TL;DR: Understanding how life insurance works can help you protect your family’s financial future with confidence. This blog breaks down why coverage matters, the different policy types available, and how to choose a plan that fits your needs and budget.
Main points:
- Why life insurance is crucial for income protection, debt coverage, and long-term family support.
- The major policy types—term, whole, variable, employer-based, guaranteed issue, and final expense—and how they differ.
- How life insurance works in practice, from premiums to payouts and cash value.
- What determines the right coverage amount and term length for your family.
- Pros and cons of no-exam policies and how an advisor helps you find the best fit.
Not everyone is comfortable talking about life insurance, but it’s a discussion every family should have. Young, healthy families with young children often get the most favorable life insurance rates.
National statistics show that roughly 60% of Americans had some form of life insurance, but 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 those 60% of Americans have their policies through their employer, meaning they would have no coverage if they lost their job.
- Many people are underinsured. Their families would still face financial stress if they died unexpectedly, even with current policies.
As a result, even those with policies must consider whether they are getting the coverage they need. If you don’t have insurance at all, now is the perfect time to look into it. But where do you start? Here’s what you need to know.
Why Everyone Should Think About Life Insurance
A life insurance policy ensures 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?
When a loved one dies suddenly, grief comes first, but immediate financial concerns follow. A substantial part of the family’s income, perhaps the only earner, might be permanently lost. Even 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 someone dies with substantial debt, their life insurance payout can cover that debt instead of leaving it to loved ones. If someone dies with 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. Many assume life insurance is only for the elderly or wealthy. In reality, anyone with family or dependents should consider a policy.
Many people avoid life insurance because they assume it will be expensive. You’ll likely find a policy that balances your financial needs and budget with a life insurance advisor.
Type of Life Insurance Policy Option
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 types of life insurance available so you can understand how life insurance works across policy types.
Policies Through Your Employer
A life insurance policy offered through your job ties your coverage to that employer, which can be a drawback. Employer-provided life insurance is convenient, and even a small paycheck deduction is better than having no coverage.
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 period). A term life policy covers you for a set period. If you die within that period, your beneficiaries receive the 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. When the term ends, your coverage stops unless you convert the policy to whole life.
Whole Life Insurance
Whole life insurance means you have coverage for your entire lifetime. 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 life insurance 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 choose to take the cash value in an emergency. But doing so reduces or eliminates their death benefit, so the decision requires caution.
Variable Life Insurance
Variable life insurance is close to whole life insurance in coverage and structure, but there’s one key difference. The cash value isn’t tied to your premiums. It grows through investment accounts such as bonds, money market funds, or equity options. 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 life insurance 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. It 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 healthy people shopping for coverage, the main choice is between term life and whole life insurance. Term life insurance is generally where most people start, especially for younger families.
You can choose a term that covers the years your children depend on you, ensuring they have financial support if you die 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. If you have a permanent dependent (e.g. a child or family member with special needs) you can direct the life insurance payout into a trust for their lifelong care. 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 life insurance 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.
4 Things to Help You Determine How Long You’ll Need It
Term life insurance is available is many different terms. Use these questions to decide what length of term is right for you and your family.
1. How long will your dependents need your income?
The length of a term life insurance policy greatly depends on the number of years your dependents will need an income. Determine how many years will it be until you officially have an empty nest.
2. What are your future plans for your dependents?
Families have different plans for the support their dependents will need in the future. For example, do you have kids that you plan to put through college or will they be independent at the age of 18?
3. How close are you to receiving retirement benefits?
Every person has a different retirement plan in place. Sometimes it’s difficult to look far into your future and determine the future needs of your family without you. It’s hard to do! An insurance agent and a financial advisor you can put together the pieces of the puzzle.
4. What is the length of your major debt obligations?
Look at major, long-term debt such as your mortgage and other personal loans.
Term life insurance policies come is several term lengths such as 10, 15, 20 and even 30 years. Depending on the answers and with a trusted insurance agent’s help you are sure to find the right length for your term insurance policy.
How to Balance Your Needs with Your Budget
Life 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.
It’s important to talk with a trusted advisor. An easy way to start thinking about your life insurance coverage needs to find the balance between:
- your needs
- financial obligations
- additional family income
- investments
- savings
Your Financial Obligations
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:
– 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?
Most life insurance policies require a medical exam to confirm your eligibility. You’ll also answer questions about your health and medical history. If you prefer to avoid an exam, some policies let you skip it.
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 premiums may rise or fall depending on your medical history or current conditions. Some people prefer to skip the medical exam because they feel uneasy with an outside examiner or fear rejection due to a pre-existing condition.
No-exam life insurance is available, but you must understand how this form of life insurance works.
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 often struggle to qualify for traditional life insurance because they pose a higher risk. No-exam policies give them access to coverage, but the premiums are much higher.
Guaranteed-acceptance policies are easier to get, but they offer low payouts that may not support dependents for long.
There are many reasons why someone may want to investigate life insurance without having a medical exam done first. However, people must understand what life insurance 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 need life insurance for your 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 with expertise in several different policy types to 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
