Buying a life insurance policy is signing a contract between you and your insurance provider. You make payments to the provider for as long as your policy demands and on your death, the company pays your beneficiaries a lump sum cash amount. These beneficiaries can be friends, loved ones, relatives, etc. The purpose of this amount is to offers some financial security and protection to your loved ones after you are pass away.
The main components of most life insurance policies include:
This is the amount of money the insurance company pays your beneficiaries when you pass away. The amount of the death benefit depends on your life insurance quote.
You pay the premium every month, 3 months, 6 months or year, for as long as your policy requires. The premium is the cost of your insurance policy. The cost of the premium is decided by the insurance company based on factors like age, health, amount of risk posed, etc.
Based on your life insurance type, part of your premiums go to a separate account, the cash value. This cash value accumulates, tax deferred and can serve as a savings account. You can withdraw from it during your lifetime. Some life insurance companies limit or do not allow withdrawal depending on the reason for it.
Riders allow you to customize your life insurance policy to accommodate any of your personal needs. The riders available depend on your insurance company. Some common insurance riders include the following:
- Accidental Death Rider
In case you pass away due to an accident, it gives more coverage
- Waiver of Premium Rider
It waives premiums if you become disabled and are unable to work
- Disability Income Rider
It gives monthly income if you become disabled
- Accelerated Death Benefit Rider
If you are diagnosed with a terminal illness, it will allow you to collect some or the entire death benefit during your life
- Long Term Care Rider
It offers monthly payments if you have to stay at a nursing home
- Child Term Rider
It provides death benefit if your child dies before a certain age
What are the different types of life insurance?
The aim of this section is to cover the different categories of life insurance. This will give you a basic idea of how each type is different and which may be the best life insurance for you. There are two major types of life insurance:
Term Life Insurance
Term life insurance offers coverage for a specific period of time. The insurance company only pays the death benefit if you pass away during the term of the policy. The time period for most term life policies ranges from 5 to 30 years, mostly in multiples of five. Though it is easy to understand and offers cheaper premiums, there is a very high probability of you outliving your policy. If you want to continue with it, you will have to pay more.
Term life policies only offer a death benefit, no cash value.
Term life insurance further has two types.
The death benefit stays the same throughout the course of the policy.
The death benefit decreases over the duration of the policy.
Whole Life Insurance
As the name suggests, whole life insurance offers coverage your entire life, as long as you pay the premiums. The insurance provider pays death benefit when you die, even if you live past 100 years. Whole life provides both death benefit and cash value.
There are three main types of whole life insurance.
Traditional Whole life
The death benefit and premiums stay the same throughout the duration of the policy.
It offers adjustable premiums and death benefit.
Variable universal life
This policy ties your cash value to investment accounts. So if the investment goes well, you can withdraw from your account, but it has higher risks involved. Since it has a lot of overhead charges, they are deducted before the amount goes to the cash value account.
Final Expense Insurance or Burial Insurance or Funeral Insurance
Burial insurance is designed specifically to cover your end of life expenses like burial and funeral costs, loans, unpaid bills, etc.
Guaranteed Life Insurance
This insurance offers instant and guaranteed acceptance, requires no health questions or medical assessments. But the policy comes with a two year waiting period and higher premiums.
Is cash value a good thing?
Whole life insurance builds up cash value while term life does not. Cash value takes a very long time to accumulate, decades in most cases. But is it a good thing? Here are some facts that may help you understand that.
- Cash value grows at different rates, known as the rate of accumulation. This rate depends on your insurance provider.
- Cash value is the liquid part of your death benefit.
- If at any point in time, you decide to surrender your life insurance policy, you receive the cash value.
- You can borrow from it during your life. But you need to remember that interest is charged from the day you borrow. And if you pass away without paying it back, the death benefit is reduced by that amount. This may leave very little or nothing for your beneficiaries.
- You can use the cash value to pay your premiums, if you cannot do so otherwise.
- The cash value goes to the insurance company on your death, your beneficiary will only receive the death benefit. Unless you bought a rider that gives both the death benefit and the cash value to your beneficiaries.
What is a life insurance quote?
Life insurance quotes are an estimate of your rate with an insurance provider.
Why should I care about life insurance?
Many people do not give life insurance any importance thinking that don’t need it. That isn’t true. You should start considering life insurance the moment you have someone depending on you. Here are a few reasons on why you should care about life insurance.
