There are many things to consider when it comes to obtaining a life insurance policy that can help protect your family’s future financial needs. This Life Insurance 101 Guide can help make it easier to understand the basics of how life insurance works, the types of coverage available, why you need it, and how to choose a plan that’s right for you. after reading this guide, agent.healthmarkets.com/” target=”_blank” rel=”noopener”>find a licensed insurance agent near you who can provide you with more information on how different life insurance plans can help provide financial security for your loved ones.
what is life insurance and how does it work?
Life insurance is a contract between you and an insurance company to provide coverage based on timely payment of premiums. Life insurance provides a death benefit to your designated beneficiary (usually a spouse) at the time of your death. When you die, your beneficiary files a claim with the insurance company to provide proof (a death certificate) of your death. If there is a licensed insurance agent who usually works with your family, your beneficiary can contact the licensed insurance agent who will help you complete the necessary paperwork. Or, your beneficiary can contact the insurance company directly and a claims representative will tell you what to do. After the insurance company receives all the documents, your beneficiary will receive the death benefit payment.
Reading: How to understand life insurance
If you name a child as your beneficiary, then a policy custodian will have to file the claim. It could be someone you named to manage the policy money in the event you die while your child is still a minor. if you didn’t name anyone, then a court will appoint someone.
main types of life insurance
Life insurance can be temporary or permanent. Temporary insurance is more commonly called term insurance, and policies are issued for a specific number of years, often 5 to 30. Permanent insurance covers you for your lifetime as long as premiums are paid.
Some of the 101 life insurance basics you need to know are the main differences between term life insurance and permanent life insurance.
types of term and permanent insurance
Virtually all term insurance policies sold to individual consumers are level-premium term policies. This type of policy guarantees that your premium will stay the same for a certain period of time, which can be the entire term or just a part of it. Other less common types of term insurance include annual renewable term and decreasing term coverage. Most insurance companies don’t offer these plans to individual insurance buyers because they’re typically not the best fit for families looking for the most protection.
Two of the most popular types of permanent insurance are whole life and universal life. Most whole life policies provide a level premium, so the rate you pay stays the same throughout the policy. With most life insurance policies, you can get a higher death benefit if you pass a medical exam. Other permanent insurance policies available include universal life and variable universal life.
how life insurance policies are issued
Policies are issued simplified or fully subscribed. Simplified issue policies only require you to answer questions about your health when completing the insurance application. these policies may cost more since the insurance company has less evidence about your health. fully underwritten policies require you to have a medical exam and complete lab work. You generally get a lower premium with these policies if your results show good health.
factors that determine your premium rate
A general rule of thumb with life insurance 101 is that the younger and healthier you are, the less you will pay. Age is typically the most important factor in calculating your premium rate. Other factors include:
- gender: women tend to get lower rates due to their longer life expectancy
- answers to health questions in the policy application
- results of medical examinations and laboratory tests
- family medical history
- marital status
- lifestyle: smoker/non-smoker, alcohol use, risky hobbies like skydiving
why do I need life insurance?
There are three main reasons many Americans get life insurance:
- to pay for burial and final expenses: even a simple funeral can cost thousands of dollars. The National Association of Funeral Directors reports that the average price Americans pay for a funeral is $7,848, as of 2021.1 That doesn’t even include the price of a vault, something most cemeteries require, which can range from $900 and $7,000.2 About 83% of Americans get life insurance for this reason, according to limra.1
- to replace income: If you died leaving behind a spouse and young children, it can be difficult for them to make ends meet without your income. The money from a life insurance policy can help maintain your family’s standard of living and pay for the expenses associated with raising children. limra reports that 68% of consumers obtain life insurance for this reason.1
- to leave an inheritance or transfer wealth: life insurance can help ease the financial burden your family may face in keeping a roof over their heads after you’re gone. the money from a policy can help them continue to make monthly bill payments or pay off a balance in full. limra says that 63% of consumers get life insurance for this reason.1
- Determine your needs: Calculate how much debt you have, your monthly living expenses and your final expenses. Include any future expenses, such as college tuition. Calculate how long you need replacement income and how much income your survivors would need to pay for immediate and future expenses.
