Life insurance is often that item on the to-do list that never actually gets accomplished. You understand the need for it, yet the process is complicated, and the options are often obscure. You don’t like thinking about your own demise, and after all, you are in good health now. This lack of urgency allows you to justify putting it on the back burner, perhaps until it’s too late.
The interesting thing about life insurance is that it really is not for you but for others. Buying a policy is an unselfish act that provides for your loved ones, should something unexpected happen, removing you from their lives. In the midst of mourning, they will have the comfort of knowing you have provided for their needs through an adequate life insurance policy.
Here are 10 Fundamental Things That Will Take the Mystery Out of Life Insurance:
- The Purpose of Life Insurance is to compensate for financial losses that will occur if you die and are no longer able to provide support. Funds may be used to cover final expenses, pay off the mortgage, fund a college education for your dependent children, or provide ongoing income for the spouse left behind.
- Who Should Own Life Insurance? Everyone who has someone who relies on them or their income should carry life insurance. This covers the vast majority of people who have a spouse or children. Aging parents who are dependent on your assistance, owning a business, or having a business partner, would also be scenarios where life insurance can provide for ongoing family and business needs.
- The Value of a Life Insurance Policy goes beyond the monetary value of the death benefit. It provides peace of mind to the policyholder and beneficiaries, along with protection for the lifestyle you have created.
- How Much Insurance Do You Need? Insurance needs are generally calculated based on either income replacement or long term financial needs.
Income replacement looks at your current income and the amount of time others will be dependent on you. For example; if you expect your children to be independent within 15 years and you earn $100,000 a year currently, you would simply multiply 15 by $100,000 to get the total amount of insurance coverage required. The formula can get more complicated when you consider variables such as income growth, inflation, and other factors that impact the cost of living.
Ask Yourself: Needs based calculations establish insurance needs based on your expenses rather than income. Questions like, how much would it take to pay off the house, put your children through college, and provide an income for your spouse?
- Types of Insurance. There are two basic types of life insurance term and permanent or cash value policies.
Term insurance is the simplest to buy and the least expensive option for the highest total benefit. You select a term (anywhere from 5 to 30 years) and buy a policy for a set benefits amount. If you do not use the insurance, the company keeps the money, and never pays a benefit. These policies grow more expensive with age. For example, a 30-year-old nonsmoking male can get a one-million-dollar policy for under $50 a month because the chances of him dying so small. That same policy for a 60-year-old would be closer to $500 a month, and by 70 would rise to over $1,500 a month because the risk rises significantly with age. The rate generally remains the same for the duration of the term and then resets to a higher level based on your new age at the end of the term.
Permanent insurance comes with different options such as whole, variable, and universal life. Each policy has a life insurance and a cash value component. These policies are more expensive up front, but provide a steadier premium over the life of the policy. It also provides an increasing account value that grows over time. The cash value can be borrowed against and in some cases used for health care costs in the event of a terminal illness, depending on the policy terms. While permanent life insurance does not replace other investment vehicles, it can provide a way to receive some benefit from premiums if you live a long healthy life.
- Policy Participants include the insurer, the owner, insured, and the beneficiary. The insured is the company providing the policy and pays the death benefit. The owner is the person responsible for making the policy payments. The insured is the person’s whose life the policy is based, and the beneficiary is the person(s) who receives a payment when the insured dies.
- The Contract, Underwriting, and Ryders. The policy is a contract between the insurance company and the owner of the policy. The contract is typically very detailed and specific about what is covered and what is not. Some policies focus on paying specific costs such as final expenses. Others solely cover accidental death and not illnesses or diseases. Understanding every element of the policy will ensure you have the right one for your needs. Never feel intimidated by asking questions.
Underwriting is completed on the insured person(s). This process typically includes a health evaluation as well as screening questions. Factors such as smoking, occupation, and weight are considered and the final result will determine whether you get approved and what your rate will be. Answer all questions truthfully as failure to do so could invalidate the policy and lead to a denied claim.
Ryders are additional benefits that can be added to the policy at an additional cost. Ryders might include guaranteed insurability, payment waivers in the event of a disability, access to the policy in the event of a critical illness, or conversion options.
- The Company Matters. Life insurance comes with lots of guarantees, which are backed by the overall strength of the company. This makes who you buy insurance from as important as what policy you purchase. Life insurance companies are either stock companies or mutual companies. Stock companies are owned by shareholders whereas mutual companies are owned by the policyholders. Each company is also rated by independent companies like Moody’s, which evaluate their overall financial strength and ability to pay claims.
- Cancellation and Claims. Term policies are cancelled when payments cease. Permanent policies should consider the current and future value, along with potential tax consequences of cashing in a policy. There also may be alternatives to cancellation which could keep the policy in force.
- Use an Agent. Rates are generally the same whether you purchase a policy online or use an agent. Working with an individual will put someone on your side. They will review your needs, explain each policy option, and help you decide which one will meet the needs of the loved ones you are striving to protect. Underwriting and policy benefits will vary between companies. Meet with several agents to determine which company provides the best coverage options for your needs.
Insurance policies offer a lifeline to loved ones that should not be delayed. Everyone thinks that illnesses and accidents will happen to someone else. When that someone else happens to be you, being prepared will help everyone survive the storm.
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