Children or dependents
If you have anyone depending on you, young children, stay at home spouse, disabled family member, etc., you need to have a plan on how they will be taken acre of after you pass away. Life insurance gives you the peace of mind that they will be taken care of after you.
Funeral and Burial Costs
With the average funeral in America costing around $7,000 to $10,000, having your loved ones arrange this huge amount in such a depressing situation can be very burdensome. Life insurance gives you peace as you know that you have at least relieved your loved ones and family of the burden of arranging the funeral and burial costs in a short time period.
If you own a large estate, you will be well aware of the huge taxes imposed. With life insurance, the proceeds from your life insurance policy will take care of the inheritance taxes and you can easily transfer your inheritance to your heirs.
How do I get life insurance?
The process is very simple. You decide on an insurance policy, you then purchase it from the insurance provider, agent or broker. They will require you to fill out an application that will ask you basic questions about your age, health, weight, habits, income, worth, assets, etc.
Some insurance companies may require a medical exam in the next step. This medical exam may take place at your home, place or work or a local clinic. It usually takes around 30 minutes but may vary depending on your age, coverage or health. The insurance company arranges a paramedic for the exam.
Most medical exams include the following:
- Measuring blood pressure and heart beat
- Measuring weight
- Taking blood and urine samples
- Questions on family’s medical history
- Questions on habits like smoking, drinking, etc.
Here are some of tips to help you do well on the exam.
- Avoid all foods with a high salt or fat content at least a week before the exam
- Refrain from drinking, caffeine and smoking at least 24 hours before the exam
- Get a good night’s rest
- Remember to take your ID
- Inform the paramedic about any medicines you take and their dosages
The insurance company uses these results to determine your eligibility. This may take between 3 to 6 weeks depending on your insurance provider.
Do I qualify for a life insurance policy?
Yes, you probably do. Life insurance companies have a process known as underwriting, that analyses and evaluates the risk a potential client poses. Based on this process and the results from the medical exam, they decide your eligibility and premium costs. The amount of risk determines your rating class. The rating class also determines the cost of your premiums.
What if my life insurance application is declined?
This is possible. The first thing you should understand in this case is the reason behind it. Once you figure that out, go to a good agent or broker and have them assist you in finding a plan that matches your requirements. It is possible that you will get coverage from a different company.
How much life insurance coverage do I need?
Even though the idea of how your loved ones will be taken care of after you is very unpleasant, you need to start thinking about it sooner or later. When considering how much coverage you need keep the following in mind. You can also get help from online calculators, life insurance providers, insurance brokers or agents.
Consider anything you owe, as it should be paid off in full. This may include loans, mortgages, credit card bills, etc. Don’t forget to take into account charges like interest.
The sole purpose of life insurance is income replacement. If you are the only bread earner in the family, go for a coverage that can replace your income, plus take a little extra to guard against inflation. According to most life insurance companies, a reasonable coverage is around 6 to 10 times that of your annual income.
If you can save from your current income then you don’t need to completely replace it. You can insure a smaller amount.
If you have children, you should consider a coverage that will cover some or all of their college tuition. You don’t have to aim for the best college, an in state college will do as well.
With the average funeral in American costing around $7,000 to $10,000, having your loved ones take care of it all alone can be very stressful. Go for a coverage that can cover the cost of funeral and burial.
What should I look out for when buying life insurance?
Finding a life insurance policy that is right for you can be a very long and cumbersome process. Not knowing where and what to start with can further complicate the process. With all the options available, a little research on your part will help you understand the process better making it less complex.
Here are some things you should remember when looking for life insurance policies.
Your beneficiaries receive the death benefit from the insurance company when you pass away. There is no limit on the number of beneficiaries you can have one. When choosing your beneficiaries remember the following:
- Avoid nominating a minor, they may not receive the funds
- Keep your list of beneficiaries list updated, e.g. if you get married or divorced or someone passes away
- Keep your state’s laws in mind
Should I buy term life or whole life insurance?
As mentioned above, these are the two main categories of life insurance. Term life insurance offers coverage for a specified time period, whole life on the other hand, offers coverage your entire life. Term life does not offer any buildup of cash value but whole life gives you that benefit.
When deciding which pone to go for, keep in mind your needs, current situation and budget. Though a majority considers term life insurance the best life insurance, it may not be the case with you. Especially if you intend on leaving your money to your family, are young and earn a lot of money.
