Guide to life insurance

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Life insurance provides financial protection for your family members in the event of your passing. Certain policies can also be used to supplement your income during retirement and pay for your funeral expenses. Having life insurance is important, but as of 2018, only about 60% of people in the United States had some type of life insurance.

Without a life insurance policy, your loved ones become financially responsible for covering your end-of-life expenses, paying your outstanding debts and dividing your assets, which can put them in a hard position. Most people can benefit from a life insurance policy, even when they are young and healthy, and there are a number of policies to choose from depending on your needs.

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, which is called the death benefit. 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 their life. And while life insurance policies include things like suicide clauses or challenges if it’s found that you were untruthful during the application process, your premium payments will most likely guarantee your beneficiaries a death benefit upon your death.

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 the policyholder 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 eventually plan to convert to a whole life policy when the term expires. 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 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 is called the policyholder. This could be you or someone you have purchased a policy for. As the policyholder, you own the policy and have the ability to adjust your coverage, add riders, choose your beneficiaries, etc. You are also the one responsible for paying the annual premiums.
  • Death benefit: The money paid out to beneficiaries when the policyholder dies is called the death benefit. When you purchase a life insurance policy, the coverage limit you select is the amount of money that will be paid out in the form of the death benefit. Most life insurance policies have a maximum and minimum death benefit you can choose from. The higher your death benefit is, the more expensive your policy will be.
  • Beneficiaries: The individuals you have selected to receive death benefits in the event of your death are called the beneficiaries. You can choose one beneficiary, or multiple beneficiaries, and you may also have the option to designate a primary and secondary beneficiary. Most people choose a spouse or significant other as the beneficiary, but you can also name a charitable organization or even a funeral home as the beneficiary, depending on the type of policy you have.
  • Premium: The amount of money you will pay to the insurance company for life insurance coverage is called the premium. Some life insurance policies have a fixed premium that stays the same for the duration of the policy, and others do not. You must continue to pay your premium in order for your policy to remain in force, otherwise, the insurance company can cancel your coverage.
  • Cash value: Permanent life insurance policies have a cash value component that grows overtime. You can think of it like a savings account. When you pay the premium, a portion of the money goes toward the cash value. At a certain point, you can borrow the cash value as a loan or use the funds to pay your premium.
  • Riders: Riders are endorsements that you can purchase for tailored coverage. Every life insurance company offers different riders, but some of the most common ones are the long-term care rider, child rider, accelerated death benefits rider and critical illness rider.

Who should buy life insurance?

Most individuals can benefit from life insurance. It does not matter how old you are, how much money you have or how many heirs you have. Here are some situations when you might want to consider buying a life insurance policy:

Parents with young children

If you have children under age 18, having a life insurance policy can provide financial support if you were to pass away unexpectedly. The money can be used to pay for child care, pay for the child’s education or however you see fit. In this case, a term life insurance policy may be a good option to consider.

Young adults who want cheap coverage

Individuals who are young and healthy pay the cheapest life insurance premiums. Buying a policy at a young age can help you lock in a more affordable rate for the future. For young adults, a term life insurance policy with the option to convert to permanent coverage may be a good solution.

Adults with significant debt

If you are an adult who has many debts, whether through a mortgage, loan or credit card, having life insurance is valuable. It will protect your loved ones from assuming your debt if you were to pass away.

Seniors who want to pay for their funeral

Past a certain age, it becomes more difficult for seniors to purchase life insurance, especially for those with health complications. But for seniors who want to pay for their own funeral expenses, buying final expense coverage is beneficial. It lowers your family’s financial burden when you pass away, and it also allows you to make arrangements for your own funeral.

How much life insurance do I need?

Everyone has different life insurance needs. When you purchase life insurance, you will need to determine how much coverage is appropriate for your situation. Many experts recommend basing your life insurance coverage on your salary, but there are other factors you need to look at. Here are some things to consider when deciding how much life insurance to purchase:

  • Your income: Your life insurance coverage should be loosely based on your income. For example, if you make $100,000 per year, you will likely need more coverage than if you made $40,000 per year. This is because your income determines your family’s lifestyle. Without your income, you would want them to continue living a similar lifestyle without worrying about selling your home or moving to a much cheaper area.
  • Your debts: If you pass away with outstanding debts, the amount you owe may not be automatically erased. In some cases, it may get passed down to your family members. Make sure you have enough life insurance coverage to pay off your debts, such as a mortgage, business loan, credit cards, medical bills, etc.
  • Your children’s education costs: If you have children, consider the cost of their future education when choosing your life insurance coverage. If your kids currently attend private school, you might want to get enough life insurance coverage to pay the remaining tuition. The same goes for your kids’ college tuition if you want to help them pay for school, rather than relying entirely on loans.
  • Your funeral plans: Some people have preferences when it comes to their end of life expenses and burial. For example, if you intend to enter an assisted living facility when you get older, or you know you want an elaborate funeral, consider that when you buy life insurance. Otherwise, your end of life costs will be based on what your family members can afford, and knowing that those costs are covered can give you peace of mind as you get older.

If you are not sure how much life insurance coverage you need, consider using an online life insurance coverage calculator. You will input some basic information, like your income, expected burial costs and the number of children you have, and the calculator will estimate how much coverage may be right for your situation.

How much does life insurance cost?

The cost of life insurance is dependent on several factors like your age, overall health and existing medical conditions. The price also depends on what type of policy you select. Here are some things to know about the cost of life insurance:

  • 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.

A 35 year old man in excellent health who purchases a $250,000, 20-year term life policy would pay an average rate of $25.72 per month. For comparison, a 45 year old man in average health who purchases the same policy would pay a much higher rate of $51.42 per month.

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 have reviewed quotes and selected which company you want, you will complete that company’s application process. Many of the largest life insurance 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 to assess your general health or complete a health questionnaire.

Finally, once your application is approved and you have agreed upon a premium, you will sign the policy, pay the premium and your coverage will take effect. Keep in mind that the time between applying for life insurance and when your coverage starts is typically at least a few weeks.

Frequently asked questions

What is the best life insurance company?

The best life insurance company is different for every individual. It depends on factors like the type of policy you want, the amount of coverage you need, your budget, your age and your health. Before you choose a life insurance company, spend time comparing providers using your personal criteria to find the best match.

How can I get a cheaper life insurance premium?

Unlike home or auto insurance, life insurance providers typically do not offer discounts. However, there are still ways to get a lower rate. Improve your health by not smoking, maintaining a healthy weight, exercising regularly and managing existing conditions with your doctor. Another tip is to buy coverage when you are young, which will be cheaper than buying a policy when you are older. If you think you are paying too much, you can also consider switching life insurance providers.

Can you purchase life insurance with pre-existing conditions?

Yes, you can purchase life insurance if you have pre-existing health conditions. However, it depends on the conditions you are dealing with. For example, if you have diabetes, high blood pressure or asthma, you can likely purchase coverage, but you will pay a higher rate. On the other hand, if you have a terminal illness, it will be harder to find an insurance company to approve coverage, and you may be limited to certain policy types.