There’s surely no shortage of life insurance advertisements! Between commercials on the TV, ads on the radio, or even the endless amount of mail you may receive from various insurance companies, it’s hard to avoid hearing about life insurance.
However, many people do not fully understand what life insurance is, and if life insurance is worth the investment. If you’re curious in purchasing life insurance, or just want to know more about this insurance product, read on.
We’ll simplify the complex world of insurance for you so that you’re ready to take the next steps towards retirement.
How Does Life Insurance Work?
Life insurance is an agreement one would have with their insurance company. Each month you pay the insurance company a premium, and when you pass away, the insurance pays a death benefit (a specific financial amount) to your beneficiaries (or the people you chose to pass this benefit to).
There are numerous types of life insurance, each with its own unique purpose.
What Is the Purpose of Life Insurance?
The purpose is to provide the beneficiary with a financial benefit when the insured individual passes away. For example, imagine a married couple.
The husband and wife both carry life insurance, and select each other as the beneficiary of their plan. If either of them were to pass away, the widowed spouse would receive the financial benefit of their deceased spouse.
Imagine if the husband passed away at 60 years old, and had a life insurance premium that paid $500,000. In this case, the wife would receive $500,000 upon her husband’s passing. This money can be used for all sorts of expenses.
How Much Is Life Insurance?
There’s no simple way to calculate the cost as there are so many variables to take into consideration. Such variables include your; age, height, weight, gender, occupation, habits (such as exercising, smoking, or drinking alcohol) and even risk factors in your daily life.
With that said, the expense can range.
On average, people in their 20’s or 30’s are spending between $20 and $40 per month on insurance premiums whereas those in their 40’s and 50’s can spend $80 – $100 per month in insurance premiums.
At What Age Should I Get Life Insurance?
The rule of thumb is the younger the better. Statistics show those in their 20’s are healthier than those in their 40’s, and the healthier you are, the less expensive your premium will be!
What Does Life Insurance Cover?
Life insurance covers natural, accidental, and unintentional death. For instance, if you had life insurance and were killed by an at fault driver, your beneficiary should receive your life insurance pay out.
Whereas, if you had life insurance and committed suicide, your beneficiary will not receive any money. Life insurance helps cover many expenses.
For example, life insurance can cover; your funeral costs, the mortgage on your home, paying off debt, and even be used for savings by the beneficiary.
Is Life Insurance Worth It?
In most cases, it is absolutely worth it. The reality is, you can’t predict the future and death can occur unexpectedly.
If you’re married, in a serious relationship, have kids, or have someone who could benefit from money when you pass away, this is a great insurance to carry.
How Often Should I Review My Life Insurance?
Life insurance should be reviewed once per year. Think about it every time you get a physical, and review it with your insurance agent following your physicals results.
What Are the Qualifications for Life Insurance?
To qualify, you’ll have to go through an application process. This application process is intense, and the insurance company will ask quite a few questions.
These questions are designed to get an understanding of your health, and your lifestyle, and this data will be used to calculate your insurance premium. Such questions include:
- Date of birth
- Height and weight (your body mass index or body fat may also be taken into consideration)
- Your medical history, and your family’s medical history
- Questions pertaining to your lifestyle, such as your engagement in high risk activities (racing cars, skydiving, scuba diving, etc)
- A list of all the medications you are currently taking
- Your alcohol, drug, and smoking use
- Your occupation
- Financial information
Types of Life Insurance
Life insurance is not a one size fits all approach. There are definitely different types better suited for different needs.
This is an insurance option that lasts for the duration of one’s life. Whole life is much more complex than term life insurance (covered below), as whole life insurance is also an investment with a growing cash value.
This type is also referred to as a blend between insurance and investing.
Term life is rather straightforward. The policyholder will pay an insurance premium for a specific period of time, also known as a term.
A term is typically between 10-20 or 30 years. If the policyholder happens to die during their term period, the policy will pay their beneficiary the financial death benefit.
Return of Premium
Return on premium life insurance offers a flat premium payment term, and returns the premium in full if the policy holder outlives the term duration.
Level term is another type of life insurance option. This type of insurance pays a flat death benefit for the entire duration of the policy.
It doesn’t matter if the policy holder passes away after year 2 of owning the policy, or year 25. The financial death benefit is the exact same.
Increasing term insurance is a form of term insurance (meaning it only lasts for a specific period of time) where the insured value increases throughout the duration of the policy. The premium will likely also increase throughout the term.
The idea behind an increasing term policy is you will earn more, and need more money, as you progress through life — and this insurance adjusts on that notion.
As we mentioned earlier, the application process for whole or term life insurance is rather extensive. Guaranteed issue life insurance does not have a health application process, nor does it require you to go through a medical exam.
However, there is a waiting period of 2-3 years before the policy actually goes into effect. The death benefit is also lower than term or whole life insurance.
Permanent life insurance is a term for life insurance policies that do not have an expiration date. The two most common types of permanent life insurance are universal life and whole life insurance.
Universal life insurance is a form of permanent life insurance. This option is a blend between insurance and savings.
Policyholders can pay additional premiums, which is then invested and grows tax deferred. The additional premium is moved into a savings account that earns a low interest rate every month.
Guaranteed universal life insurance is viewed as the golden zone between a term life insurance policy and a whole life insurance policy. This is insurance that will be in place until you pass away.
Once you do pass, a death benefit is paid. However, the growth rate on the cash value will not keep up with the cash value growth rate found in a true whole life policy.
Another form of permanent life insurance is indexed universal life insurance. This life insurance not only provides a cash value, it will also provide a death benefit.
