Why Should I Get Life Insurance?
Nobody enjoys planning for the worst, but everyone wants to be prepared for it - a statement that is especially true when it comes to getting life insurance.
Planning ahead for the loved ones that you would be leaving behind can be a difficult endeavor, but it brings peace of mind knowing that – should you meet your untimely end – their period of grief won’t be strained with concerns for covering living and funeral expenses.
The decision to plan ahead for the care of your loved ones is the easy part, actually planning it can seem a bit tougher.
Negotiating how life insurance works and which type is right for you doesn’t have to be daunting.
How does life insurance work?
When you purchase a life insurance policy with an insurance company, you enter a contract. You pay them a set, agreed-upon premium, either annually or monthly. In the event of your death, the insurance company will pay your beneficiaries a death benefit in the amount of your policy.
What's a death benefit?
The answer is simple - it is the lump sum payout that your beneficiary would receive, untaxed, in the event of your death. It equals the face value – or total worth – of your policy.
Are there different types of life insurance?
Indeed, there are. And which one is best for you can be determined based on your unique situation and specific concerns.
Term Life Insurance
Covering a specific amount of time, term life insurance policies are generally the most affordable and provide coverage only for the specified term, typically a period of 1, 5, 10, or 20 years.
Whole Life Insurance
Also known as permanent life insurance, whole life insurance is a policy that locks in premiums and offers guaranteed lifelong death benefits. Whole life policies also come with a cash value accumulation component.
Universal Life Insurance
A permanent policy that provides flexible premium options, universal life insurance also includes a cash value investment element.
Policies are not one size fits all. One will certainly be a better fit for your goals and financial situation than another.
Which Policy is Best for Me?
The policy that is right for you can be determined based on your unique situation and specific concerns.
Term life is a very popular choice for young couples and parents with young children, for example. The premiums can be much lower compared to permanent life insurance policies such as whole life and universal life.
With term insurance, you have the opportunity to renew term coverage or change to a whole life policy when your “term” expires. However, your term renewal rates could be significantly higher at this age than they were when you first obtained the policy. With whole life insurance, on the other hand, your premium amounts will remain the same year after year. You’ll pay the same price at age 20 as you will at age 99.
One major difference between term and whole insurance is guaranteed benefits. With a term policy, the insurer will pay out death benefits to your beneficiaries if you die within the policy term. However, once the term is over and the policy has expired, the insurer has no further obligation to you. With permanent life insurance, your beneficiaries are guaranteed to receive a death benefit, so long as you have kept up with your premium payments and your policy hasn’t been canceled.
While term policies can be more affordable than whole life, they don’t often provide the opportunity to accrue cash value.
Is There a Medical Exam?
While there are some insurers who do not require medical exams prior to signing you to a life insurance policy, they are the exception to the rule.
Those who don’t will usually charge higher premiums and offer less coverage than those who require a medical exam.
Why?
Most insurers want to assess the level of risk they are taking when insuring you.
Candidates with high blood pressure, high BMI, history of smoking, etc. would be a greater risk for insurance carriers than a healthier candidate.
This doesn’t necessarily mean that higher risk applicants won’t be insured. It could simply be a matter of paying higher premiums in order to achieve the same level of coverage.
What Does Life Insurance Cost?
Many different factors converge when determining the cost, and benefit, of life insurance.
As mentioned above, one factor is how big of a ‘risk’ you are to insure. The higher the risk, the more you pay. For instance, it’s not uncommon for being an active smoker to double your life insurance premium.
Another important factor is the amount of coverage you want or need. The higher the policy limit that will be paid out when your number is up, the higher your premium.
There is no definitive answer to how much life insurance will cost you until you consider all the options and determine which type of policy is right for you and your family.
When choosing your life insurance policy, consider the following:
Monthly Spending Needs
You’ll want to make sure that the coverage you purchase will be enough to cover the same standard of living, month-to-month, that your loved ones are accustomed to.
Existing Debts
Be sure to factor in any existing debts that would be outstanding in the event of your death.
Family Needs
Current and future needs should come under consideration. Be sure to include a large payout – $100,000 or so per child – to any school-aged children in order to cover the cost of their higher education.
Existing Savings
If you already have an existing savings account, you can possibly get away with less coverage. However, if you’d like to leave the whole of your savings account to your family, then don’t factor that amount into your coverage decision.
While there are many variables to consider, one thing stands true: your family will be better protected if you have a life insurance policy in place.