Life Insurance; Every Thing Worth Knowing About It

What Exactly Is Life Insurance?

 

A life insurance policy is a legal agreement between a company and the policyholder. In exchange for premiums paid by the policyholder during their lifetime, this policy guarantees that the insurer will pay a sum of money to one or more named beneficiaries when the insured person dies.

 

Life Insurance Types

 

There are numerous types of  available to meet a wide range of needs and preferences. The major decision of whether to choose temporary or permanent life insurance is important to consider depending on the person to be insured’s short- or long-term needs.

 

Term Life Insurance

 

Term life insurance policy is intended to last for a set number of years before expiring. When you purchase the policy, you select the term. The most common terms are 10, 20, and 30 years. The best of term policies strike a balance between affordability and long-term financial stability.

 

• Decreasing term policy is a renewable term policy with coverage decreasing at a predetermined rate over the life of the policy.
• Policyholders of convertible term can convert their term policy to permanent insurance.
• A quote for renewable term under this policy is provided for the year the policy is purchased. Premiums rise annually and are typically the least expensive term insurance at first.

 

Once the term is up, many term life insurance policies allow you to renew the contract on an annual basis. This is one method of extending your policy coverage, but because the renewal rate is based on your current age, premiums can skyrocket each year. 

 

Converting your term life insurance policy into a permanent policy is a better solution for permanent coverage. This is not an option on all term life policies; if this is important to you, look for a convertible term policy.

 

Permanent Life Insurance 

Unless the policyholder stops paying premiums or surrenders the policy, permanent life insurance remains in force for the insured’s entire life. It is more costly than term.

• Whole life insurance is a type of long-term insurance. It builds up a cash value over the course of the insured person’s life. Cash-value life insurance also allows the policyholder to use the cash value for a variety of purposes, such as borrowing money or paying policy premiums.
• Universal life (UL) insurance is a type of permanent life insurance with an interest-bearing cash value component. Premiums for universal life are variable. Unlike term and whole life insurance, premiums can be adjusted over time and designed with a fixed or increasing death benefit.
• IUL is a type of universal life insurance that allows the policyholder to earn a fixed or equity-indexed rate of return on the cash value component.
• Variable universal life (VUL) insurance allows the policyholder to invest the policy’s cash value in a separate account if one is available. It also has adjustable premiums and can be designed with a fixed or increasing death benefit.

 

Term Life Insurance vs. Permanent Life Insurance

 

Term life insurance differs from permanent life insurance in several ways, but it tends to meet the needs of the majority of people seeking affordable life insurance coverage. Term life insurance is limited in duration and pays a death benefit if the policyholder dies before the term expires. 

 

Permanent life insurance remains in force as long as the policyholder continues to pay the premium. Another significant distinction is in premiums—term life is generally much less expensive than permanent life because it does not require the accumulation of cash value.

 

Before applying for life insurance, you should assess your financial situation and calculate how much money is needed to maintain your beneficiaries’ standard of living or to meet the need for which you are purchasing a policy. Consider how long you’ll require coverage.

 

For example, if you are the primary carer and have two children aged two and four, you would want enough insurance to cover your custodial responsibilities until your children are old enough to support themselves.

 

You could look into the cost of hiring a nanny and a housekeeper, as well as using commercial child care and cleaning services, and then add money for education. In your life insurance calculation, include any outstanding mortgages and retirement needs for your spouse. Especially if the spouse is a stay-at-home parent or earns significantly less. Add up these costs over the next 16 years, plus inflation, and that’s the death benefit you might want to buy—if you can afford it.

 

What Factors Influence Life Insurance Premiums and Costs?

 

The cost of life insurance premiums can be influenced by a variety of factors. Certain factors may be beyond your control, but others can be managed to potentially reduce the cost before (and even after) applying. Because your health and age are the most important factors in determining cost, purchasing life insurance as soon as you need it is often the best option.

