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A life insurance policy can financially protect your family members or other beneficiaries when you’re no longer here. Life insurance premiums are less expensive when you’re younger, so it’s never too early to research your options.
To help you prepare for this step, we at the Guides Home Team have put together this guide to life insurance. Below, you’ll find everything you need to know about life insurance, including answers to common questions and an overview of the different types of policies.
Life insurance is a contract between an insurance company and an individual. Its purpose is to provide financial support for the policyholder’s loved ones if the policyholder dies during the plan term.
The policyholder agrees to make regular premium payments and names a beneficiary—typically a spouse, child or another dependent. In return, the insurance company agrees to pay a certain amount of money to the beneficiary when the policyholder dies.
Depending on the type of policy, this agreement remains in effect as long as the premiums are paid (for permanent life insurance) or until the term expires (for term life insurance).
During their lifetime, policyholders pay premiums to their life insurance provider. Once the policyholder dies, the insurance company pays out the death benefit to the beneficiaries.
To understand what all this means, it may be helpful to define a few key terms.
Anyone whose death will financially impact other people should consider purchasing life insurance. Life insurance can be a particularly wise investment in the following situations:
Life insurance comes in two main types: term life insurance and permanent life insurance. Which one you choose depends primarily on your needs and budget. If you want coverage that lasts your entire life, choose a permanent policy. If you need a budget-friendly option, consider a term policy.
Term life insurance provides coverage for a certain period of time, known as the term. This policy only pays out if the covered individual dies during the term. As a result, term life insurance tends to be more affordable than permanent life insurance, with a fixed rate that lasts for the entire term.
As the original term draws to a close, you may have three options for continued coverage:
Not all term life insurance policies are renewable or convertible. Some policies include a decreasing term, which means the coverage decreases over time. Although the term for most policies will be a predetermined number of years, such as 20 or 30 years, there are some exceptions. Below are a few examples.
The complimentary life insurance you receive through your employer is a type of group life insurance. Group life insurance might also be provided by your church or another organization to which you belong. Although the employer or organization is the policyholder, covered individuals choose their own beneficiaries. Coverage is typically guaranteed but only lasts as long as you belong to the group or remain employed at the company providing the coverage as an employee benefit.
Supplemental life insurance is often available as an add-on to group life insurance. Supplemental coverage is usually cheaper and easier to obtain than other types of insurance, but, as the name suggests, it is meant to supplement rather than replace an individual policy. Most supplemental life insurance policies expire when the associated group life insurance does. That means you will likely lose this coverage when you leave or lose your job, stop paying dues or otherwise sever ties with the group policyholder.
Additionally, supplemental coverage is typically limited and sometimes requires medical underwriting.
Mortgage life insurance covers a mortgage’s full or partial balance if the borrower dies before paying it off. This type of policy lasts until the mortgage has been paid in full. Although it is designed to protect the borrower’s family from the burden of mortgage payments, the beneficiary is actually the mortgage lender. Mortgage life insurance does not require a medical exam.
Like mortgage life insurance, credit life insurance covers a specific debt and lasts until the debt has been paid. Typically, the premiums for this insurance are rolled into the loan payments. The payout goes to the lender rather than any survivors to pay off the remaining balance. Because credit life insurance is so targeted, it is easier to qualify for than other options.
As long as the policyholder pays the premiums, permanent life insurance never expires. Because it covers the insured’s entire life, premiums are higher than a term life insurance policy. These policies typically have a cash value that grows over time.
Read more about the different types of permanent life insurance below.
Whole life insurance is what most people think of when they consider permanent life insurance. It pays out no matter when the policyholder passes away and has a cash value that increases over time, similar to a savings account.
While the policyholder is still alive, he or she can draw on the policy’s cash value. However, a withdrawal from the cash value functions like a loan and must be repaid with interest. If the policyholder dies before repaying the loan, the insurer will deduct the remaining principal and interest from the death benefit before paying any beneficiaries.
Universal life insurance, also known as adjustable life insurance, may differ from whole life insurance in three ways:
The terms of universal life policies vary. Before purchasing a universal policy, be sure to understand exactly what it does and does not guarantee and how the costs and benefits might change over time.
