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Life Insurance

Life Insurance

About nine out of ten people say that they understand the importance of having life insurance, according to a recent LIMRA survey. At the same time, less than 60 percent reported having coverage and even fewer people thought they had enough life insurance.

If you have concerns about making sure your loved ones are covered after you pass, life insurance is an excellent policy to invest in. Make sure to do your research about different policy types; depending on your age and financial situation, a policy that makes sense for one person might not be the right fit for you. 

What is life insurance?

As with other kinds of insurance, a life insurance policy represents a contract between the policy owner and an insurance company. In exchange for premium payments, the insurer agrees to pay a death benefit to beneficiaries in case the insured person passes away. Some policies may also pay benefits for other events named in the policy. Typically, the government doesn’t tax death benefits. The government also defers any growth in the value of cash-value that you may have with a permanent policy.

These explanations of the relationship between the owner, insured person, and beneficiary can help make this definition of life insurance more clear:

Policy owner: Very often, the insured person also owns and pays for the policy, but sometimes another person may own a policy that covers another person. For instance, parents might buy life insurance to cover minor children with the intention of transferring ownership after the minors have grown up. Similarly, sometimes adult children purchase coverage and pay premiums for elderly parents. Owners can even sell some kinds of insurance policies under certain conditions and transfer ownership to an unrelated third party.

Insured person: The contract covers the life of the insured person. It’s also possible to buy joint coverage that could either pay benefits on the first to die or for each individual. For example, a married couple might buy a first-to-die life insurance policy that will pay benefits to the surviving spouse when the first one passes away.

Beneficiary: The policy will have one or more people named as the beneficiaries of the death benefit. Beneficiaries collect the death benefit after the insured person passes. With multiple beneficiaries, it’s possible to divide the proceeds of the benefit as a percentage of the total. Sometimes, policies allow for contingent beneficiaries, or people who will receive the benefits in case the first beneficiary has passed away before the insured person.

How do different kinds of life insurance work?

Before you buy coverage, you should understand how four main kinds of life insurance work. These include:

  • Term Life Insurance
  • Whole Life Insurance
  • Universal Life Insurance
  • Final Expense Insurance

Unlike term, whole and universal life are considered permanent policies. This means that they will stay in force as long as the premiums get paid. Term policies expire on a date specified in the contract. 

Final expense insurance is under the umbrella of life insurance, but it’s quite a bit different than most other policies. Unlike whole and universal, it doesn’t have a savings element built into it, and unlike any other policies, it’s not meant to replace the policyholder’s income after they pass. It’s more so meant to cover end of life costs, like leftover bills and funeral expenses. This is a good fit for someone who doesn’t need to fully support anyone after they pass away, but doesn’t want to leave anyone with thousands of dollars in end of life costs.

How much will life insurance premiums cost?

As mentioned before, your premiums will first depend upon the kind of life insurance coverage that you buy. You will generally pay considerably much less for term than for permanent coverage. Even with term life, longer terms typically cost somewhat more than shorter ones, because insurers take a risk for longer. Generally, people find term life insurance more affordable when they need hundreds of thousands to millions of dollars worth of life insurance.

Consider these other factors that can determine the premium you will pay for life insurance:

Amount of coverage: Beyond the kind of coverage. Of course, the size of the death benefit will matter too. For the same kind of coverage from the same company, buying a $1,000,000 death benefit will cost more than a $100,000 death benefit.

Age: Premiums will increase with age.

Health: Some insurance companies will ask questions about health conditions, health history, and even the health history of close family members.

Location: A few insurers will offer the same premiums for everybody in the U.S., but others may have different rates for various states or even ZIP codes.

Other risk factors: Insurance carriers may also ask about using tobacco, drinking alcohol, weight, and even risky hobbies or the frequency of international travel.

The insurance company will look at answers on the application and assign a rate class. They will charge less for low-risk applicants than for high-risk applicants. Some insurers will even pay for a medical exam or ask for a doctor’s statement to verify answers, but these days, many companies offer no-medical exam policies that you can apply for online or over the phone.

Even if you don’t have to take a medical exam, it’s important to answer questions honestly. Insurance companies may use other sources, like the Medical Information Bureau database, to verify your health history. You can visit MIB.com to request a free report at any time, so you know what kind of information insurers can access about you.