 

If your health has improved and you’ve made positive lifestyle changes since being approved for an insurance policy, you can request that your risk class be changed. Even if it is discovered that you are in worse health than when you were underwritten, your premiums will not be raised. If you are discovered to be in better health, your premiums may be reduced. You may also be able to purchase additional coverage at a lower cost than you did previously.

 

Purchasing Guide For Life Insurance

 

Step 1: Determine the Amount Required

 

Consider what expenses would need to be met in the event of your death. Mortgage, college tuition, and other debts, not to mention funeral costs. Furthermore, income replacement is important if your spouse or loved ones require cash flow and are unable to provide it on their own.

 

There are online tools that can help you calculate the lump sum that will cover any potential expenses.

 

Step 2: Get Your Application Ready

 

Personal and family medical history, as well as beneficiary information, are typically required on life insurance applications. You may be required to undergo a medical examination and disclose any preexisting medical conditions, a history of moving violations, DUIs, and any dangerous hobbies such as auto racing or skydiving. Most life insurance applications require the following components:

 

• Age is the most important factor because life expectancy is the most important determinant of risk for insurance companies.

 

• Gender: Because women live longer lives on average, they pay lower rates than men of the same age.

 

• Smoking: A smoker is at risk for a variety of health problems that can shorten one’s life and raise risk-based insurance premiums.

 

• Health: Most policies require medical exams to screen for health conditions such as heart disease, diabetes, and cancer, as well as other medical metrics that can indicate risk.

 

• Dangerous lifestyles can drive up premiums significantly.

 

• Family medical history: If you have a history of major disease in your immediate family, you are at a much higher risk of developing certain conditions.

 

• Driving record: A history of moving violations or drunk driving can significantly raise insurance premiums.

 

• Standard forms of identification, such as your Social Security card, driver’s licence, or U.S. passport, will also be required before a policy can be written.

 

Step 3: Compare Insurance Quotes

 

After gathering all of your necessary information, you can obtain multiple life insurance quotes from various providers based on your research. Prices can vary significantly between companies, so it’s important to shop around to find the best combination of policy, company rating, and premium cost. Because life insurance is something you will most likely pay for monthly for decades, finding the best policy to fit your needs can save you a significant amount of money.

 

Life Insurance Advantages

 

There are numerous advantages to having life insurance. Some of the most important features and protections provided by life insurance policies are listed below.

 

Most people purchase life insurance to provide funds to beneficiaries who would face financial hardship if the insured died. However, the tax advantages of life insurance, such as tax-deferred cash value growth, tax-free dividends, and tax-free death benefits, can provide additional strategic opportunities for wealthy individuals.

 

Tax Avoidance

A life insurance policy’s death benefit is usually tax-free.

 

To pay estate taxes, wealthy people may purchase permanent life insurance through a trust. This strategy aids in the preservation of the estate’s value for their heirs.

 

Tax avoidance is a legal strategy for reducing one’s tax liability; it is not the same as tax evasion, which is illegal.

 

Who Requires Life Insurance?

 

After the death of an insured policyholder, life insurance provides financial support to surviving dependents or other beneficiaries. Here are some people who may require life insurance:

 

• Parents with children under the age of 18. If a parent dies, the loss of their income or caregiving skills may result in financial difficulties. Life insurance can ensure that the children have the financial resources they require until they are able to support themselves.

 

• Parents of adult children with special needs. Life insurance can ensure that the needs of children who require lifelong care and will never be self-sufficient are met after their parents die. The death benefit can be used to fund a special needs trust, which a fiduciary will manage for the benefit of the adult child.

 

• Adults who jointly own property. If the death of one adult would mean that the other could no longer afford loan payments, property upkeep, and taxes, life insurance may be a good idea. An engaged couple, for example, might take out a joint mortgage to buy their first home.

 

• Seniors who wish to leave money to adult children who care for them. Many adult children give up time at work to care for an elderly parent who requires assistance. This assistance may also include direct financial assistance. When a parent dies, life insurance can help pay for the adult child’s expenses.

