[vc_row][vc_column width=”2/3″ el_class=”section section1″][vc_column_text]The majority of people have some kind of knowledge of auto insurance, homeowners or renter’s insurance, and healthcare insurance. But what about life insurance? Numerous Americans either do not have any coverage at all or have inadequate coverage, even though it is considered one of the most important types of insurance you can have. In the following commentary, we will demonstrate how important life insurance is and give you a step by step through the numerous types of insurance available – primarily term life insurance versus other kinds of permanent life insurance. Also, we will also touch on how much coverage to buy and what to look for in an insurance policy.
Why you need to get life insurance
Previously, it was thought that only the rich could afford life insurance. However, regardless of how much money you earn, you still need life insurance to provide your family and loved ones in case you pass away unexpectedly.
If you are wondering if you still need life insurance, think about how your untimely death will financially impact those most important to you. If you believe it will, then you must get life insurance.
Even if you are not currently earning any money, your death could still deliver a financial blow to your loved ones. Think about the scenario of you being a stay-at-home parent who watches the children while your partner works. In the event of your death, your spouse could be hurt financially because then they would need to pay for childcare to take care of your children.
The inner workings of life insurance
Buying life insurance is, in essence, signing a contract with your life insurance company. Your life insurance company pays a sum of money after your passing called a death benefit. In contrast, you agree to pay premiums (fees related to your policy) on a set schedule (which can be monthly, quarterly, semi-annually, or most commonly annually).
Premium costs depend on a variety of factors, such as health, age, and how large of a death benefit you think your family will need. After you have picked a policy, you need to assign beneficiaries to receive your death benefit, which can be used from anything from general bills to funeral expenses.
The process of applying for life insurance
The process of buying life insurance can appear complex and confusing at first, but it is relatively straightforward and easy. When purchasing life insurance, there are several ways you can go about it. You can look for an independent insurance agent who can help you review your coverage options through various insurance companies. Bear in mind that independent agents earn commissions from selling policies, so be wary of agents who are overly pushing for you to get the most expensive choices. Or, you can call up an individual insurance company and request a quote from them directly. Lastly, a financial advisor may be able to help recommend someone qualified to help you.
You will need to decide on how much coverage to buy and whether or not you want term life insurance or permanent life insurance. Once you figure that out, it is a beneficial idea to get multiple life insurance quotes so you can make a policy comparison and see what premium rates are out there.
Then, you will need to complete a detailed application for your life insurance policy that will need to be reviewed by the life insurance company you have selected. You will probably need to include numerous health-related information that will need to be verified by your insurance company to ensure all your data is accurate.
Before you can get approval for your policy, you will need to undergo a medical exam. The majority of the time, a representative from the insurance company will come to your house to perform the exam, making it convenient and easy for you. A blood draw can test for factors that determine your eligibility for insurance, like cholesterol issues, blood sugar problems, and underlying diseases. You will also have your blood pressure and weight checked.
Once you receive the results, which usually takes several weeks to receive, your policy will be created, where you will sign some paperwork, submit your initial premium, and sit back and relax, knowing that you have coverage in case of the unexpected.
How much coverage is enough for your situation?
Purchasing life insurance can be a little complex. The bigger the coverage you receive (meaning, the bigger the death benefit your loved ones will receive upon your death), the more expensive your premiums will be.
Financial experts generally recommend having a life insurance policy to replace at least ten times your salary while you are in the workforce. However, that guideline is too general and does not take into account all of your family’s needs and individual situation. If you want enough life insurance to support your family but also pay off your mortgage or put your kids through college, then having ten times your salary will not be enough. This formula also does not work for those who are stay-at-home parents not earning any income, even though their death would bring financial ruin.
A better way to calculate how much you will need is to examine your income, financial goals, and debts, and then purchase a policy that includes enough coverage to deal with all of these factors.
First, look at your debts, including a mortgage, if you have one. If you want the option for your beneficiaries to pay off the remaining balance after your death, then you need to factor that into your coverage.
Then, you need to examine your income. It is essential to figure out how many years of income you will need to cover if you were to pass. As previously stated, a general figure to start with is about ten years, but that number could be lower or higher. For example, if you have children who are 17 and 19, you might be able to get away with having less coverage. That being said, if your children are younger, say 11 and 13, you might want more coverage to help pay for their expenses through the end of their college years. In that same regard, if your partner did not enter the workforce and they are in their late 30s or 40s, you will probably want enough coverage to help your partner until retirement financially. Although, if your partner is in their late 50s or early 60s, then they only have a handful of years until they are eligible for Social Security benefits. Therefore you will not need such a significant death benefit.