Finally, each insurance company will set its own rates and the way that it assigns risks. For any particular applicant, rates can vary quite a bit for the very same policy. That’s why you should determine the amount of coverage you need, the type of policy to buy, and then shop around to see which quality insurer will offer you the most competitive deal.

Simplified issue vs. fully underwritten vs. guaranteed issue

If you apply for a fully underwritten policy, you may need to answer a lot of questions and even submit to a quick medical exam.

If you want to save time, you might look for one of these kinds of application processes:

Simplified issue: You may commonly see term policies that don’t require a medical exam and only have short applications. Typically, insurers can issue these very quickly and may even accept applications over the phone or online. Sometimes you will see simplified issue life insurance policies referred to as no-medical-exam life. These simplified underwriting requirements offer people a chance to easily get covered without having to answer a lot of questions.

Guaranteed issue: With guaranteed issue, the insurer may set age or other restrictions. At the same time, they usually don’t ask any other health questions and accept everyone who applies. Other kinds of life insurance will pay an immediate death benefit, so long as the policy is in-force when the insured person passes away. Guaranteed issue policies use a waiting period, so they do not pay the full death benefit until after that ends. Expect waiting periods to last from 24 to 36 months. If the insured individual passes away before then, they may either refund premiums or pay a portion of the death benefit. Generally, the policies will pay interest on refunded premiums.

You might wonder why anybody would bother to go through the process to buy fully underwritten life insurance when they could simply choose the other kinds of applications. People who are in good health and don’t lead very risky lives could save a lot of money if they’re assigned a preferred rate class, and insurance companies require more information before they will assign those rate classes. Less-healthy folks may get assigned an average rate classification anyway, so they may not lose much by skipping the longer application process, plus they can probably get covered faster.

Generally, you should consider guaranteed issue policies as a last resort, and they’re generally marketed to older people who might not qualify for other coverage. They will have more limited benefits, higher premiums for the amount of coverage, and of course, a waiting period that the insured person must survive for the policy will pay full benefits. This is one reason why it may pay off to choose a life insurance premium when you’re young, and don’t feel that you need it—you’re more likely to get a better deal as a young healthy person, who is unlikely to pass away.

How much life insurance should you buy?

You should start by figuring out why you want to buy protection. Most people decide to buy life insurance after certain life events. For younger adults, these might include starting a career, buying a house, having children, or getting married. Older people may consider adding coverage when they get ready to retire or start a business. Sometimes, seniors just want to make sure they leave behind enough cash to pay for a funeral and settle other expenses after they pass away. Your reasons for purchasing coverage should help you determine how much coverage you need.

For example, many people decide to purchase life insurance after they take out a mortgage on a home. They want to make sure that their family can keep making mortgage payments in order to keep the house.

For this example:

Some insurance advisors might start with the size of your mortgage, other debts, and the replacement income your family would need to maintain their lifestyle to calculate how much coverage you need. Other advisors just ask their clients to calculate six-to-ten years of income to come up with a reasonable figure. To keep it even simpler, you might consider a term life policy that closely matches the balance and time left on a mortgage.

Keep in mind that your family won’t need to pay the entire mortgage off right away but can still make payments. They might invest the bulk of the proceeds to keep it earning interest while they spend only what they need to make up for lost income. If you can’t afford to buy a policy large enough to cover every eventuality in the future, you can still do your loved ones a favor by at least ensuring they have cash on hand for immediate needs. On the other hand, as the old saying goes, few survivors ever regretted having their loved ones buy too much life insurance.

Why do you need life insurance?

Life insurance provides you with a simple way to leave a typically tax-free cash sum to your beneficiaries if you pass away unexpectedly. Generally, the beneficiaries just need to contact your insurer, give them a death certificate, and wait only a few days for their money. You will certainly want to consider providing this benefit to anybody who depends upon you for income, particularly if you have such large debts as a mortgage and don’t have the assets to cover them. Of course,  people also purchase policies to protect their businesses, transfer wealth, or even to support a worthy cause.

Once you understand what and who you hope to protect, you can start exploring your life insurance options to select the best kind for your needs.

Life Insurance