Life Insurance 101: The Grown-Up Talk Every Parent Needs to Have

With my birthday coming up at the end of the month, I’m about to complete another lap around the sun. And with each passing year, I’m reminded that time is undefeated, it waits for no one.

The years from 22 to 27 felt like they took forever. But 28 to 37? Blink-and-you-miss-it fast. Now that I’m firmly planted in my late thirties (gulp), I’m constantly reminded that this ride called life doesn’t last forever.

Back when I was single, and even early into being married, I didn’t spend much time thinking about what would happen after I was gone. Honestly, I didn’t need to. But once my two sons were born, that all changed. I think about it often now (I can’t help it, I’m paranoid by nature. Honestly, I think it can be healthy, so long as there’s a balance). I want to make sure that if, God forbid, the worst-case scenario ever happens, they’ll be taken care of.

Just a heads-up, this post isn’t going to be fun. But it is important. In what’ll end up being a two-part series, in Part 1, I’ll cover some common terms you’ll run into when planning your estate and specifically, getting a life insurance policy.

When it comes to life insurance, there are really just two key terms you need to know: Dependent and Beneficiary.

Dependent - A dependent is someone who relies on you financially. This usually means your kids, a parent, or another relative you support.

Beneficiary - A beneficiary is the person or entity (trust) who receives your money or assets when you pass away. Think retirement accounts, IRAs, life insurance policies, and more.

In many cases, but not always, if you're married, your spouse is by law your beneficiary.

What Is Life Insurance and Why Is It Important?

Life insurance is a policy you buy to make sure your loved ones receive a payout if you die unexpectedly.

Let’s say you take out a $1 million policy. If something happens to you, your beneficiary contacts the insurance company, provides a death certificate, and they receive a check for $1 million.

And here’s one silver lining: that money is paid in lump-sum and is tax-free. 

Now, there are various types of life insurance out there. However, there’s only one type that I recommend – Term Life Insurance.

Term Life Insurance (what I have and what I recommend)

Term life insurance means you’re covered for a set number of years - 10, 20, 30, even 40.

Say you want a $1 million policy for 30 years. After a medical exam and some paperwork, the insurance company might offer it to you for $100/month. To keep it active, you just keep paying the monthly premium. And if you ever want drop the policy, you can.

It’s a good idea to shop around every few years to see if you can get a better deal on your policy. And if your income or lifestyle has gone up, it might be worth considering a larger policy to make sure your coverage still fits your needs.

Losing someone is already painful enough. But leaving your partner or kids in financial chaos makes it exponentially worse. Life insurance helps soften that blow by covering the financial side of things.

How Much Life Insurance Do You Need?

The simple rule of thumb is: 10x your income. If you earn $100K per year, aim for a $1 million policy. Want to get more detailed? You can also estimate the cost of raising your kids until they’re 18, factor in college expenses, and include any debts or financial obligations you’d want covered. 

Also, check to see if your employer offers life insurance as part of your benefits. At my last two jobs, they included a policy worth one year’s salary at no cost to me. It’s definitely worth asking your HR department if your company offers something similar, or anything at all.

A Quick Word on Whole Life Insurance and Indexed Universal Life (IUL)

When it comes to insurance, term life is the only type of policy I recommend.

Other policies try to mix insurance with investing (IUL). And it sounds good in theory - the company takes your higher premium, invests it, and guarantees a payout. But in reality, those fees are higher, the investments often underperform the market, and you’re overpaying for something you hope never to use. (That's the whole point of insurance. You pay for it and pray you never have to use it. Insurance is NOT an investment. It's insurance in case the worst-case scenario happens).

Life insurance isn’t an investment. It’s protection. That’s it.

Who Doesn’t Need Life Insurance?

If no one relies on you financially - no kids, no aging parents, no spouse - then you probably don’t need life insurance.

To be honest, I didn’t even consider life insurance until I had kids.

And if you’re already financially set — say your house is paid off and you’ve got several million in assets — you may not need it either. If your net worth can take care of your family, a policy might be unnecessary.

It’s not the most fun topic to think about. But having a plan means peace of mind - for you and the people you love.

Later this week, we’ll dive into Wills and Trusts and what makes sense based on your situation.

Note: This is purely educational and not investing or tax advice.