The Life-Changing Impact of Life Insurance

What is Life Insurance?

Life insurance is a contract between an insurance policy holder and an insurer that provides a monetary benefit to named beneficiaries upon the insured’s death. In exchange for premium payments, the insurance company provides this lump-sum payment, known as a “death benefit”, to beneficiaries when the insured passes away.

Life insurance works by pooling premium payments from policyholders so the insurer can pay out claims from those who die during the policy coverage period. Most life insurance policies accumulate cash value over time, in addition to paying out a death benefit. The cash value accrues on a tax-deferred basis and can be accessed by the policyholder through withdrawals and policy loans.

There are two main types of life insurance:

  • Term life insurance provides coverage for a set period of time, such as 10, 15, 20 or 30 years. It pays out a death benefit if the insured dies during the coverage term but does not build cash value. Term policies are a more affordable option for those wanting pure death benefit protection.

  • Permanent life insurance covers the insured for their entire life, as long as premiums are paid. It has an investment component that builds cash value, allowing policyholders to borrow against or withdraw the cash value. The death benefit and cash value grow over time. Types of permanent life insurance include whole life, universal life, and variable life insurance.

Life insurance can provide financial security for dependents and beneficiaries. The death benefit can replace lost income, pay off debts, cover final expenses, and more. Life insurance can be an important part of financial planning.

Why Get Life Insurance?

Life insurance is an important part of financial planning, especially for those with families depending on their income. There are several key reasons to consider getting life insurance coverage:

  • Protect loved ones financially – Life insurance provides funds to help loved ones cover living expenses, pay off debts, fund college savings, and more in the event of your passing. For many families, losing the primary breadwinner’s income can put them in dire financial straits if that income is not replaced. Life insurance ensures your family is provided for.

  • Pay for final expenses – Funerals, burials, and other end-of-life costs quickly add up. Life insurance benefits can cover these final expenses so your family doesn’t have to worry about covering thousands in immediate costs while also grieving. This offers financial peace of mind.

  • Replace income – For those with working spouses and dependents, your income often covers a significant portion of family living expenses. Life insurance provides a lump sum that can be invested to generate ongoing income for years to come after your death. This income replacement helps ensure your family can maintain their standard of living.

Having adequate life insurance coverage gives you assurance that your loved ones will be financially secure even in your absence. It protects against the unexpected while bringing comfort that your family’s monetary needs will be taken care of.

How Much Life Insurance Do You Need?

Determining how much life insurance to get can be tricky. The amount you need depends on several personal factors:

Income

Consider how much income you earn and provide for your family. If you were no longer around, your family would lose that income stream. The proceeds from a life insurance policy could help replace some of that lost income over time.

For example, if you earn $60,000 per year, a $500,000 policy could provide your family with around 10 years of income replacement. This gives them time to adjust financially.

Dependents

Think about dependents like a spouse, children, or aging parents. Life insurance provides money to continue supporting dependents if you’re not around.

More dependents means more life insurance needed. A stay-at-home parent with 3 young kids needs more coverage than a single person with no dependents.

Debts

Debts like a mortgage, car loans, student loans, and credit cards still need to be repaid if you pass away. Life insurance can provide money to pay off debts so dependents don’t take them on.

The greater your debts, the more coverage you likely need. Even if you have no dependents, getting enough insurance to pay debts allows for a clean financial slate.

Final Expenses

Funerals, burials, and other end-of-life costs can be expensive. Life insurance helps loved ones pay for final arrangements without financial burden.

Most experts suggest at least $15,000 in coverage just for final expenses. More may be needed for elaborate funerals or high cost-of-living areas.

Consider all these factors and the costs associated with them when determining how much life insurance to get. An insurance agent can also help assess needs and provide policy recommendations.

Types of Life Insurance

There are several main types of life insurance policies to choose from:

Term Life Insurance

Term life insurance provides coverage for a specific period of time, such as 10, 20, or 30 years. This type of policy only pays out if you die within the term. Term policies typically have lower premiums compared to other types, but they do not build cash value. Term insurance is great for covering needs you have for a particular timeframe, such as providing income for your children while they are young.

Whole Life Insurance

With whole life insurance, you pay a level premium for life and the policy accumulates cash value. This type of permanent insurance has an investment component, allowing you to grow your cash value tax-deferred. Whole life policies pay out upon death, no matter when it occurs. This type of coverage is more expensive but remains in effect forever.

Universal Life Insurance

Universal life insurance is a form of permanent life insurance with a death benefit and cash value component. You have flexibility in setting your premium payments, and can adjust the death benefit amount as needed. It offers a customizable approach, though premiums can become costly as you age.

