Life Insurance: What To Know
If you want your loved ones to have some form of financial protection after your death, then consider purchasing a life insurance policy. It’s not always easy to save money for your family, especially when a personal financial crisis occurs. So, having a life insurance policy—particularly one that allows you to borrow from it—is the next best thing.
Life insurance has many advantages, but a 2022 survey by LIMRA and Life Happens found that 106 million adults either do not have life insurance or have inadequate coverage. Not knowing what policy to select and believing that insurance is too expensive are among the top reasons why people do not have insurance, according to the survey.
There are so many life insurance options that it’s hard to know what to get, says Faisa Stafford, CEO and president of Life Happens, an industry-funded nonprofit that educates consumers about insurance.
“It can be extremely confusing,” Stafford told Forbes Advisor.
What may help to clear up the confusion is to work with a life insurance agent or a financial planner and learning the basics about life insurance.
What is life insurance?
A life insurance policy is a legally binding contract between an insurance company (insurer) and an individual who purchases a policy (policyholder). The policyholder pays premiums for the contract and in exchange, the insurer promises to pay designated beneficiaries a sum of money when the policyholder dies.
Upon the death of the policyholder, beneficiaries can contact the insurer for instructions on filing necessary documents to receive the death benefit payout.
Should a life insurance company close or is declared bankrupt or insolvent, the state’s insurance guaranty association transfers the insurer’s polices to another insurance company. Insurance guaranty associations protect policyholders and beneficiaries in the event of an insurance company’s insolvency.
Types of Life Insurance
The two main types of life insurance policies are term life and permanent life:
1. Term Life
A term life policy provides coverage at a fixed rate for a limited amount of time, usually 10, 15, 20 or 30 years. Term life premiums are usually lower than premiums for permanent life insurance policies. In addition, term-life insurance has no value at the end of the term.
Should the policyholder die before the term of the policy expires, the beneficiary will receive the death benefit through a lump sum payout. Generally, young families who have significant financial obligations choose term life insurance.
2. Permanent life
Permanent life insurance provides protection throughout your life as long as the premiums are paid. What’s more, permanent life insurance builds up a cash value over time. A certain amount of the premium goes into a cash value account which grows at a rate specified by the policy.
The two most common types of permanent life insurance policies are whole life and universal life. Whole life insurance has a fixed premium that you pay every year. This type of insurance offers tax benefits and a cash component that grows over time.
Universal life insurance provides flexibility by allowing policyholders to raise or lower their monthly premium payments and adjust their death benefits.
Whole life and universal life both allow policyholders to borrow against the cash value of the policy. If repayment of the loan is not required, keep in mind that the loan decreases the amount of the death benefit.
Some insurers may require you to take a medical exam to determine your health risks. Certain conditions, such as heart disease, diabetes, or cancer, can raise insurance premiums. On the other hand, some types of life insurance, such as guaranteed approval life, do not require medical exams but generally have much higher premiums. These insurances may also have an initial waiting period before the policy takes effect and offers a death benefit.
Do This Before You Purchase Life Insurance
Life insurance experts recommend doing your homework before purchasing a life insurance policy. For example, consider doing the following:
1. Review your insurance needs. Speak with an insurance agent or a financial advisor about what needs you should cover with life insurance. For example, do you have a mortgage? Dependent children who need support? A small business to maintain? Discuss these and other needs with your professional advisor.
2. Decide what coverage you need, for how long, and what you can afford to pay. One recommendation is to have a policy with a death benefit equal to 10 times your annual salary.
3. Choose what type of policy would be best for you. Whether you choose a short-term or long-term insurance policy will depend on your needs and financial goals.
4. Compare life insurance policy prices. You may consider contacting an independent insurance agent who can help you compare prices and find the best companies and the best coverage at the best price.
5. Keep your current policy. If you already have a policy, do not cancel it until you have thoroughly compared it with a new policy and know that it meets your needs better than your existing policy.
6. Be sure you can afford the premium payments. Policyholders can usually save money on premiums by making an annual payment. However, paying the premiums monthly, twice a year, or quarterly (four times a year) may be more affordable for you. Also, find out if the type of policy you are considering has the possibility of premium increases.
7. Have an insurance agent help you evaluate the future of your policy. Some policies have a low cash value in the early years that builds up quickly in the future. Other policies have a more level cash value build up. Ask your agent for a year-to-year display of values and benefits.
8. Understand renewal policies. Most term insurance policies are renewable for one or more terms regardless of your change in health. However, premiums may be higher when renewing the policy. Ask what the premiums would be to continue the policy and whether you cannot renew the policy once you reach a certain age.
9. Read your policy carefully. Policies can vary. For instance, some benefits or premiums may not be guaranteed and interest could be affected on the money paid and received at different times on the policy.
10. Review your life insurance policy every few years. Your needs may increase over time. For instance, your family size may increase. So, go over your policy with your agent every few years to keep up with changes in your income and needs.
It pays to do your homework on life insurance so that one day, your loved ones can get paid after you are gone.