Life insurance protects your loved ones from the financial strain that can accompany your passing. Without life insurance coverage, your family may have to pay outstanding debt and end-of-life expenses on your behalf. Life insurance ensures your dependents and loved ones are taken care of financially.
Other life insurance benefits include retirement fund supplementation and tax-free dividend payments. Even young and healthy people should consider getting life insurance because they qualify for low rates. Find out more about life insurance and how to get the best policy for you.
Types of Life Insurance
You will choose between permanent and term life insurance when you buy a life insurance policy. Permanent life insurance covers you until you pass, while term life insurance covers you for a specific period.
Term policies can be short or long-term depending on your needs, and some are convertible into permanent policies once the term is complete. Within both permanent and term policies are sub-categories from which to choose.
A decreasing term life insurance policy’s coverage decreases as the policy ages. If you pass closer to when you bought the policy, you receive higher payouts than if you pass toward the end of the term. Coverage decreases over time at a predetermined rate, but premiums usually stay constant throughout.
Renewable term life insurance is a year-long policy you can renew annually. Premiums start low and increase as the years pass. This option is suitable for young buyers who want flexibility in their coverage.
Renewable term policies can be more expensive than long-term or permanent policies if renewed for too many years. You can convert most renewable policies to other term lengths.
Convertible term life insurance lets the policyholder change their term policy into a permanent policy without going through the whole application process again. A convertible policy’s premium goes up when the conversion happens.
Permanent Life Insurance and Cash Value
Permanent policies last a lifetime as long as the policyholder pays their premiums. These policies usually have higher premiums but offer advantages that come with cash value.
A life insurance’s cash value earns interest based on stock market indexes or how well specific securities perform. Cash value gives your insurance policy the ability to grow and affords the policy owner advantages while still alive.
Whole life policies provide a death benefit that never expires. Whole life policies also have a cash value segment where the policyholder can pay more than their premium into an interest-bearing account. Interest accrues at a fixed rate in the cash value portion of the policy.
Eventually, the interest dividends may cover the policy’s premium payments. Some policies allow the cash value to be withdrawn at any time or used as collateral for loans. In this way, policies with cash value offer a living benefit to the policyholder.
Universal life insurance offers policyholders more flexibility than whole life. With universal policies, the insured can change their premium payments and death benefit payouts as they see fit. This coverage also has cash value benefits.
Indexed universal life insurance is the same as universal life insurance, but the cash value doesn’t grow at a fixed interest rate. Instead, the cash value’s growth rate mirrors a market index like the S&P 500. In effect, this ties a policy’s cash value to the success of a section of the economy.
Life insurance companies usually cap the cash value’s growth rate and a minimum interest rate. This limitation makes an indexed universal policy a safe investment option.
A variable universal policy is the same as a universal life policy, but the policyholder can invest the cash value into the stocks and companies they want. This life insurance option gives the policyholder the most freedom, but it comes with the risk of investing without the safety of the indexed policy.
The policyholder’s cash value is tied to the investments they choose. If they invest all their cash value into one company, that company’s financial outcomes determine how much the policy’s cash value is worth.
People choose to do this rather than just invest because of the tax advantages of earning money through their life insurance’s cash value. Cash value earnings are taxed until they are more than the premium payment.
Who Should Purchase Life Insurance?
While life insurance is necessary for parents with young children, it is also a smart purchase for many others. It protects people against co-signing debts, is economically responsible to purchase it early in life, and assists those connected to you financially even if they aren’t dependents.
Parents with dependents
When a parent dies, their children can face severe financial hardship. If the parents have life insurance policies, the coverage will financially take care of their kids until they can support themselves.
Adults who own things together
Whether or not you are married, if you co-own property or other high purchase items with someone else and could not pay for it if the other person passed, they should have life insurance. Their policy can help you meet the payments and upkeep.
Young adults who share loan debt with their parents
If your parents co-signed a loan with you, whether for school loans, a car, or a house, and you pass away, then your parents are stuck with paying off the rest of the loan. Protect their finances by taking out a life insurance policy for yourself.
Young adults looking to the future
While many young people do not have financial dependents, if you plan on this changing in the future, it may benefit you to get a life insurance policy now. You may be able to lock in a low insurance rate because of your age and health.