Should I buy life insurance from an insurance company or through agents and brokers?
This is up to you. Insurance costs are regulated so it doesn’t matter where you buy it from, it will cost the same. This section will discuss what you should be careful about when you buy from wither the company or through agents or brokers.
When choosing an insurance company go for one that is financially stable. You can also find ratings which are a measure of the provider’s financial position and performance. The more stable the provider, the higher the chances of the company paying the death benefit when your beneficiaries claim it.
Agents or brokers
Some insurance companies sell their insurance policies through agents or brokers. It is the duty of agents and brokers to help you find the right life insurance quotes based on your needs and budget. They also have to explain everything about the policy including any discrepancies. In return for selling policies, insurance companies pay them a commission. Though their jobs sound similar duties, there are some differences.
Agents may represent one or more life insurance companies. They sell a company’s policies because they sign a contract that allows them to do so. Brokers, on the other hand, have a client based model and sign no contract with the insurance companies. If someone agrees to buy a policy through a broker, the insurance provider issues them an insurance binder.
If you plan on purchasing through an agent or broker remember the following.
- Ensure that your agent or broker has an active license and can sell the policy you want. You can check this from your state’s insurance department website.
- Go for the agent or broker that represents the most life insurance companies. This way you will have more options to choose from and can thus find the best life insurance.
- Make sure they can explain how the policy works, the terms and conditions and answer any of your question in simple language.
- Don’t let them pressure you into making a decision.
- Understand how they are paid so you know if they are making you purchase “the best life insurance policy” only because they will receive more commission.
- Go for agents or brokers who have a lot of experience.
- Make sure they ask you lots of background questions before recommending policies.
- Fill out all application forms yourself! This way you will understand the policy better and there won’t be any misinterpretation of facts.
Research on your end is very important! Get as much information as you can, from the Internet, from agents or brokers and compare all the policies that meet your requirements. This way you will get a better understanding of what you need, what is available and thus choose the best life insurance policy for you.
Reevaluate the policy
Your needs change throughout your life, so an insurance policy you buy now may not be the best life insurance policy in the future. You may need to increase or decrease your coverage. Talk to your provider in that case. Most providers have an annual policy check, even if you feel your policy is fine, it is still best that you have it reevaluated. If you pay more premiums due to a health condition, reevaluation may help lower your premiums, if your health has gotten better in at least the past one year.
You will be charged higher premiums if the life insurance companies’ standards declare that you overweight.
Being a reckless driver means that you are at a higher risk of getting in an accident. Since you pose greater risk, thus you will be charged higher premiums.
Try to pay your premiums annually. It will definitely save you money in the long run. Many insurance providers charge more for frequent payments and may offer discounts on annual payments.
Another tip about payment is setting it up as credit card charges or automatic bank drafts. This way you won’t risk forgetting and thus getting your policy cancelled.
Do not lie or hide anything
This is something very important that you need to keep in mind. Lying, hiding or misinterpreting information will only cause you problems like higher premiums or cancellation of your policy. Do not even hide things that you may consider irrelevant. Being transparent will allow your provider, insurance agent or broker to find you to the best life insurance policy based on your needs.
Let guaranteed life insurance be your last resort
If you fear that you have to go for guaranteed life insurance because of your health or age, be sure to look up all possible life insurance companies. With the growth of the insurance business, companies are constantly coming up with new strategies to attract more customers. So there will definitely be plenty of options for you.
Most people put off buying life insurance. That is not a wise decision! It will only cost you more with age. It is also possible that you develop a health condition that stop life insurance companies from insuring you.
Though age alone does not determine if you need life insurance, Noexam.com concluded that the best time to purchase insurance is in your 30s. According to Business Insider, the price of life insurance goes up by 63% between the ages of 30 and 40.
Can a life insurance policy be changed after it is bought?
Yes, it is possible. As you go through life, your circumstances change, so do your needs, all this impacts your coverage. You may want more or less coverage over time, in that case, you can go for a policy reevaluation, if that does not work you can buy another policy.
For your insurance policy to remain the best life insurance it has to be in sync with your life stage. If you get married, have children, move to new house, earn a higher salary or in the worst case develop a medical condition, you will need more coverage. Applying for more coverage, even through reevaluation will cost you higher premiums. In case reevaluation isn’t of help you keep your old insurance provider and take a new top up insurance with another provider.