- Get a quote from different insurance companies: Compare rates, policy features, and benefits to make sure you’re getting a good value.
- Choose a company with a strong financial rating: Companies with higher ratings offer more assurance that they will have the funds to pay your claim.
- make an appointment with a licensed insurance agent: after narrowing your search to a specific company, speak with a licensed insurance agent to go over more details about your needs.
- Make sure you can afford the premium: Double check how much income you have and how much expenses you have to make sure the rate you get is affordable.
- Read Your Policy: After you’ve been issued a policy, be sure to read all of the fine print. If you don’t like your policy, state law generally requires that you have a certain number of days to cancel your policy and receive a refund of the premiums you paid. depending on the state, this can be between 10 and 30 days after the policy issuance date.
how to take out life insurance
understanding life insurance
part of life insurance 101 is knowing when to choose term or permanent life insurance.
Young and married with young children: Young families may need the highest death benefit from a life policy because the need for income replacement that can cover the expenses of growing children is older. Also, if a spouse staying home to care for the children dies, it would be an additional expense for the surviving spouse to pay for child care services. a term plan is usually the least expensive option for the most coverage. longer-term policies, such as a 20-year or 30-year plan, may be more suitable for young families.
Young, married and childless: If both you and your spouse share work and household expenses equally, you may not need life insurance. but depending on your lifestyle, it can be difficult to maintain the same standard of living if one of you is no longer around. According to an article in Kiplinger magazine, a modest amount of coverage may be enough to meet your needs. Since term policies allow you to get only the basic amount of coverage you need, you can choose a plan with a lower death benefit for a more affordable rate.
Single Parents: Like young couples with children, single parents with younger children may also need a policy that provides a large death benefit. Studies show that the majority of single parents are women, and the average salary single mothers earn as of 2019 was $48,098.3 This is much less than the average salary of married couples with children under the age of 18, which is of approximately $102,308 (as of 2019).3 With less income among most single parents, it is more likely that there will not be enough savings that can be used as income replacement if the parent dies. The basic life insurance 101 step in this situation is to obtain a low-cost life insurance policy that can provide the most protection. the lower cost of term insurance can make it a good option for single parents.
Recent Empty Nest: So the kids are off to college, but that doesn’t mean your life insurance needs are over. You may need to support your children during their college years to help pay for tuition, room and board, books, or even clothing. If your household is operating on two incomes and you still have significant debts to pay, such as a mortgage, you may need the protection of income replacement. Depending on your age, it may be a while before you have enough savings for retirement.
At this stage of life, a policy that has a death benefit could be used by your spouse to cover expenses if one of you dies. the policy can also build cash value to supplement your income may be most suitable. You can choose to go with a term plan that converts to permanent insurance or go directly to a permanent policy depending on your needs. For example, if you’re 55 and looking to have cash value in a policy by the time you’re 65, then a permanent plan may be better because it could take that long for the policy to build cash value.
If you don’t need supplemental income that fast, you can get a 10-year convertible term plan. So when you’re 65, you could have a whole life policy, and when you’re 75, you could have cash value in the policy. One thing to keep in mind when converting a term plan is that insurance companies generally only allow you to do this before you turn 65.
If you need a policy that can help supplement your income, then the cash value of a permanent plan may meet your needs. keep in mind that it takes a while to build cash value. so depending on your age, you may want to weigh the odds on whether or not you’ll be around long enough to take advantage of this feature. One type of permanent insurance you can also choose from is final expense insurance, which is typically offered as a whole life policy. this type of coverage is only intended to cover your burial and funeral expenses, not your long-term financial needs.
find a life insurance plan today
Now that you’ve learned the basics with this Life Insurance 101 guide, it should be easier for you to make a decision about what type of coverage you should get. A licensed insurance agent can help provide further guidance in making that decision, and can answer any questions you may have.
Call to speak with a licensed insurance agent, or locate one at agent.healthmarkets.com/” target=”_blank” rel=”noopener”>in your area now.