Variable Life Insurance

Variable life insurance provides permanent coverage where you can invest the cash value portion in a variety of subaccounts. This allows you to potentially grow your cash value based on market performance, while maintaining a guaranteed death benefit. Variable policies require monitoring and carry more risk.

Final Expense Insurance

Final expense, or burial insurance, provides a small death benefit starting around $5,000 to $25,000. It is designed specifically to cover end-of-life costs like funeral and burial expenses. This simplified policy has no medical exam and is easier to qualify for.

The main types of life insurance offer permanent or temporary coverage, cash value options, and flexibility for different needs and budgets. Consulting with a financial advisor can help determine the right policy for your unique situation.

Term Life Insurance

Term life insurance provides temporary coverage for a set period of time, usually 10, 15, 20 or 30 years. This type of life insurance is designed to cover your financial responsibilities and dependents for a specific term.

Term life policies tend to have lower premiums compared to permanent forms of life insurance like whole life. This makes term life insurance more affordable for most people. The tradeoff is that term life insurance only provides coverage for the predetermined term length. Once the policy expires, your coverage ends unless you choose to renew it.

With term life insurance, your death benefit payout to beneficiaries remains level throughout the duration of the term. It does not accrue cash value like whole life insurance does. Term life insurance is best suited for covering short- or medium-term financial needs like paying off a mortgage, funding a child’s college education, or replacing lost income for your family.

The lower cost of term life insurance makes it a practical option for protecting loved ones in the event of your passing. You can lock in coverage for 10, 20 or 30 years to cover specific expenses without paying exorbitant premiums. While term life insurance is temporary, it is an affordable way to secure the necessary death benefits to protect your family.

Whole Life Insurance

Whole life insurance is a form of permanent life insurance that provides lifetime protection as long as you continue paying the premiums. It is also sometimes called “straight life insurance” or “ordinary life insurance.”

Whole life insurance policies come with a level premium that stays the same throughout the life of the policy. This means you pay the same amount each year for the coverage. While term life insurance only provides temporary coverage, whole life insurance provides permanent protection that lasts for your entire lifetime.

A key feature of whole life insurance is that it has a cash value component that builds up over time. A portion of each premium goes toward the policy’s death benefit coverage, while the remaining portion builds cash value that the policyholder can access while still living.

The cash value accrues on a tax-deferred basis and can be withdrawn or borrowed against. Policyholders can take loans against the cash value as a way to access funds while keeping the death benefit protection intact. The cash value earns interest at a rate set by the insurance company.

Whole life insurance tends to be more expensive than term life insurance since it offers permanent coverage. However, the premiums are locked in once the policy is purchased, so they will not increase with age or changes to your health. This allows you to lock in a premium rate when young and healthy that will continue throughout your lifetime.

People may consider whole life insurance if they want lifelong insurance protection, want to build cash value that can be used while living, or want to lock in premium rates at an early age. It can also be used in estate planning to help minimize taxes when passing on assets to heirs.

Getting Life Insurance

Once you’ve determined how much coverage you need and what type of policy makes sense for your situation, it’s time to start shopping for a life insurance plan. The process of getting life insurance involves several steps:

Health Evaluation

When applying for life insurance, you’ll need to go through a health evaluation so insurance companies can assess your risk level. This typically involves:

  • Medical exam – This may include blood work, urinalysis, and in some cases an EKG or other heart screening. The exam is done by a paramedical professional.

  • Health and medical history – You’ll fill out detailed forms covering your health background, prescriptions, family medical history, and lifestyle (smoking, alcohol use, driving record, etc). Honesty is crucial.

  • Motor vehicle records check – Companies will verify your driving and motor vehicle violation history. Too many moving violations can increase your premiums.

  • Prescription history check – Insurance companies can access pharmacy databases to validate your prescription drug history.

  • Interviews – You may also have an interview with a nurse or medical professional to further review your health.

The goal of the health evaluation is for the insurance company to accurately gauge your life expectancy and risk factors. Being in excellent health can potentially lower your premiums.

Shopping for Plans

Once the health evaluation is complete, you can start reviewing plan options from various insurance carriers. When comparing plans, look at:

  • Premium amount and structure – Consider both the initial premium and how it may change over time.

  • Length of coverage – Compare term lengths for term life policies.

  • Amount of coverage – Make sure the death benefit meets your needs.

  • Riders and extras – Review optional riders like waiver of premium, accidental death, or chronic illness riders.

  • Company financial strength – Select an established company known for honoring claims.

An independent insurance agent can help you evaluate plans from multiple insurers to find the best fit. You can also get quotes directly from insurance company websites.

Applying

The application process will vary by insurance company but generally involves:

  • Completing an application – This covers your personal details, policy specifications, and beneficiary designation.