Lastly, you should reflect on what your future financial goals are and how much money they will require. If you feel you want an insurance policy that will provide enough money for your children to get through college and pay for significant events in their life, like a wedding, then you will need to increase your calculations to account for this. That being said, if those things are not as relevant to you, then you can choose to have less coverage, which will result in a smaller death benefit.
Add up all of these costs once you have figured out a rough estimate for them. Be sure to factor the cost of childcare if you are doing this as a couple, and one of you is a stay-at-home parent, as your passing could bring significant financial hardship in finding childcare.
Here is a scenario: imagine that you and your partner each make $100,000 a year for a grand total of $200,000, and you want to replace ten years of your combined income, which totals $2 million. Then add in that you want to pay off your $300,000 mortgage, have $50,000 available for each of your two children to have a wedding, and $200,000 for each child to attend college. In total, you need to have about $2.8 million in coverage to pay for all of these. If you happen to have any assets, then you can subtract that amount for a lower policy. If you are looking to have about $2.8 million and already happen to have $1 million in savings, then you only need to have coverage for $1.8 million.
Various types of life insurance
You need to figure out which kind of policy you want to buy after you determine how much of a death benefit you need to get. There are two types of life insurance: permanent life insurance and term life insurance. Within permanent life insurance, there are various subsets: variable life insurance, variable universal life insurance, whole life insurance, and universal life insurance. Unfortunately, permanent life insurance is much more expensive than term life insurance, so it is essential to consider your options before deciding on a policy.
Term life insurance
One of the most significant differences between this type of insurance and permanent life insurance is that term only gives coverage for a selected amount of time. This means that if you purchase term insurance and then proceed to pass during the time period your policy covers, then your death benefit in the policy is distributed to your beneficiaries. That being said, you do have the option of choosing how long your term insurance policy covers. The most common options range from 10 years to 30 years. If you are on the younger side (anywhere between your early 20s and 30s), then it may behoove you to get a policy that includes a more extended period of coverage. However, if you are older, then you might be okay getting a policy with a much shorter term. If you happen to have kids, it is essential to make sure you pick a coverage option that will provide for them until they can work full-time and support themselves financially. If you have a 5-year old and a 3-year old, then a 20-year term policy gives your children enough coverage to last them into their 20s. By this time, they should hopefully be able to be earning enough to support themselves.
Term life insurance policies are usually less expensive than permanent life insurance, but they run out at some point. Also, the premiums you pay will stay the same for the duration of your policy.
The downside to term life insurance is that it does not build any cash value and, when your term runs out, it will be worthless. With permanent life insurance, it never runs out. Because of this, you may feel that buying term life insurance is a waste of money if your beneficiaries never receive your death benefit, however, if your policy did not pay out your death benefit that means that you did not pass during that time frame which is something for you to be thankful for.
It can be challenging to figure out the correct amount of coverage you need, and some people in their haste end up buying limited coverage and find out, later on, they needed more of it. Another downside of term insurance is that your coverage goes away once your covered time period expires.
Here is another scenario: Let’s say that you are a reasonably healthy 30-year-old adult and decide to buy a 20-year term insurance policy. Then, at age 47, you sadly are diagnosed with an illness at the same time as realizing that you want to extend your term coverage past the original 20-year mark. Because of this diagnosis, you risk having insanely high premiums or even getting denied.
Whole life insurance
Permanent insurance does not expire, unlike term life insurance, which only covers a limited period of time. There are several options when it comes to permanent life insurance, with the most popular one being whole life insurance. Whole life insurance is a policy that is designed to give you coverage for the entirety of your life, as long as you continue to pay your premiums on a fixed schedule. Whole life insurance not only accumulates a cash value, but it also provides a death benefit for your loved ones, which they can collect tax-free.
The money that you pay on your whole life insurance premiums is divided up into different areas. The majority goes towards your overall cash value that builds over time, with the rest of it going towards your death benefit. In time, the overall cash value part of your policy will represent the entirety of your death benefit.
Your whole life policy might also pay dividends, similar to the dividends you would get from having certain stocks. Additionally, your life insurance company will usually put the cash value portion of your policy in a high-yield savings account to grow over time. You will not pay taxes on any of the gains or interest in that account throughout the years, similar to a traditional IRA or 401(k).
The cash value portion of your policy can do you a lot of good. You can withdraw some of that cash to use or even take out a loan against that portion of your policy. Although if you pick either of these, the overall total of your death benefit will decrease by the amount you took out. For example, if you have a total death benefit of $600,000 with a $300,000 cash value and you take out $100,000, then your new reduced death benefit would be $500,000. In essence, you get greater flexibility with your money under this type of policy.
Under a whole life insurance policy, you have the option to surrender your policy, and if you do, you get the accumulated cash value. If you do this, you will miss out on the death benefit you would have left to your beneficiaries. One of the best advantages of this policy is that it forces you to save and, in doing so, get value from it.
