start by going over the very basics of life insurance, answer common questions, and go over the main decisions you’ll have to make when getting your plan, so that way you’re ready to make the best choice for you when it comes to life insurance.
The Basics
Life insurance plans come in many different varieties, but at the end of the day, they all do the same thing, pay your beneficiaries when you pass.
Like most insurance plans, this works on a system where you pay a monthly or bimonthly premium. It can get more complicated with things like indexed universal life insurance plans, riders, and different customization options, but for the most part it really is just sign up and pay for your plan.
Most people get life insurance so that they have peace of mind knowing that their loved ones are taken care of should they pass away. But you can also get it so that way you know your final expenses (e.g. a funeral) is covered, or to pay off existing debt like a mortgage.
Life insurance plans are either term, whole, or universal. Term plans last for a certain period of time, usually 10-30 years. Whole life insurance covers you for your whole life, it’s usually the most expensive, but the rate never changes. Universal life insurance also covers you for your whole life, but the rate may change.
When you’re getting your life insurance policy, the cost is usually determined based on what type of plan you’re getting; your age; how large of a death benefit you’re signing up for; any riders/add-ons you’re putting into the plan and, with some plans, your overall health. There are some discrepancies, group plans for example can sometimes make your rates more affordable.
Common Terms
Life Insurance – An insurance plan that pays your beneficiaries if you pass away.
Beneficiaries – These are the people you choose to receive your life insurance pay out when you pass.
Provider – The company who you have your life insurance policy with.
Policy – The actual insurance plan that you pay premiums on and that your beneficiaries will receive a payout based on.
Premium – This is the cost of your plan, you will either pay monthly, twice a month, or per paycheck depending on your plan (there are some plans that are annual, quarterly, and biannually).
Death Benefit/Payout – This is the amount your life insurance policy will pay out when you pass, most people aim for a payout of 10 to 1, meaning 10 times your current annual salary.
Term Life Insurance – This life insurance covers you at a fixed rate for a set period of time, usually between 10 to 30 years. After the term is over the rates steadily increase as you age. These plans usually are the most affordable (until the term ends) but also have a number of restrictions.
Whole Life Insurance – These plans cover you for your whole life at a fixed rate. These plans usually have high premiums, and those premiums are often based on your age, general health, and lifestyle.
Universal Life Insurance – These plans also cover you for your whole life, but adjust their cost over time based on the financial market and other economic conditions. Essentially, your premium will go up as you get older or if your health declines. Sometimes you can also choose to increase or decrease your payment, but keep in mind that will have an impact on how long your coverage lasts.
Indexed Universal Life Insurance – This is a universal life insurance plan where your premiums are tied to an investment. Essentially, your premiums can generate interest. If you accumulate enough interest, you can use it to increase your payout or to cover a portion of your premiums.
Group Rate – This refers to the reduced premium you’ll pay when you sign up for a “group” life insurance plan, like SDPEBA’s Aflac Plan.
What Decisions do I need to Make?
The first and most important decision to make is what your goal is with life insurance. Are you looking to replace your income and make sure your loved ones are covered after you die? Are you looking for an investment to make sure your assets are protected? Or are you just looking for peace of mind when it comes to debt/funerary expenses? These are big questions, and you might even be saying yes to all three, and your answers might even change as you get older.
Once you make those decisions you can start leaning toward either term, whole, or universal life insurance. Generally, term life insurance is the best bet to deal with debt and to make sure your loved ones are covered after losing your income. Whole and universal life insurance plans are more like investments that are big financial commitments.
After you’ve done some thinking on that, you’ll need to decide where you’ll get your plan. With SDPEBA you can get a plan through Aflac, Ethos, or have a custom plan by one of our life insurance specialists. Your employer might have specific plans you have access to, (for example, City Employees have access to some group rated plans through the Hartford; basic term and portable term, that have limitations and their rates increase over time.).
If you don’t know where to start, we suggest you look at the City’s 2025 booklet on their Flexible Benefit site (County employees click here) or book a meeting with SDPEBA so you can explain your situation and our specialist can point you in the best direction. We are also happy to help you do the math and think big picture about what plans are best for you and your situation, so if you’re still feeling rattled by the first step, we’re happy to help.
By now, you’ll probably have a good idea about how much life insurance you want or how much you’re willing to pay per month. The general rule of thumb is to find a plan that pays out between 5 times your annual income and 10 times your annual income. Usually, people get this through multiple life insurance sources. The range is so large because it really depending on how many people are dependent on your income.
At the end of the day, that’s just a rule of thumb and is too broad to apply to every specific situation, which is why we suggest you talk with a specialist, your loved ones, or a financial planner to get a good idea as to how much you should aim for.
Once that’s done, you’ll select your plan and that’s that!
Okay, well it isn’t that simple. There are riders and customization options and so much more to think about. This article is just meant to be a starting point, if you’d be interested in a more in-depth article, let us know!
Until then, feel free to ask us your questions by emailing [email protected] or booking a meeting by clicking here.