When acquiring a life insurance policy, there are many elements to consider that can help protect your family’s future financial needs. This life insurance directory can help make it easier to understand the basics of purchasing life insurance. For example, how it works, the types of coverage available, why you need it, and how to go about choosing a plan that’s right for you.
What is Life Insurance, and How Does it Work?
Life insurance is a contract between you and an insurance company to provide coverage based upon your timely payment of insurance premium. Life insurance provides a death benefit to your named beneficiary (usually a spouse) upon your death. When you pass away, your beneficiary files a claim with the insurance carrier to submit proof (a death certificate) of one’s passing. If an agent usually works with your family, your beneficiary can contact the agent who will help them complete the needed paperwork. Or, your beneficiary can go through the insurance company directly, and a claims representative will illuminate what to do. After the insurance company receives all the documentation, your beneficiary will be issued the death benefit remit.
If you name a minor as a beneficiary, then a custodian of the policy would have to file the claim. This could be an individual you called to manage the money from the procedure if you died while your child is still a minor. If you didn’t name anyone, then a court can appoint someone.
Main Types of Life Insurance
Life insurance can either be temporary or permanent. Temporary insurance is more commonly called term insurance, and policies are issued for a specified number of years, often from 5 to 30. Permanent insurance covers you for your entire life or up to a certain age, usually 100-years-old.
The main differences between term and permanent life insurance.
Term pays a death benefit to your beneficiary only if you die during the term period of an active policy until age 95. After that, pay a death benefit to your beneficiary regardless of when you die as long as the policy is in force.
In most cases, death benefit and the right to convert to a permanent policy without proof of insurability are the primary features that Include both a death benefit and a savings feature.
The policy has no value at the end of the term Policy builds cash or loan value you can borrow against, withdraw, or invest.
Types of Term and Permanent Insurance
Most term insurance policies sold to individual consumers are level premium term policies. This type of policy guarantees that your premium will stay the same for a set period, which could be the entire term or just a portion. Other less common types of term insurance include annual renewable time and decreasing term coverage. However, most insurance companies don’t offer these plans to individual insurance shoppers because they are generally not the best fit for families looking for the most protection due to the guaranteed premium.
Two of the most popular types of permanent insurance are whole life and universal life. Most life policies provide a level premium, so the rate you pay stays the same for the entire procedure. You can get a more considerable death benefit with most life insurance policies by passing a medical exam. Other permanent insurance policies available include variable life and variable-universal life.
How Life Insurance Policies Are Issued
Policies are either simplified issues or fully underwritten. Simplified issue policies only require that you answer questions about your health when completing the insurance application. These policies may cost more since the insurance company has less proof about your health. Fully underwritten policies require that you take a medical exam and complete lab work. You usually get a lower premium with these policies if your results show good health.
Factors That Determine Your Premium Amount
- Gender—females typically get lower rates because of longer life expectancy.
- Answers to health questions on the policy application
- Results from medical exam and lab work
- Family medical history
- Marital status
- Lifestyle—smoker/nonsmoker, alcohol consumption, risky hobbies like skydiving
Why Do I Need Life Insurance?
There are three main reasons why many Americans get life insurance:
- To pay for burial and final expenses: even a simple funeral can cost thousands of dollars. The National Funeral Directors Association reports that Americans’ median price for a funeral is $7,181 as of 2014. When you include the vault price, something that most cemeteries require, this comes out to a median price of $8,508. About 51% of Americans get life insurance for this reason, according to LIMRA.
- To replace income: if you die leaving behind a spouse and young children, it may be hard for them to make ends meet without your payment. Money from a life insurance policy can help maintain your family’s standard of living and pay for expenses that go along with raising children. LIMRA reports that 34% of American households get life insurance for this reason.
- To pay off a mortgage: a large part of your working adult life is dedicated to paying off the mortgage on your house, which can take 30 or more years. Life insurance can help ease the financial burden your family may face to keep a roof over their head after you’re gone. Money from a policy can help them continue to make monthly payments or pay off the entire balance. LIMRA states that 26% of Americans get life insurance for this reason.
How to Buy Life Insurance
- Determine your needs: calculate how much debt you have, your monthly living expenses, and your final costs. Include any future expenses, such as college tuition. Figure out how long you need replacement income and how much revenue it would take your survivors to pay for immediate and future expenses.
