Guide to Life Insurance

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In 2018, only about 60% of people in the United States had some type of life insurance. What does this mean for the 40% who don’t? Life is expensive, but so is death. Average funeral and burial costs in North America today range from $7,000-$10,000, and that estimate doesn’t consider other costs associated with the death of a loved one like outstanding debts and lost wages. All of these things combined can put your loved ones into a downward spiral of financial hardship if you do not have a life insurance policy.

In this guide to understanding life insurance, we’ll walk step-by-step through the basics to help to make getting life insurance easy and affordable for you.

What is life insurance?

Life insurance is a policy between you and your insurance provider. You will pay a monthly or annual premium in exchange for a lump sum of money for your loved ones in the event of your death. That money may help them cover things like unpaid medical expenses, funeral expenses and loss of income.

There are three types of life insurance: whole life insurance, term life insurance and convertible life insurance.

What is whole life insurance?

Whole life insurance policies are active until the policyholder’s death. In other words, they do not expire as long as the policyholder is still living and paying the annual premium.

Whole life insurance premium rates and death benefits are typically fixed, meaning that they never change. Additionally, some offer a cash-value option that allows you to withdraw or borrow money against the policy in an emergency. Whole life insurance premiums are most often higher than other types of life insurance.

If someone buys a whole life insurance policy for an annual premium of $4,000, they will pay the annual premium of $4,000 for the remainder of his life but will be guaranteed the agreed-upon death benefit no matter when his death occurs.

What is term life insurance?

Usually, with terms from 1 to 30 years, term life insurance policies are created for a period of time and then expire. Under some term life insurance policies, the death benefit is fixed while under others, the death benefit decreases as the policy ages. Premiums for term life insurance are sometimes, but not always, fixed. Ask your insurance about this before signing a policy.

If someone buys a 20-year term life insurance policy for an annual premium of $1,000, they will pay the annual premium of $1,000 for the duration of the 20-year term. Death benefits will only be paid if Adam dies before the end of the 20-year term.

What is convertible life insurance?

If you have a convertible life insurance policy, you most likely signed up for a term life insurance policy that you later wish to convert to a whole life policy. This is not an option offered by all insurance companies, so be sure to ask.

If someone buys a 20-year convertible life insurance policy, they will pay the annual premium of $1,000 for the 20-year term with the option upon expiration to convert to a whole life policy.

How does life insurance work?

To understand how life insurance works, you should understand some basic life insurance terminology:

  • Policyholder: The person insured under the life insurance policy. This could be you or someone you have purchased a policy for.
  • Death benefit: The money paid out to beneficiaries when the policyholder dies.
  • Beneficiaries: The individuals you have selected to receive death benefits in the event of your death
  • Premium: The amount of money you will pay to the insurance company yearly for life insurance coverage

For example, a married couple decides to take out life insurance policies on each other. In this case, both people are policyholders and have designated each other as beneficiaries. Each year they will pay a premium for individual life insurance policies, and if either of them dies, the other will receive a death benefit.

Do I need life insurance?

Who does not need life insurance?

Let’s start by talking about people who might NOT need life insurance.

If you are single or widowed, have no children and no debt with other individuals, you may not need life insurance coverage. Remember though, that if you have family who will be responsible for your funeral and burial, someone will have to pay for that. A small life insurance policy may be adequate for you.

If you have adequate financial resources to cover your own death expenses and provide for your family upon your death, you may not need a life insurance policy.

Who needs life insurance?

The easiest way to say this is if you do not fit into the categories above for people who may not need life insurance, you need life insurance!

If you will leave behind debt that a loved one will be responsible for, funeral expenses someone else will be responsible for or lost income that will place financial hardship on your loved ones, you need a life insurance policy.

How much does life insurance cost?

The cost of life insurance relies on several factors like age, overall health and existing medical conditions. The price also depends on what type of policy you select. Some general rules of thumb:

  • Whole life insurance will be more expensive than term life insurance
  • The younger you are, the more inexpensive your life insurance will be
  • The better your overall health is, the more inexpensive your life insurance will be
  • The fewer medical conditions you have, the more inexpensive your life insurance will be.

According to Nationwide Insurance, policy prices for a 40-year-old man in great health purchasing a $500,000 30-year term life policy would be around $660 a year. A whole life policy for the same person could cost $6,760 yearly

How do I buy life insurance?

First, we recommend seeking comparable life insurance quotes from several insurance providers. If you notice a large difference in quoted premiums, double check that each insurance provider quoted the same type of policy and level of coverage.

After you’ve reviewed quotes and selected which company you want, you will complete that company’s application process. Many insurance companies offer an online or phone application process for your convenience. As part of the application process, you may be asked to get a medical exam/physical completed to assess your general health or be asked to participate in a phone interview.

Finally, once your application is approved and you’ve agreed upon a premium, you will sign the policy, pay the premium and officially be a life insured individual.

The bottom line

Life insurance is an often overlooked but important necessity. Not only is it not mandatory, but it can be an uncomfortable topic to address. We recommend looking at life insurance as less about dying and more about planning for the care and well-being of your loved ones.

Life insurance isn’t just for older people. In fact, we recommend seeking a life insurance policy as early in life as possible to get affordable rates. Regardless of age, life insurance is an important peace of mind to provide yourself and those you may leave behind.

Acquiring a life insurance policy is fast, easy and well worth the effort.