Like all other policies, whole life insurance policies do have a downside, with the primary one being its cost. You are more likely to pay more for this policy than you would for a term life policy because you are getting the cash value of your policy along with coverage for life.
Variable life insurance
Variable life insurance can be similar to whole life insurance in that it lasts your whole life, as long as you continue to pay the premiums. Additionally, it accumulates a cash value, just like whole life insurance.
However, that is where their similarities end. One of the most significant differences between the two policies is that with variable life insurance, the cash value portion of your policy is put into mutual funds with a variable growth rate that is determined by the performance of those funds. Because of this, the cash value portion of your policy can grow to be much higher than a whole life policy, but it also means it could lose value. Similar to whole life policies, variable policies grow on a tax-deferred basis.
There are two significant drawbacks to variable life insurance policies. The first is that in exchange for potentially higher returns, you may be hit with investment fees that could deteriorate your returns. The second is that your premiums can likely increase if your policy’s investments perform poorly, and your cash value decreases.
Universal life insurance
Similar to life insurance, universal life insurance policies gain cash value, and the interest is applied to the overall cash value to help increase its growth. That interest is guaranteed at a specific rate. Universal life insurance can be a popular choice for group policies offered through most companies.
Premium rates for universal life insurance are set up to cover more than the cost of the policy itself. The remaining amount from those premiums is then distributed to the cash value portion of the insurance policy.
Within the realm of universal life, insurance is indexed universal life insurance. Like the S&P 500, indexed universal life insurance is similar to universal life insurance, except its cash value pays a return based on the overall performance of a market index. Because of this, you could expect more significant growth in your cash value with a typical universal life insurance policy. However, if the market does not perform as well, you could end up with decreased returns. Furthermore, due to the insurance company being allowed to keep a portion of your overall gains, your actual returns can be reduced.
Universal life insurance and whole life insurance differ primarily due to premium costs. Universal life insurance premiums vary because you can use the cash value portion of your policy to pay for a part or all of your premiums. Additionally, some universal life policies let you decrease or increase your death benefit as your needs or situation changes.
Variable universal life insurance
Variable universal life insurance is similar to universal life insurance, for the most part, for the exception that with a variable policy, you do not earn a guaranteed interest rate on the cash value portion of your policy. Still, you do get the option to put some, if not all, of that cash value into various investment funds. Therefore, you can invest some of that to gain more growth, and you can lock in a fixed interest rate on some of that cash value.
Some of the benefits of a variable universal life policy include flexibility with premium payments and the chance to earn higher returns compared to what you might get from other kinds of permanent life insurance. You can also assert greater control of the cash value portion of your policy and invest it as you like. These benefits are very similar to universal life policy. That being said, there may be a more significant investment risk with a variable universal life policy, which could decrease your overall cash value. Depending on the investments you choose, you may be stuck paying higher fees.
How to determine which type of life insurance is for you?
It may not be easy researching and learning about the various life insurance options that are available. If you cannot decide on one particular policy, ask yourself these questions:
How much hassle am I willing to put up with? Permanent life policies tend to be more complicated than term life policies. Within the subsets of permanent life policies, whole life policies are the easiest to understand. If you want to keep things straightforward, you might want to pick whole life coverage or term coverage.
How much can I pay for my premiums? Term life insurance is cheaper than permanent life insurance. Analyze your financial situation as you might find that a permanent life insurance policy is not in your budget right now.
Do I save well, or do I need a tool that will force me to save? While term life insurance is a cheaper option for most, you do not get the money from the policy unless you die, and you do not want to sit around hoping for an untimely death so that your family and loved ones can reap the cash value of the policy. Permanent life insurance acts as a savings vehicle, which forces you to save money, and it can be used as protection for your loved ones.
How much coverage are you looking for? Permanent life insurance covers you for the duration of your life, which may help you sleep easier at night. Term life insurance does not cover you for life and, in fact, only covers you for a certain amount of time. If you pass away after your policy ends, your loved ones do not receive anything. Ask yourself if you would like the ease and peace of mind that permanent policies can bring or if you are happy with a term policy.
The most important thing is to make sure you research and understand precisely what you are signing up for, regardless of the type and coverage amount you decide to buy. That being said, do not be too slow with picking a life insurance policy. You do not want to take so long choosing a life insurance policy and then unexpectedly pass, and your family is left with financial hardship without you. It might be a worthwhile investment for your family’s well being to pick a life insurance policy with higher premium costs and greater peace of mind. [/vc_column_text][/vc_column][vc_column width=”1/3″][vc_single_image image=”36525″ img_size=”292×285″ style=”vc_box_shadow”][/vc_column][/vc_row]