  • Paying initial premium – You’ll need to submit payment to activate coverage.

  • Signing forms – Review and sign any required paperwork thoroughly.

  • Scheduling exams – If needed, you’ll schedule any required medical exams with a paramedical examiner.

  • Interview – You may need to do an application interview by phone or in person.

  • Reviewing the policy – Carefully review the issued policy for accuracy before the free look period expires.

The underwriting process can take 4-6 weeks. Once approved, your life insurance coverage will be in effect as long as you pay your premiums on time. Maintaining your policy will involve ongoing premium payments and periodically reviewing your coverage needs.

Choosing a Life Insurance Company

When shopping for life insurance, it’s important to choose a reputable company that’s financially stable and provides good customer service. Here are some factors to consider when evaluating life insurance companies:

Financial Strength

  • Check the insurer’s financial ratings from agencies like A.M. Best, Moody’s, and Standard & Poor’s. These ratings assess an insurer’s financial strength and ability to pay out claims. Look for companies with high ratings (A, A+ or A++ from A.M. Best).

  • Review the company’s financial statements. Look for positive trends in assets, reserves, and surplus over time. Make sure the insurer has enough assets to pay anticipated claims.

  • Consider the age and reputation of the company. Established insurers with a long history may be more stable.

Customer Service

  • Read reviews and complaints to evaluate customer satisfaction. Good insurers resolve issues promptly and have positive reviews.

  • Ask about support options like phone, email, live chat, and online account access. Convenient customer service can make your experience smoother.

Premium Costs

  • Get quotes from multiple highly-rated insurers. Compare costs for the same coverage amounts and terms.

  • Consider the insurer’s premium increase history. Companies with smaller and less frequent increases may be more affordable long-term.

  • Ask about discounts that could lower your premiums, like bundled policies or health incentives.

Taking the time to research and compare life insurers can help you find an affordable policy from a reputable provider. Prioritize financial strength, customer service, and long-term value when choosing a life insurance company.

Life Insurance Riders & Options

Life insurance policies often allow you to add additional features, called riders, to customize your coverage. Here are some common life insurance riders to consider:

Disability Rider

A disability rider allows you to continue your life insurance coverage without paying premiums if you become disabled. This ensures you maintain your policy even if you lose income due to an illness or injury. With a disability rider, premiums are waived if you are disabled according to the policy definition, which usually requires being unable to work for 6 months due to sickness or injury.

Accelerated Death Benefit Rider

Also known as a “living benefits” rider, an accelerated death benefit allows you to access part of your death benefit while still alive if diagnosed with a terminal illness. For example, if given 12 months or less to live, you could withdraw up to 50% of the death benefit early to help pay for medical bills, housing, and other needs.

Waiver of Premium Rider

A waiver of premium rider will waive the premium payments if the insured becomes disabled and is unable to work. This ensures the policy stays in force without paying premiums during the disability period. The definition of disability varies by policy.

Adding riders like these to your life insurance can be valuable. But they also raise the policy cost. Evaluate your specific needs and priorities when deciding on riders. An insurance agent can explain your options. With the right additions, you can customize your life insurance to fit your financial situation.

Maintaining Your Policy

Once you have a life insurance policy in place, there are some ongoing maintenance tasks you’ll need to stay on top of to ensure your policy remains valid and your beneficiaries are properly set up. Here are some key areas to focus on:

Paying Premiums

  • Make sure to pay your life insurance premiums on time and in full each month or year, depending on your payment schedule. Set up automatic payments or calendar reminders if needed.

  • If you ever run into financial hardship and have trouble making premium payments, contact your insurer immediately. There may be options to reduce or defer payments temporarily.

  • Letting payments lapse can put your policy at risk for termination, so stay in communication with your insurer if you anticipate any issues.

Updating Beneficiaries

  • Review your beneficiary designations regularly, at least once a year, and after any major life events. Update as needed if relationships or circumstances change.

  • Primary beneficiaries are first in line to receive the death benefit payout. Secondary or contingent beneficiaries only receive funds if no primary beneficiaries are living.

  • Minor children cannot directly inherit life insurance funds. Assign an adult as custodian for minors under your state’s UTMA or UGMA laws.

Policy Conversion

  • Many term life policies allow you to convert to permanent life insurance within a certain timeframe, often 10-15 years.

  • Converting term policies to permanent coverage allows you to lock in insurability and continue life insurance as you age. Premiums will rise substantially, however.

  • Discuss conversion option timeframes with your insurer. Take advantage before option periods expire or health conditions develop that could prevent qualifying for permanent coverage.

  • Review insurability and premiums carefully before converting term life policies. Make sure permanent coverage aligns with changing insurance needs.

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