What is Life Insurance?
Life insurance is a contract between you and an insurance company that provides financial protection for your loved ones if you pass away. In exchange for premium payments, the insurance company promises to pay out a lump sum of money known as a death benefit after the insured person dies.
The death benefit from a life insurance policy can be used by your beneficiaries for anything – paying off debts, covering funeral costs, replacing lost income, funding college tuition, etc. Having life insurance ensures your family will be financially secure even after you’re gone.
How Does Life Insurance Work?
With most life insurance policies, you pay a monthly, quarterly, or annual premium to keep the coverage active. As long as you continue to pay your premiums, the death benefit will be paid out to your listed beneficiaries after you die.
The insurance company calculates your premium based on factors like your age, health status, lifestyle, and the amount of coverage you want. The younger and healthier you are, the lower your premiums will typically be.
Main Types of Life Insurance
There are two major categories of life insurance:
Term Life Insurance: Provides temporary coverage for a set period of time, such as 10, 15, 20, or 30 years. It pays out a death benefit if you pass away during the term. Term life is the most affordable type of life insurance.
Permanent Life Insurance: Offers lifetime protection as long as you continue to pay the premiums. Includes a death benefit plus a cash value savings component that accumulates over time. More expensive than term but lasts forever.
The most common permanent life insurance policies are whole life and universal life. Permanent policies are a good choice if you want lifelong coverage or want to use the policy to build cash value.
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Benefits of Having Life Insurance
There are many advantages to having life insurance protection:
Financial Security for Loved Ones
The primary benefit of life insurance is that it ensures your family will be taken care of financially if you pass away unexpectedly. The death benefit can help them maintain their standard of living without your income.
Pay Off Debts
Life insurance proceeds can be used to pay off large debts like mortgages, student loans, and credit cards, so your family doesn’t get burdened.
Cover Funeral Costs
An average funeral costs over $7,000. Life insurance can ease the financial burden of final expenses for your loved ones.
Replace Lost Income
For families who depend on two incomes to make ends meet, life insurance can help replace the deceased person’s earnings for a period of time.
Fund College Education
If you die while your children are still young, life insurance can provide funding for their future college tuition and expenses.
Supplement Retirement
Permanent life insurance can build cash value that your spouse can tap into if you die early and retirement savings are impacted.
How to Determine if You Need Life Insurance
Here are some questions to ask yourself when deciding if you need life insurance:
Do you have dependents?
If you have young children or a non-working spouse, they may need your income to maintain their lifestyle if you were to pass away prematurely.
How much debt do you have?
If you have a mortgage, student loans, auto loans, or credit card balances, life insurance can provide funds to pay off debts so they aren’t passed on.
Do you have final expense needs?
At a minimum, life insurance should cover burial and funeral costs, so your family isn’t left with the bill.
Do you need to replace your income?
Calculate how much of your salary your beneficiaries would need to maintain their standard of living if you were gone.
Could your family afford daily expenses without you?
Look at your current household budget and identify any gaps your death might create for housing, food, transportation, etc.
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How Much Life Insurance Do You Need?
Determining the right amount of life insurance requires adding up your family’s financial needs:
Final Expenses
Funeral costs, burial plot, headstone, etc. This is usually a minimum of $10,000 to $15,000.
Debt Payoff
Total mortgage balance, credit card debt, student loans, car loans, etc.
Income Replacement
How much of your salary is needed to cover living costs? Multiply this by the number of years needed.
College Funding
Projected future college costs for each child.
Retirement Gap
Estimate if an early death would impact your spouse’s retirement savings.
As a general guideline, many financial experts recommend 7-10 times your annual income in total life insurance coverage. But running the numbers for your specific situation is best.
How to Get Affordable Life Insurance
Here are some tips for finding the most affordable life insurance for your needs:
Compare Quotes
Get quotes from several highly-rated life insurance companies to find the best rates. Online marketplaces make this easy.
Lock In When Young
Life insurance rates are significantly lower when you’re young and healthy. Don’t wait too long.
Choose Term Life
Term life insurance provides the most coverage for your budget. It’s much less expensive than permanent policies.
Take Good Care of Your Health
Losing weight, quitting smoking, and lowering cholesterol can potentially result in lower premiums.
Look Into Employer Policies
Group life insurance through work is typically more affordable than individual policies.
Ask About No-Exam Options
No medical exam policy can offer lower premiums if you qualify based on age and health.
Choosing the Right Life Insurance Policy
Here are some things to consider when deciding on the right life insurance policy for your needs:
Term Life Insurance
Best for temporary coverage needs of 5-30 years. Offers the largest death benefit per premium dollar. Easy to qualify for while young and healthy.
Whole Life Insurance
Provides permanent coverage and builds cash value. Premiums remain fixed. Strong choice for lifelong protection and leaving an inheritance.
Universal Life Insurance
Offers lifetime coverage with flexible premiums and an adjustable death benefit. Allows for cash value investing. Can be customized as needs change.
No Medical Exam
No hassle; underwriting can get you coverage fast. Best for younger, healthy applicants on a budget. Coverage amounts are usually limited.
Group Life Insurance
Offered by employers and associations. Offers simplified underwriting. It usually ends if you leave the group. Not customizable.
Think about your specific needs, budget, and how long you want coverage when weighing the policy options above. An insurance agent can provide guidance.
To Recap
Life insurance provides important financial protection for families if a breadwinner passes away prematurely. The right amount and type of coverage depend on your specific situation.
Term life insurance offers affordable coverage for temporary needs, while permanent policies provide lifelong protection and cash value. Shop around, lock in rates when young and healthy, and choose a highly-rated insurer.
Discuss your needs with a licensed life insurance agent. They can help you calculate the ideal amount of coverage and guide you through the application process. Do your due diligence to pick the best policy for your budget and goals.
Life Insurance FAQs
Does life insurance pay out for any cause of death?
Yes, life insurance policies pay their death benefit no matter the cause of death, including illness, accidents, suicides after the first two years, etc. Only a few rare exclusions, like terrorism, may apply.
Is a medical exam required to get life insurance?
For permanent policies and large term policies, an exam is usually required. But medical exam options are increasingly available, especially for younger, healthier applicants.
Can you get life insurance if you have a pre-existing condition?
Yes, most people can get some amount of life insurance even with pre-existing conditions like diabetes, heart disease, etc. You may pay higher rates. Guaranteed issue policies are an option.
How do beneficiaries file a life insurance claim?
Beneficiaries will need to provide a certified death certificate and fill out a claim form for the insurance company. A payout is usually made in 1-2 weeks once paperwork is complete.
Is cash value of a permanent policy available while living?
Yes, most permanent life insurance policies allow you to access the cash value that builds up over time through withdrawals or policy loans while you are still living. However, this will reduce the death benefit amount.
Do you get any money back if you outlive a term life policy?
With traditional term life insurance, there is no cash payout if you outlive the term. Some policies offer a return of premium features for an added cost.
Does life insurance pay for accidental deaths only?
No, life insurance policies pay out for any cause of death, whether it’s accidental or natural. Accidental death is not a requirement or limitation.
Can you change beneficiaries on a life insurance policy?
Yes, you can change the beneficiaries on your policy at any time by contacting your life insurance company and completing a change of beneficiary form.
In another related article, Planning for the Future with Life Insurance