Plus, starting a permanent policy early gives you more time to build the policy’s cash value which equates to more years where the cash value dividends pay for the premium.
Many other people
The list of people who can benefit from a life insurance policy is long and varied. From earning tax-advantaged dividend payments to repaying a caregiver for their efforts, many people should consider getting a life insurance policy. Talk with an insurance agent or broker to find out how life insurance can benefit you.
How to Buy Life Insurance
If you decide you need life insurance, you must find the perfect policy for your needs. The first step in buying the right policy is determining how much coverage you require. Then gather all the necessary life insurance application materials and compare insurance quotes from various companies. Finally, you can choose the policy that best matches the price and coverage.
Step 1: Determine coverage needs
Before you go to an insurance company, find out how much insurance you are looking to buy. Look at how much your dependents will need to maintain their quality of life, cover funeral expenses and pay any outstanding debts you currently have. If your paycheck sustains people, it may include months or years of lost wages.
Your necessary amount of coverage is liable to change as your life changes. Policies with customizable death benefits ensure you pay for the amount of coverage you need throughout the policy’s life.
Step 2: Eliminate cost-increasing factors
Many factors contribute to an insurance policy’s price. The amount of coverage plays a large part, but so do personal risk factors as evaluated by the insurance company. Your family medical history, lifestyle choices, tobacco use, personal health, age, and gender all affect the life insurance quotes you receive.
While many of these are out of your control, there are some ways to reduce risk in the eyes of the insurance evaluation.
You can stop engaging in risky lifestyle choices. Some of these are related to your profession as some jobs expose workers to higher risk than others. Risky habits like race car driving, skydiving, and rock climbing also increase your payments. Replace these activities with safer hobbies to earn lower premiums.
Improving your health is another effective way to reduce your life insurance payments. A policy’s application process includes a life insurance medical exam that evaluates your overall health and risk to the insurance company. Losing weight, quitting smoking, and reducing alcohol consumption can all help decrease insurance premiums.
Step 3: Compare multiple quotes
Comparing multiple company’s quotes is the most time-consuming and complicated part of finding the right insurance policy. You can use captive agents, independent agents, brokers, and online tools to help. Each option has its benefits and shortcomings.
A captive agent works for an insurance company and can only sell policies from that one company. Their knowledge about the company is helpful, but they won’t help you compare companies.
Independent agents have access to multiple companies to compare various policy options for you. They likely do not offer policies from every company, so you may miss out on the best option.
Insurance brokers help those looking for policies find the right one. Brokers also help you determine how much coverage you need and can afford. They are great for those struggling to understand their financial needs, but brokers do not sell you policies. They advise you on the best policy, and then you still need to go through an agent to get the policy.
Online tools are similar to brokers because they help you calculate your coverage needs and recommend the best policies and companies. Whichever company you choose, it is crucial to evaluate the policy’s coverage, price, and the other products and services that come with it. These include insurance riders, employer-sponsored policies, and ease-of-use, among others.
Life insurance riders
Companies offer riders to augment a policy to meet the policyholder’s needs. The accidental death rider increases the policy’s payout if the policyholder dies in an accident. A waiver of premium rider stops premium payments if the policyholder becomes disabled and unable to work.
Other riders include the long-term care rider, the guaranteed insurability rider, and the accelerated death rider. Most riders come with additional premium payments. Not all insurance companies offer every rider, so be aware of a company’s offerings if you need a specific rider added to your coverage.
Group insurance policies available through your employer are an excellent option for acquiring life insurance at a reasonable rate. They are often less expensive than individual coverage options. They are worth buying into if they accommodate your coverage needs and if they stick with you when you change jobs or retire.
Some life insurance policies are easier to apply for than others. If you prefer to skip the medical examination, you should opt for instant coverage options. You should also do research into a company’s reviews. Make sure their customer service is reliable because this is the company you or your family will deal with during the fragile times around your passing.
Don’t Wait to Buy Life Insurance
Life insurance provides a host of benefits for all types of people. Young adults without dependents benefit from cash value investments and low insurance rates. Working parents can ensure their children’s financial future in the case of their passing. Retirees can supplement their retirement income with cash value dividends and cover their end-of-life expenses with their policy’s coverage.
At Finance is us, we provide case-specific financial advice about life insurance and many other financial matters.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.