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Life insurance 101 - Financial Peace of Mind

Life Insurance 101

Not everyone is comfortable talking about life insurance, but it’s a discussion every family should have. This especially applies to young, healthy families with young children because this is when there’s an opportunity to get more favorable pricing on life insurance.

According to national statistics, roughly 60% of Americans had some form of life insurance; however, they may not have the coverage that they need.

  • This means 40% of Americans still have no coverage for their dependents, estate taxes, or funeral expenses.
  • Some of that 60% of Americans have their policies through their employer, meaning they would have no coverage if they lost their job.
  • Many people are underinsured, meaning their families would still be under financial duress if they suddenly died, even with the existing policies.

As a result, even those with policies must consider whether they are getting the coverage they need. And, for those without life insurance, now is the perfect time to look into getting it. But where do you start?

Why Everyone Should Think About Life Insurance

Fundamentally, a life insurance policy is implemented to ensure that your family and dependents are taken care of financially if something happens to you. When you purchase a life insurance policy, you pay premiums towards the policy on a monthly or quarterly basis. Depending on the nature of your policy, additional value may also be added. When you pass away, the death benefit (payout) will be given to your beneficiaries as outlined in the policy.

Why is life insurance so important?

While the first thing that comes to mind in the event of sudden death in the family is grief, there is also a practical financial concern. A substantial part of the family’s income, perhaps the only earner, might be permanently lost. In addition, in a dual-income household, the surviving spouse may have to leave or lower their work to care for children. Sometimes, people left behind may be young children or people with special needs requiring long-term or permanent care.

Sudden funeral and medical expenses also happen due to unexpected death. If the person left behind has substantial debt, the life insurance payment can go toward the debt instead of being passed on to loved ones. For people who pass away and leave behind significant assets, there may also be the issue of settling an estate tax.

Sometimes, heirs may have to sell off properties left to them to avoid the estate tax. While many quickly assume that life insurance is something that just the very old or wealthy require, the truth is that anyone with family or dependents should consider getting a policy.

One of the things that may hold a lot of people back from considering a life insurance policy is the perception that it’s going to be expensive. This isn’t the case at all. In fact, with the help of a life insurance advisor, you will likely find a policy that balances your financial needs and budget.

Life Insurance Policy Options

When you commit to getting a life insurance policy, it’s essential that you don’t just go with the first option you find. Working with a trusted advisor will help you identify which life insurance policy fits your needs. Let’s take a look at the different options.

Policies Through Your Employer

We mentioned how getting a life insurance policy as a part of your benefits package means your coverage is linked to that job, which may be a drawback. It is one of the most convenient ways of securing coverage, and if someone doesn’t have life insurance on their mind, it’s better to have a relatively small deduction from your paycheck than to have no coverage at all.

For those who are concerned about life insurance coverage, you should apply some scrutiny to your policy. Many work policies may not have enough payout to cover a family with long-term dependents. Look into the details of your work policy to see what coverage you have rather than assuming your plan is sufficient for your needs.

Term Life Insurance

Term life insurance is considered one of the most affordable and accessible options. These policies supply life insurance coverage for a term (a defined time period). If you purchase a term policy with a set term and pass away in that period of time, anyone that you name as a beneficiary will see a payout. You can choose the payout and term length you want when you first purchase a policy. Generally, they are either 10, 20, or 30 years. Notably, the payout and monthly cost will stay the same for the entire term. However, when the term expires, you only have coverage if you decide to convert the policy into whole-life insurance.

Whole Life Insurance

Whole life insurance means you will have coverage for your entire lifetime, and because of that added benefit, you can expect to pay more in premiums. There is one other aspect that differentiates whole life policies. Your policy will build up its equity and cash value as you make premium payments. This may be compounded with dividends depending on what type of policy you buy.

You can use this cash value as a loan, borrowing money against the policy. Some people may also decide to forfeit their penalty if they need cash in an emergency; however, this also means reducing or losing your death benefit, so you want to make this decision carefully.

Variable Life Insurance

Variable life insurance is close to whole life insurance in coverage and structure, but there’s one key difference. Rather than being tied to your premiums, the cash value is associated with investment accounts, such as bonds, money market, or equity. The major benefit here is that you may have a far greater cash value to work with; however, you need to be far more involved with the daily management of your account.