 

• Young adults whose parents have private student loan debt or have cosigned a loan on their behalf. Young adults without dependents rarely require life insurance, but if a parent is obligated to pay off a child’s debt after their death, the child may want to carry enough life insurance to cover that debt.

 

• Children or young adults seeking to lock in low interest rates. Your insurance premiums will be lower if you are younger and healthier. A 20-something adult may purchase a policy even if they do not expect to have dependents in the future.

 

• Spouses who stay at home. Stay-at-home spouses should have life insurance because the work they do at home has a significant economic value. According to Salary.com, the economic value of a stay-at-home parent in 2018 would have been equivalent to a $162,581 annual salary.

 

• Wealthy families who anticipate having to pay estate taxes. Life insurance can provide funds to cover taxes and keep the estate’s full value intact.

 

• Families who are unable to pay for burial or funeral expenses. A small life insurance policy can provide funds to commemorate the death of a loved one.

 

• Businesses with key personnel. If the death of a key employee, such as a CEO, would cause a company to suffer severe financial hardship, the company may have an insurable interest that allows it to purchase a life insurance policy on that employee.

 

• Pensioners who are married. Rather than choosing between a pension payout that includes a spousal benefit and one that does not, retirees can accept their full pension and use some of the money to purchase life insurance for their spouse. This is known as pension maximization.

 

• Those who have pre-existing medical conditions. For example, cancer, diabetes, or smoking. However, some insurers may refuse to cover such individuals or charge exorbitant rates.

 

Considerations to Make Before Purchasing Life Insurance

 

1. Investigate Policy Alternatives and Company Evaluations

 

Because life insurance policies are a significant investment and commitment, it is critical to conduct proper due diligence to ensure that the company you choose has a solid track record and financial strength, given that your heirs may not receive any death benefit for decades. Investopedia has evaluated scores of companies that provide various types of insurance and rated the best in a variety of categories.

 

2. Consider How Much Death Benefit You Will Require

 

Life insurance can be a wise financial tool for hedging your bets and providing protection for your loved ones in the event of your death while the policy is in effect. 

 

However, there are some exceptions, such as buying too much or insuring those whose income does not need to be replaced. As a result, it is critical to consider the following.

 

What expenses would be unaffordable if you died? If your spouse has a high income and you don’t have any children, it may not be necessary. 

 

It is still critical to consider the impact of your potential death on a spouse and how much financial support they would require to grieve without having to worry about returning to work before they are ready. If both spouses’ income is required to maintain a desired lifestyle or meet financial obligations, both spouses may require separate life insurance coverage.

 

3. Understand Why You’re Purchasing Life Insurance

 

If you’re purchasing a policy on the life of another family member, you should consider what you’re trying to insure. Children and seniors don’t have any meaningful income to replace, but burial expenses may need to be covered if they die. 

 

Aside from burial costs, a parent may want to protect their child’s future insurability by purchasing a small policy when they are young. This allows that parent to ensure that their child’s future family is financially secure. Parents are only permitted to purchase life insurance for their children up to 25% of the value of their own policy.

 

Could investing the money that would have been spent on premiums for permanent insurance throughout the life of the policy earn a higher return over time? 

 

Consistent saving and investing, such as self-insuring, may make more sense as a hedge against uncertainty in some cases, such as when a significant income does not need to be replaced or policy investment returns on cash value are overly conservative.

 

How Life Insurance Works

 

Death Benefit

A death benefit and a premium are the two main components of a life insurance policy. These two components are present in term life insurance, but permanent or whole life insurance policies also include a cash value component.

 

The death benefit. When the insured dies, the insurance company guarantees the death benefit or face value to the beneficiaries named in the policy. For example, the insured could be a parent, and the beneficiaries could be their children. 

 

The insured will select the desired death benefit amount based on the estimated future needs of the beneficiaries. Based on the company’s underwriting requirements for age, health, and any hazardous activities in which the proposed insured participates, the insurance company will determine whether there is an insurable interest and whether the proposed insured qualifies for coverage.

 

Premium. 