- Get a quote from different insurance companies: compare rates, policy features, and benefits to ensure you’re getting the best deal.
- Choose a company with a solid financial rating: companies with the highest ratings offer more guarantee that they will have the finances to pay your claim. You can get financial strength ratings from rating agencies like A.M. Best Company.
- Make an appointment with an agent: after you narrow down your search to a specific company, speak with a licensed agent to go over more details about your needs.
- Make sure you can afford the premium: double-check how much income you have coming in and how much expenses you have going out to make sure the rate you’re getting is affordable.
- Read your policy: after you’ve been issued a policy, make sure you read all the fine print. If you don’t like your approach, state laws generally mandate that you have a certain number of days to cancel your policy and receive a refund of any premiums you paid. Depending on the state, this may be within 10 to 30 days after the policy issue date.
Understanding the Life Chart
A part of buying life insurance is knowing whether you should purchase term or permanent life insurance.
Young and married with small children: young families need the most death benefit from a life policy because the need for income replacement to cover growing children is more significant. Also, if a spouse who stays home to take care of the kids were to die, it would be an additional expense for the surviving spouse to pay for child care services. A term plan is typically the least expensive in the beginning. Longer-term policies like the 20-year or 30-year plan can be the most suitable for young families.
Young and married with no children: depending on your lifestyle, it may be hard to maintain the same standard of living if one of you is no longer around. According to a Kiplinger Magazine article, a modest amount of coverage may be enough to meet your needs. Since term policies allow you to get the introductory amount of coverage you need, you can pick a plan with a lower death benefit to get a more affordable rate.
Single-Parent: like young couples with children, single-parents with more youthful kids also need a policy that provides a significant death benefit. Studies show that most single-parents are women, and the average salary single-mothers earned as of 2014 was $36,780, according to Forbes Magazine. This is far less than the average wage for married couples with children under 18, about $107,054 (as of 2013). With less income among the majority of single-parents, it’s more likely that there wouldn’t be enough savings that could be used as income replacement if the parent dies. The primary step in this situation is to get a low-cost term policy that can provide the most protection. The lower cost of term insurance makes it a good choice for single parents.
Recent empty-nester: so the kids are off to college, but that doesn’t mean your life insurance needs end. You may need to support your children through the college years to help pay for tuition, room and board, books, or even clothing. If your household runs on two incomes and you still have significant debts to pay off like a mortgage, you need income replacement protection. Depending on your age, you may also have a while to go before having enough retirement savings.
At this stage in life, a policy that has a death benefit your spouse could use to cover expenses if one of you dies. The procedure can also build cash value to supplement your retirement savings may be the most suitable. Depending on your needs, you could choose to go with a term plan that converts to permanent insurance or go straight for a permanent policy. For example, if you’re 55 and looking to have cash value in a policy by the time you’re 65, then a final expense plan may be best because it could take that long for the procedure to build cash value. This usually takes 8 to 10 years for whole life policies, according to a Kiplinger Magazine article.
If you don’t need supplemental income as fast, you could get a 10-year convertible term plan. So by the time you’re 65, you could have a whole life policy, and when you reach 75, you could have cash value in the policy. According to the Texas Department of Insurance, one thing to keep in mind when converting a term plan is that insurance companies usually only allow you to do this before you turn 65.
- Retired senior citizen: if you’re under 80, you can still get a term life insurance plan. As the Texas Department of Insurance mentioned, this is typically the maximum age at which insurance companies provide term coverage. Although the cost would be more expensive because you’re older, premiums are usually lower than a permanent insurance policy, such as whole life.
If you need a policy that can help supplement your retirement savings, then the cash value from a permanent plan may meet your needs. However, keep in mind that it does take a while to build cash value. So depending on your age, you may want to weigh the odds of whether or not you will be around long enough to take advantage of this feature. You could also choose a type of permanent insurance: final expense insurance, typically offered as a whole life policy. This type of coverage is only meant to cover your burial and funeral expenses, not your long-term financial needs.
Making a Decision
Now that you have learned the basic information from this guide, it should be easier to decide what coverage you should get.
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