Life insurance is confusing—here’s everything millennials need to know

The last thing you want to think about in your twenties (er, anytime?) is your own death. It’s difficult enough to juggle brunch plans, your love life and your micromanaging boss, let alone plan for what could happen to you decades from now.

But life comes at you fast — and suddenly you’re 35, living with your partner and two gorgeous kids in the suburbs. OK, maybe you’re not quite there yet, but some version of adulthood is likely staring you in the face.

Which means it may be time to sit down and think through what happens if you suddenly die. Certainly depressing, sure. But it’s best to be prepared. Ask yourself: How is your family going to get by without your income? How will they pay for the funeral costs? Will they take on any debt that you leave behind?

If you’ve got people depending on you for financial support, you need to be prepared to give it, even if the worst should happen. One of the easiest ways to do that is by purchasing life insurance. And this goes beyond what you may get for free from your employer as a benefit.

“Insurance is really important when you have dependents and obligations,” Barbara Ginty, a certified financial planner and host of the “Future Rich” podcast, tells CNBC Make It.

Ahead, some life insurance basics to help you get started.

Let’s set the record straight: Not everyone needs life insurance. It’s more than likely that you’ll start thinking about needing a policy as you hit major life milestones, whether that’s starting a business, getting married or having your first child.

Single:

Young and single 20-somethings probably haven’t thought much about life insurance, and that’s OK. If you’re 25 with no debt you probably don’t need a life insurance policy, Ginty says.

But if you’ve co-signed a student loan with your parents, you may want to consider getting a life insurance policy because you have a financial obligation that could impact your parents. If you suddenly died, some private lenders have clauses in their contracts that require the loan balance to be repaid immediately. Your family may need a life insurance payout to cover that debt.

Or perhaps you help support other family members — siblings, parents or grandparents. What happens to them if you aren’t capable of covering their expenses? Do they depend on your income? If so, then taking out a policy is a good bet.

The same is true if you’re a business owner and took out a loan to fund your company. Not only do some small business loans require you to have life insurance coverage, but you need to ask yourself what happens to your employees and your company if you should suddenly die? In most cases, there will be expenses that will need to be wrapped up or perhaps a portion of the loan that will need to be repaid.

Married:

Getting married often prompts couples to have hard financial conversations, and it’s not a bad idea to discuss life insurance while you’re at it. You may want to consider getting a policy if your spouse depends on your income to fund your shared expenses (or vice versa).

Financial coach Dave Ramsey recommends life insurance for married couples in situations where they, individually or jointly, racked up a lot of debt. If you live in a community property state where assets and debts are divided equally, your widow could be stuck trying to pay off all your joint debt if you died. That includes residents of Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Plus, if you plan to have kids one day, you may want to purchase life insurance before you become a parent. Your life insurance rate is based on your age, medical history and lifestyle choices (do you smoke, for example). It’s generally easier to get a cheaper policy if you’re young and relatively healthy.

This is especially true for women. Pregnancy is sometimes considered a pre-existing condition and may complicate the process of getting life insurance. And in some cases, a pregnancy may trigger lasting health effects for women, which again, may lead to higher insurance rates.

Married + Kids:

Once you have children, you almost always need life insurance. If something should happen to you or your co-parent, a life insurance policy will help your family handle expenses. Dave Ramsey recommends once you have kids to get a policy that is worth 10 times your annual pay.

You now know when to buy, but actually figuring out what to buy can still be stressful and confusing. That’s why it’s important to learn the basics of how to buy life insurance so you’re more in control when you finally pull the trigger.

“As an educated consumer, you always make a better decision when it’s not fear based,” Ginty says. You also can choose to work with an insurance broker or financial advisor who can help you compare rates from multiple companies, giving you options.

There are two basic types of life insurance: term and permanent (whole life insurance is an example of this type of policy). When you buy a life insurance policy, you can specify the amount that will be paid out if you die (called the death benefit). Your monthly payment is the “premium.” As long as you keep up with the premiums, your insurer will pay your beneficiaries when you die, usually as a lump sum.

Term life insurance is pretty much exactly what the name implies — it’s insurance that covers you for a specific period of time, typically 10, 20 or 30 years. If you die while the policy is in place, you’re covered. Once the term expires, you’re no longer covered.

Permanent life insurance — which includes universal life, variable life and whole life — covers you throughout your life. Unlike term life, which is pure insurance that simply offers a payout if you should die, permanent policies, such as whole life, essentially create a savings account for you where you can earn a minimum guaranteed interest or a dividend. These earnings are generally tax-deferred and referred to as the “cash value.” Over time, this builds up and you can borrow against it, (but you’ll typically need to repay it) or even use it to cover your premiums.

Yet those extra perks on permanent policies also increase the price. They can cost up to 10 times more than term, which can lead to people missing a payment or abandoning them all together. About 45% of people surrendered their policies within the first 10 years, according to a comprehensive study from the Society of Actuaries.

That’s why, for most people, term life insurance is the way to go, Ginty says. For example, a 30-year-old, relatively healthy woman who’s considering buying a $500,000 policy will likely pay $35 a month for a 30-year term life policy, as opposed to $455 a month for whole life coverage, Ginty calculates.

When it comes to term life, experts advise consumers to take out level term life insurance, which guarantees you pay the same rate throughout the life of the policy. And if you’re worried about being covered later in life, you usually can convert a term policy into a permanent policy up until a year before it expires, if that’s of interest, Ginty says.

You’ve settled on the type of insurance policy. Now how much coverage do you need? Most standard policies range from $250,000 to $1 million. How much you need depends on how the money will be spent. Do you need the policy to help pay off any funeral costs? Your mortgage? Fund your children’s college education? Or maybe it’s simply to help cover day-to-day expenses, such as childcare, for a certain period of time. Once you decide on how the money will be spent, you can determine how much insurance you need.

The non-profit insurance information organization Life Happens offers several calculators that can help if you’re not quite sure.

Some employers will offer life insurance as part of your benefits package, which is great. These policies are good for those who need little to no life insurance. But they’re not usually portable, which can be a huge drawback. Your policy ends when your job ends, so if you quit or are let go, you’ll be left with zero coverage.

“I always think of the work policy as the cherry on top, it’s extra” Ginty says. “It’s better than nothing if you’re struggling.”

Navigating life insurance policies and salespeople can be complicated, but that’s not a good excuse for inaction. Many people think you need to know a lot about finance in order to successfully buy life insurance, but that’s not true, Ginty says. “You just need to rely on your gut instincts,” she says. “If it doesn’t feel comfortable, it’s probably not the right fit for you.”