Like other types of permanent life insurance, variable life insurance carries both a death benefit and a cash value. The key difference is the policyholder’s ability to invest the policy’s cash value. Depending on the performance of that investment, the cash value may rise or fall over time. Throughout all this, the policyholder must maintain a high enough cash value to cover any policy fees. Otherwise, the policy will lapse.
If investments perform poorly, the policyholder may need to pay higher premiums to make up the difference and avoid a policy lapse. On the flip side, the earnings from a high-return investment could cover some or all of the premium costs. Another benefit is that, unlike with most policies, the cash value of a variable policy can be added to the death benefit.
Final expense life insurance, also known as burial or funeral insurance, is meant to cover bills that will be charged to the policyholder’s family or estate. Examples include medical and funeral costs plus any unpaid debts, such as a mortgage or credit card balance. Because the death benefit typically falls between $5,000 and $25,000, this coverage may be less expensive and easier to obtain than other permanent life insurance policies.
A survivorship life insurance policy covers two people, typically two spouses. As a joint policy, it does not pay out until both covered individuals have died. This type of policy may cost less than two separate policies. It is a particularly attractive option if one party has health issues that make an individual policy unaffordable. However, it is less common than other types of permanent life insurance.
The cost of life insurance can vary dramatically based on several factors. The most obvious factors are the type of policy you choose, your age and your health. As noted above, term life insurance policies are generally more affordable than permanent ones. However, prices can vary even within those categories. The longer the term and the higher the coverage amount, the more a policy will cost.
Further, certain factors can cause the same policy to cost significantly more for one person than another. Insurance companies base their rates on how soon or likely a payout might be. As a result, anything that might lower your life expectancy or increase your risk of serious illness or death will negatively impact your life insurance rates.
Some of these factors, such as your age and family medical history, are outside your control. However, you can make lifestyle changes to improve your health and obtain lower life insurance rates.
Generally, the younger you are when you apply for life insurance, the less expensive it will be. You can also lower your rates by avoiding high-risk activities, proactively managing preexisting conditions and maintaining a healthy lifestyle.
As you shop for a life insurance policy, consider your needs and budget. Start by determining how much life insurance you need by taking the following steps:
Next, request life insurance quotes from multiple companies, as rates can vary significantly. You might get multiple quotes from each company for different life insurance options. As you decide between term and permanent life insurance, consider the following:
If the quoted rates are higher than you can afford, ask the insurance agent for prices on a lower coverage amount or a shorter term. If you are denied coverage altogether, look for alternatives. Not all companies weigh risk factors the same way, and not all policies require a medical exam.
Finally, compare your options. Be sure to consider the monthly or annual premiums and the risks and benefits associated with different types of policies. Check for exclusions and note whether the policies feature level premiums or stepped premiums that increase as you age.
Life insurance helps protect your loved ones from financial loss after your death. If you choose a permanent policy with a cash value component, you may even reap some benefits while you’re alive.
The key to finding affordable life insurance is to apply early. The younger and healthier you are, the better your rates will be. Then, shop around and compare policies to find the best deal.
Life insurance can help provide for your family after you pass away. This is especially important if you have a spouse, child or parent that depends on your income. It can also help pay off any outstanding debts that a joint account holder or cosigner would have to shoulder alone after your death.
You should get life insurance as young as possible. Although you are less likely to need life insurance in your 20s, you will be able to secure a much better rate at that age. It also becomes harder to qualify for life insurance as you age, leaving you with fewer options.
Term life insurance lasts for a predetermined period of time, while whole life insurance lasts for your entire life. Whole life insurance also has a cash value component that is not available with term policies.
Yes, you can get life insurance with a preexisting condition. However, you may need to shop around to find a policy for which you qualify. You can also expect life insurance to be more expensive with a preexisting condition.
During the application process, most life insurer health questionnaires will include a few COVID-19 questions. Previously having COVID should not impact your ability to purchase new life insurance coverage, according to the Triple-I. However, if you are experiencing long COVID symptoms, that may be considered a chronic condition and could impact the rate you are charged.
Mark Friedlander is Director, Corporate Communications, at the Insurance Information Institute (Triple-I), a New York-based nonprofit research and education organization focused on providing consumers with a better understanding of insurance. Mark serves as a national spokesperson for the Triple-I, handling a wide array of insurance industry media issues. His responsibilities also include spearheading the association’s hurricane season communications strategy and its member company support and media outreach in Florida, where he is based.
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