Life Insurance: What You Need to Know
Life insurance can provide essential financial security for your loved ones. Many people assume it’s expensive, but comparing quotes often reveals surprisingly affordable options. The key is to understand the different types of policies and how they fit your individual needs.
What is Life Insurance?
Life insurance is a contract between you and an insurance company, also known as a policy. In this agreement, you pay a premium—regular payments over time—to keep the policy active. If you pass away while the policy is in force, the insurance company will pay a death benefit to your designated beneficiary.
Who Needs Life Insurance?
You may need life insurance if others depend on you financially. Consider life insurance if:
- Your family relies on your income.
- You have someone who will be financially dependent on you indefinitely, such as a child with special needs.
- You want to cover burial expenses.
- You want to leave an inheritance.
Benefits of Life Insurance
Life insurance primarily provides financial stability for your loved ones after your death. Additional benefits include:
- Cash Value Policies: Some policies allow access to accumulated cash value while you are still living.
- Living Benefits: Some policies offer early access to the death benefit if you develop a serious health issue.
- Beneficiary Flexibility: Beneficiaries can generally use the death benefit in any way they deem appropriate, such as paying off a mortgage or covering living expenses.
- Generally Non-Taxable: Death benefits from life insurance are generally not subject to income tax.
How to Find the Right Life Insurance
1. Determine Your Life Insurance Needs
Before comparing policies, assess how much coverage you require. Calculate your financial obligations and resources.
Consider the following financial obligations:
- Funeral and burial expenses
- Income replacement
- Outstanding debts, such as a mortgage
- Childcare costs
- College tuition
Factor in any existing resources your family could use:
- Emergency savings
- College savings accounts
- Retirement savings
- Existing life insurance policies
- Prepaid funeral costs
For assistance in estimating your needs, consider using an online life insurance calculator or consulting a financial planner.
2. Evaluate Insurance Companies and Policies
Choose an insurer with a strong reputation and options that meet your needs at a fair price. Look for a company’s financial strength ratings from agencies like AM Best.
If considering term life, check options for renewing the policy or converting to permanent life. For permanent life insurance (like universal life), understand internal fees and how fast cash value accumulates. The policy illustration will show these details.
3. Prepare Application Information
Be ready to provide basic information for quotes, including:
- General health details (height, weight)
- Medical history (current and former conditions)
- Family medical history
- Current and previous medications
4. Compare Life Insurance Quotes
The best way to secure a good price is to compare quotes from several insurers. You can find quotes:
- Online: Easy for term life and guaranteed issue life insurance. Other policies may require an agent.
- By Phone or In-Person: Connect with a local life insurance agent. An independent agent, who sells policies from multiple companies, is often preferred over a “captive” agent, who represents only one insurer.
- Through Financial Advisors: Many financial advisors offer life insurance quotes and can assist in financial planning.
Applying for Life Insurance
Once you’ve chosen an insurer, it’s time to apply. The process depends on the underwriting type used. Options include:
- Full Underwriting: Requires a questionnaire, medical exam, and authorization to gather information. This may result in the lowest quote, especially for those in good health, but the process may take months.
- Accelerated Underwriting: Similar to full underwriting, but does not always require a medical exam, and uses data for risk assessment. Coverage can be approved quickly.
- Simplified Issue: Quick and straightforward, with few health questions. No medical exam is needed. However, this might involve higher rates because insurers have less applicant information.
If a medical exam is needed, prepare appropriately in the weeks leading up to the exam.
Types of Life Insurance Policies
There are fundamentally two main types of life insurance: term life and permanent life. Each can suit different needs.
Term Life Insurance
Term life insurance offers coverage for a specific period. Key types include:
- Level Term: Keeps the rate and death benefit consistent during the term (e.g., 10, 20, or 30 years).
- Annual Renewable Term: Offers a locked-in rate for one year; the premium increases annually at renewal.
- Decreasing Term: Locks in a rate while the death benefit decreases over time.
- Return of Premium Term: Refunds your premiums if you outlive the policy.
Permanent Life Insurance
Permanent life insurance offers lifelong coverage and the ability to build cash value, which grows tax-deferred. This makes it more expensive than term life.
Key types of permanent life insurance include:
- Whole Life Insurance: Provides lifelong coverage with a cash value feature, with typically a guaranteed return. Premiums and the death benefit remain constant.
- Guaranteed Issue Life Insurance: A form of whole life insurance for older adults with health issues who need coverage for final expenses. No medical exam is needed, but coverage is typically limited and premiums are often high.
- Universal Life Insurance: Offers lifelong coverage, with variable premiums and death benefits. Policies allow the insured some flexibility in payments and benefits.
- Guaranteed Universal Life (GUL): May have little cash value, but the premiums and death benefit remain constant.
- Indexed Universal Life: A cash value component tied to a market index such as the S&P 500, allowing returns to vary.
- Variable Universal Life (VUL): Adjustable premiums and the ability to invest the cash value portion in options selected by the insurer. Death benefits may vary according to investment performance.
Comparing Term and Permanent Life Insurance
Here is a general comparison of Term vs. Permanent Life:
Factors Affecting Life Insurance Quotes
Key factors influencing life insurance quotes:
- Age: This affects your risk level.
- Gender: Used to determine your risk level.
- Health: Your overall health and medical history impact your life expectancy.
- Lifestyle Choices: Smoking status, substance abuse and risky hobbies are closely considered.
- Driving Record: Infractions such as DUIs can affect rates.
- Criminal Record: Major felonies typically lead to a decline.
- Credit and Finances: Scores and public records can affect your risk level.
5 Important Tips Before Buying Life Insurance:
- Affordability: Life insurance can be more affordable than you might believe. The average quote for a term life policy is about $17-$21 monthly.
- Age Matters: The younger you are when you buy, the lower your premium will be.
- No-Exam Options: You might not need a medical exam. Many insurers offer no-exam policies.
- Application Speed: If you are healthy and under 60, applying can be quick, often online.
- Comparisons Save: Comparing quotes can lead to significant long-term savings.
Important Life Insurance Terminology
- Beneficiary: The person or entity named to receive the death benefit.
- Cash Value: Money that accumulates in a permanent life insurance policy.
- Death Benefit: The payment to the beneficiary after the insured’s death.
- Face Amount: The coverage amount purchased.
- Insured: The person whose life is covered by the policy.
- Policy: The legal life insurance contract.
- Policyholder: The owner of the life insurance policy (who also is responsible for premium payments). This person can be different from the insured.
- Premium: Payments needed to keep a life insurance policy active.
- Rider: Additional coverage included in a policy (usually with an extra cost).
- Underwriting: Process of determining whether to insure an applicant, how much to charge.