The cash account will earn interest based on various indexes in the stock market – such as the S&P 500. The attraction here is that the cash aspect of this insurance grows tax deferred until retirement.
Variable universal life insurance is a form of insurance that grows a cash value over time. The main difference between variable universal insurance and the other universal insurance mentioned above is, there are more investing options with a variable insurance policy.
As with all universal policies, a death benefit is paid upon your passing.
Burial insurance, also known as final expense or funeral insurance, is a type of insurance policy that is designed to absorb the bills involved in passing away. For instance, if you were to pass away your loved ones may stress about the funeral costs.
If you had burial insurance, your loved ones would receive a death benefit upon your passing to pay for these expenses. The payout is usually between $5,000 and $25,000.
Main Components of Life Insurance
The main components of life insurance can be broken down into three key terms.
The first term to review is the premium. Simply put, the premium is the amount the policyholder pays to carry this insurance.
Premiums are either paid monthly, quarterly, or yearly.
The second term is the death benefit. This is the amount of money that is paid out to the beneficiary when the policyholder passes away.
Last but not least, the cash value. The cash value is the part of your premium that is invested and earns a slight interest rate.
If the policyholder had an emergency, they can draw against the cash value of their insurance. This is a loan against your insurance, and if the policyholder were to pass away before fully paying back the borrowed money, the death benefit would be reduced by the outstanding cash value.
Who Needs Life Insurance?
Now that we’ve covered all the details and different types, let’s review who should have life insurance.
Married (or Partnered) Couples Who Own Property
Couples who own property together can always benefit from having life insurance. In the event someone were to pass away, their income would be removed from the equation.
A life insurance policy would be good insurance to carry to prevent the surviving partner from financial hardship. In the event one of the partners were to pass away, the life insurance policy would pay a death benefit, and that death benefit can help pay for the properties expense.
Married (or Partnered) Couples With Minor Children
If a couple has young children, a life insurance policy is good to have. In the event one of the parents were to pass away, the surviving parent may have a heavy financial burden to carry.
A death benefit could help pay for the house/cost of living, or could be used to pay/save for college.
Single parents should also consider carrying life insurance. In the event the single parent were to pass away, they’d want to be sure their children have enough money to take care of themselves.
A death benefit can help bridge the financial gap children may face.
Parents With Special-Needs Adult Children
If your adult child has special needs, you may still be the primary caregiver for your child even if it’s late into their adult years. If you were to pass away before your child does, who would take care of your son or daughter?
They may need care around the clock, and the death benefit paid may help pay for such care.
People Who Cannot Afford Funeral Expenses
Everything in life costs money, and that even includes passing away. Funerals can cost between $5,000 and $25,000 on average.
If you or your family does not have the money to pay for a funeral, carrying a final expense, or burial insurance, is a smart option. When you pass away, the beneficiary is paid a lump sum of cash, and that cash is used to pay for your burial expenses.
Businesses That Have Employees
Businesses who want to attract employees to work for the company can use life insurance as a benefit to appeal to the candidate base. Additionally, a business can have an insurable interest in their employees, so the business isn’t faced with financial hardship if a key employee dies.
Life insurance in your retirement years still makes sense. Although it wouldn’t replace your lost income if you were to pass away, it could be used to leave your loved ones an inheritance.
What Is a Life Insurance Rider?
A life insurance rider are extra benefits a policyholder can add onto their life insurance policy. Some of the most common riders include:
Accidental Death Rider
An accidental death rider will pay an additional death benefit, above and beyond the death benefit provided on your standard policy, if the policy holder dies in an accident.
Child Term Rider
A child term rider is a death benefit that is paid if a child dies before a specific age. If the child survives beyond the maturity of the policy, the policy will convert to a term life insurance policy without needing a medical exam.
Long Term Care Rider
If the policyholder ever needed long term care, such as around the clock healthcare at their home, or must live in a nursing home full time, a long term care rider would absorb some, or all, of that cost.
Return on Premium Rider
A return on premium rider is when the insurance company refunds all your premiums at the end of the policy, if the policyholder is still alive.
Advantages of Life Insurance
The three most common benefits are:
- The death benefit can protect your family from financial hardship when you pass away.
- The monthly premium can fit most budgets. One can get premiums as low as for $20 a month!
- There are tax benefits associated.
Disadvantages of Life Insurance
Some of the disadvantages of life insurance include:
- Policies are often complex with a lot of fine print and insurance jargon. You must fully understand what you are signing up for, and what would cause the insurance company to not pay a death benefit.
- The returns on life insurance do not keep up with the stock index. Instead of paying a monthly premium, you could invest that money in the stock market. If you started doing this in your 20’s and passed away in your 70’s or 80’s, the money invested in the stock market would likely be greater than the death benefit the insurance policy would have paid.
- Above we indicated life insurance fits most budgets, and that’s true if you sign up when you’re young. But if you buy life insurance in your older years, it can be rather expensive.
Is Life Insurance Right For You?
Life insurance is a tool in your financial tool chest. It’s certainly not the only tool you should have, but it comes in handy.
There are many reasons why one would want to carry life insurance. When you stop to think about it, life insurance isn’t about you, it’s about your loved ones.
In the event you passed away, it would provide your loved ones/beneficiaries with a financial death benefit. This could help keep life on track for them in your absence.
Signing up in your younger years will help you get an affordable policy, and each policy comes with some tax benefits. However, this by itself is not enough.
When paired with other financial tools/investments, you can truly fortify your family’s financial security and future.