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 the time where 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 form of 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, it’s important that even those people that already have policies 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 put into place to make sure 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 accrue as well. 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 as well. A substantial part of the family’s income, perhaps the only earner in the family, might be permanently lost. In addition, in a dual-income household, the surviving spouse may have to leave or lower their work to take care of children. In some cases, people left behind may be young children or people with special needs that will require long-term or permanent care.
There are also issues of sudden funeral and medical expenses that happen due to unexpected death. If the person left behind is left with substantial debt, the life insurance payment can go towards the debt instead of it being passed onto loved ones. For people who pass away and leave behind substantial assets, there may also be the issue of settling an estate tax.
In some cases, heirs may have to sell off properties that are left to them to avoid the estate tax. While many are quick to assume that life insurance is something that just the very old or very wealthy require, the truth is that anyone with family or dependents should think about 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 you’re your budget.
Life Insurance Policy Options
When you decide to commit to getting a life insurance policy, it’s important that you don’t just go with the first option that you find. Working with a trusted advisor will help you identify which life insurance policy is the right fit for 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. To be fair, though, it is one of the most convenient ways of securing coverage, and if someone didn’t have life insurance on their mind, it’s better to have the relatively small deduction from your paycheck than having no coverage at all.
For those who are concerned about life insurance coverage, it’s best that you apply some scrutiny to your policy. Many work policies may not have enough of a 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. What these policies do is supply life insurance coverage for a term (a defined time period). If you purchase a term policy with a set a term and pass away in that period of time, anyone that you name as a beneficiary will see a payout. You get to choose the payout and term length that you want when you first purchase a policy. Generally, they are either 10, 20, or 30 years. One notable thing here is that the payout and monthly cost will stay the same for the entire term. However, when the term expires, you do not have coverage unless you decide to convert the policy into whole life insurance.
Whole Life Insurance
Whole life insurance means that 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. As you make premium payments,, your policy will build up its own equity and cash value. 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 as 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 already suffering from major health conditions. In order to offset the high risk of providing a policy, these policies will not pay a death benefit for the first two years. 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 in order to help cover the funeral expenses after their death. While 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 prior to death. Final expense insurance can be a major help in a difficult time.
What is 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 is largely going to be between term life insurance and whole life insurance. Term life insurance is generally where most people start, especially for younger families. Because you can set a term and can create a policy that will provide coverage for the years while your children are dependent on you. This way, if you were to suddenly pass away, they would at least have financial support. You can set your term long enough so that when it expires your children will be off on their own.
Whole-life policies allow for more flexibility and cover situations where there’s not an 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 that lets you collect a portion of 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 which lets you buy more insurance later without a medical review.
Different providers offer different rider options, and this is only a small sampling.
Choosing An Advisor To Work With
With all this said, what’s the process actually going to 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 strike a balance between your budget and your life insurance needs. Sometimes, this is an easy task. For example, if you are just looking to get funeral insurance, you can just 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 want to work with a provider that has expertise in several different policy types so they can help you find the right fit. It’s best to find a life insurance agent that you feel comfortable talking to. It’s important to be honest and candid about your financial situation and needs. Trust and confidence will go a long way if you ever need to cash in your life insurance policy. You’ll want to have peace of mind knowing that the life insurance benefit will be there for your family when they need it. A trusted advisor can help lift the burden and help your family with the claims process.
How do Life Insurance Medical Exams Work?
One important point that we should mention is your medical exam. Most life insurance policies are going to 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, there are some policies that don’t require them. As a result of the 2020 Pandemic, many people wondered if there were contact-free life insurance policies 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 if you plan to go ahead with a medical exam, the insurer will go through your information and records to calculate your premium costs based on the risk you present on your policy. This is part of the reason it pays to get a policy early in life. A young person in good health presents the least risks, so they can get favorable rates on their premiums.
Ultimately, though, 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.
To consult with a life insurance advisor call Bryan Hodgdon at 800-392-6532 or email Bryan@colby-group.com