Premiums are the funds paid for insurance by the policyholder. When the insured dies, the insurer must pay the death benefit if the policyholder pays the required premiums, and premiums are determined in part by how likely it is that the insurer will have to pay the policy’s death benefit based on the insured’s life expectancy. Age, gender, medical history, occupational hazards, and high-risk hobbies are all factors that influence life expectancy.

 

A portion of the premium is also used to cover the insurance company’s operating costs. Premiums are higher for policies with larger death benefits, for people who are more at risk, and for permanent policies that accumulate cash value.

 

The Monetary Value. 

Permanent life insurance’s cash value serves two functions. It is a savings account that the policyholder can use throughout the insured’s life; the cash accumulates tax-free. Withdrawals may be restricted under some policies depending on how the money is to be used. 

 

For example, the policyholder may take out a loan against the cash value of the policy and be required to pay interest on the loan principal. The cash value can also be used to pay premiums or purchase additional insurance. 

 

The cash value is a living benefit that the insurance company retains when the insured dies. Any outstanding loans against the cash value will reduce the death benefit of the policy.

 

Life Insurance Riders and Policy Modifications

 

Many insurance companies allow policyholders to tailor their policies to meet their specific requirements. Riders are the most common way for policyholders to change or modify their plans.

 

There are a lot of riders, but availability is determined by the provider. Although some policies include certain riders in their base premium, the policyholder will typically pay an additional premium or a fee to exercise the rider.

 

The accidental death benefit rider adds additional life insurance coverage if the insured dies in an accident.

If the insured becomes disabled and unable to work, the waiver of the premium rider relieves the policyholder of making premium payments.

 

In the event that the policyholder is unable to work for several months or longer due to a serious illness or injury, the disability income rider pays a monthly income.

 

When a terminal illness is diagnosed, the accelerated death benefit rider allows the insured to collect a portion or the entire death benefit.

 

The long-term care rider is a type of accelerated death benefit that can be used to pay for nursing home, assisted-living, or in-home care when the insured requires assistance with daily living activities such as bathing, eating, and toileting.

 

A guaranteed insurability rider allows the policyholder to purchase additional insurance at a later date without having to undergo a medical exam.

 

Borrowing funds.

 

Most permanent life insurance policies accumulate cash value that can be borrowed against. You are technically borrowing money from the insurance company and using the cash value as collateral. Unlike other types of loans, the policyholder’s credit score is not taken into account. The loan repayment terms are flexible, and the loan interest is credited to the policyholder’s cash value account. However, policy loans can reduce the death benefit of the policy.

 

Saving for Retirement.

 

Cash-value or investment-based policies can provide a source of retirement income. This opportunity may come with high fees and a lower death benefit, so it may be best for people who have exhausted all other tax-advantaged savings and investment accounts. Another way life insurance can fund retirement is through the pension maximisation strategy described earlier.

 

Life Insurance Eligibility

 

Insurers evaluate each life insurance applicant on an individual basis, and with hundreds of insurers to choose from, almost anyone can find an affordable policy that meets their needs at least partially.

 

According to the Insurance Information Institute, there were 841 life insurance and annuity companies in the United States in 2018.

 

Furthermore, many life insurance companies sell a variety of policy types and sizes, and some specialize in meeting specific needs, such as policies for people with chronic health conditions.

 

Some brokers specialize in life insurance and are familiar with the various companies’ offerings.

 

Applicants can work for free with a broker to find the insurance they require. This means that almost anyone can obtain some form of life insurance policy if they look hard enough and are willing to pay a high enough premium or accept a less-than-ideal death benefit.

 

Because the insurance industry is much broader than many consumers realize, getting life insurance may be possible and affordable even if previous applications have been denied or quotes have been unaffordable.

 

In general, the younger you are and the healthier you are, the easier it is to qualify for life insurance, and the older you are and the less healthy you are, the more difficult it is.

 

Certain lifestyle choices, such as smoking or participating in risky hobbies such as skydiving, also make it more difficult to qualify or result in higher rates.

 

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