Guaranteed Issue Insurance

Issues like diabetes, cancer, and heart conditions may leave you uninsurable under many policies. Guaranteed issue life insurance is intended for people suffering from significant health conditions. These policies will not pay a death benefit for the first two years to offset the high risk of providing a policy. However, any premiums paid during this period will be returned. After those two years, the payout will be handled similarly to a conventional life insurance policy.

Final Expense Insurance

Also known as burial insurance, this is generally a smaller-scale policy that people get to help cover the funeral expenses after death. At the same time, this is generally a smaller payout; a sudden funeral can cost between $7,000 and $12,000. This doesn’t include any medical expenses incurred before death. Final expense insurance can be a significant help in a difficult time.

What is the Best Life Insurance Option For You?

With so many options, how do you determine what is best for you?

For most people in good health and thinking about life insurance, the debate will primarily be between term and whole life insurance. Term life insurance is generally where most people start, especially for younger families. You can set a term and create a policy that will provide coverage for the years while your children depend on you; this way, they would at least have financial support if you were to pass away suddenly. You can set your term long enough so your children will be off on their own when it expires.

Whole-life policies allow for more flexibility and cover situations with no expiration date on financial concerns. For example, if you were to have a permanent dependent, like a family member or child with special needs, the life insurance payout could be set to go into a trust for their permanent care. In addition, you can use that money to handle estate taxes or contribute to inheritances since the payouts are generally larger.

Other policies we mentioned, like final expense insurance and guaranteed issue insurance, are more specific in use, but you can also customize your general policy with different life insurance riders. Generally, these will either increase your premium or require a fee to execute. However, they can provide some helpful coverage options. A few examples of riders include:

  • Waiver of premium if you are unable to work due to disability.
  • The accelerated death benefit lets you collect some benefits early after being diagnosed with a terminal illness.
  • Long-term care if you need help paying for nursing homes or assisted living.
  • Guaranteed insurability lets you buy more insurance later without a medical review.

Different providers offer different rider options; this is only a tiny sampling.

How to Balance Your Needs with Your Budget

Balance your life insurance needsLife insurance will provide your family with a safety net after you leave. It will help cover the debt, provide income, and help your family maintain their accustomed lifestyle. Everyone’s life insurance needs will vary depending on their financial and family situation, so it’s important to talk with a trusted advisor. An easy way to start thinking about your life insurance needs to find the balance between your needs or financial obligations and your resources, such as additional family income, investments, savings, etc.

Your Financial Obligations

Take a look at the financial obligations you have as well as anticipated future obligations.

Amount of debt.

  • Monthly bills such as heating, electricity, phone/internet, etc.
  • Lifestyle and how much will it cost to maintain it
  • The time you have before retirement benefits
  • Dependents – here are some things to consider about the needs of your dependents:
    – How many dependents rely on your income?
    – How much longer will they need support?
    – What are their future needs, such as schooling?
    – Future medical needs such as orthodontics?

Resources

Before you decide how much life insurance you need, consider what additional resources will be available to your family after you’re gone, such as:

  • Investments
  • Savings
  • Ability to pay off debt if your income is reduced
  • Plan out how your resources will be able to provide income over time

With over 2,000 companies offering Life insurance, shopping for a policy can be overwhelming. An independent insurance agent will have access to several different life insurance carriers. They can provide several options to find the one that best fits you and your family.

How do Life Insurance Medical Exams Work?

no medical exam life insuranceOne crucial point that we should mention is your medical exam. Most life insurance policies will require some form of a medical exam to determine your eligibility. This is generally supplemented with a series of questions about your health and medical history. If you don’t want to go through an exam, some policies don’t require them. As a result of the 2020 Pandemic, many people wondered if contact-free life insurance policies were available that did not require a medical exam. The good news is there are policies you can get. It’s best to talk with a life insurance advisor who can help you navigate the pricing and coverage options.

Whether you are looking for a contact-free policy option or plan to go ahead with a medical exam, the insurer will review your information and records to calculate your premium costs based on the risk you present on your policy. This is part of why it pays to get a policy early in life. A young person in good health presents the least risk of getting favorable rates on their premiums.

Ultimately, the best way to get an ideal life insurance policy is by working with a trusted life insurance expert who knows the best options for people in your situation. Even though you can’t predict what lies ahead in life, you can do what it takes to keep your loved ones as protected as possible.

Is It Possible to Get Life Insurance Without A Medical Exam?

One of the hallmarks of many life insurance policies, especially whole-life ones, is a medical exam. A medical professional will analyze your blood and urine and ask questions about your medical history.

Your premium prices may be adjusted based on your medical history or current conditions. However, for many reasons, a person may want to look into a policy without a required medical exam. Perhaps they are uncomfortable having someone other than their physician conduct the exam or fear getting rejected due to a pre-existing condition. There are life insurance policies that don’t require an exam, but it’s essential to understand what they entail.

Options Without A Medical Exam

If you want the easiest method to get life insurance without a medical exam, look into getting it through your job. If you have a life insurance policy as a part of your benefits package, you’ll generally be able to take part without requiring an exam. However, you need to make a few considerations when going this route. While it’s an easy method without a lot of added paperwork or expense, if you were to lose your job, you would lose your coverage. This could lead to a large coverage gap while you look for another job with a policy as a part of its benefit. In addition, if you have several long-term dependents, the policy’s payout may not be enough.

If you do not feel your employee policy has enough coverage and are concerned about the continuity of coverage, you can still use other methods without relying on a medical exam. Simplified issue life insurance is probably the most versatile option for getting a policy without an exam. Generally, all you’ll have to do in this case is to answer a brief series of questions about your health. While this can vary based on your state and insurer, you can expect them to include some of the following:

  • Do you smoke?
  • Do you have HIV/AIDS?
  • Are you currently in a care facility or hospital?
  • Have you been declared terminally ill?

These questions allow insurers to determine significant health-risk factors before giving you a policy. Remember, falsifying information will enable them to void claims after your death.

The second option you have is a more limited one, but it can be beneficial for families trying to avoid going into debt over burial expenses. Guaranteed acceptance life is a policy with a low payout generally used to help with burial costs. The payout will vary by state, but $50,000 is the most common.

The Drawbacks of Purchasing a Life Insurance Policy Without a Medical Exam

Many may wonder if getting this type of insurance has any significant drawbacks. The major one is that, on average, a no-exam life insurance policy will be more expensive than one with an exam. This is primarily to help offset the increased risk that the provider incurs.

People with chronic conditions like diabetes are unlikely to get other life insurance policies due to their increased chance of collecting on them. No-exam policies mean they will at least get something, but it comes at a higher price. In addition, policies like guaranteed acceptance life may be more accessible but have a low payout that won’t be enough to support surviving dependents for an extended period.

There are many reasons why someone may want to investigate life insurance without having a medical exam done first. However, people must understand what coverage is available with these policies and the potential risks and additional expenses involved. To ensure you have something that fits your needs and that you fully understand, consult with a trusted and experienced insurance expert.

Choosing An Advisor To Work With

With all this said, what will the process look like when you find that ideal policy and are ready to move forward?

Before you rush into buying the first policy you find, you will need to take a close look at your financial situation. This will help you balance your budget and your life insurance needs. Sometimes, this is an easy task. For example, if you want funeral insurance, you can estimate based on the costs you see for burial/service now. However, if you’re trying to cover a family, you will need to cover all custodial responsibilities until your children are independent. A qualified life insurance advisor can help you calculate your needs.

Ideally, you would like to work with a provider that has expertise in several different policy types so they can help you find the right fit. Finding a life insurance agent you feel comfortable talking to is best. Being honest about your financial situation and needs is essential. Trust and confidence will go a long way if you ever need to cash in your life insurance policy. You’ll want peace of mind knowing that the life insurance benefit will be there for your family when needed. A trusted advisor can help lift the burden and help your family with the claims process.

To consult with a life insurance advisor, call 800-392-6532 or email insure@colby-group.com

This article is for informational purposes only. Insurance needs, and coverages vary, therefore the terms of your policy will be specific to your situation. We recommend that you discuss your insurance needs with a licensed agent for details on pricing, coverages, and exclusions.