Life insurance helps you cope with the vagaries of life, monetary uncertainty after your death or a loved one's, and the often complex legal ramifications of estate planning and wealth distribution to relatives.
Life insurance would not be a complicated matter if you do your homework, plan ahead and talk to the right people. Talk to professionals working in the life insurance industry to understand things like the type of insurance needed, coverage required, and the best way to buy a good policy at a competitive price.
What Is Life Insurance?
Roughly speaking, life insurance protects people who depend on your paycheck. Life insurance provides income to your loved ones if you die prematurely until they have sufficient income to replace yours.
Some life insurance clauses allow you to plan for things like emergency funds as well as money for legal, medical and funeral expenses - a smart and economically proper move, especially if your family can't afford those often pricey end-of-life costs.
Besides taking care of your loved ones' existential needs, a life insurance policy offers others benefits. You can use it as an investment vehicle, depending on the type of insurance you get – be it term life, whole life, universal life, variable universal life, and survivorship life. Through a life insurance policy, you also can make money by accumulating cash or selling your policy.
Life Insurance Types
There are two basic types of life insurance: cash value and term.
Term Life Insurance
Term life insurance provides coverage for a limited period – say, 60 months or 10 years. The premiums start out low, and the insurance company typically would guarantee that the premiums would not go up during the term. Note, however, that rates can increase after the specified period.
Cash Life Insurance
Cash value life insurance, as the term implies, enables you to build up a cash component to your policy over time. If possible, I recommend you choose this type of insurance policy because if you are faced with financial tumult, you can tap into the cash on a temporary basis and repay it back later. More specifically, there are three ways you can benefit from the cash value of your insurance policy:
- Borrow against the policy,
- Buy more insurance with the cash value, and
- Use the extra cash to increase your retirement income.
What Key Things Should I Consider When Buying Life Insurance?
Buying life insurance helps you address various needs, but don't choose a policy you cannot afford. Before buying life insurance, ask yourself the following:
- Who depends on you and what would be their earnings, excluding life insurance proceeds, after your death? Dependents can be your "direct family," such as spouse and children, and "extended family," say, an aunt, uncle, nephew, or niece.
- Do you have other investments, such as property and retirements accounts?
- Would you need life insurance for your entire lifetime or just a specific period, say, 25 years?
- Do you want a disability provision in the policy, so that you get coverage before your death?
- Does the insurance company have enough financial strength to be around when I'm no longer here?
How Much Life Insurance Do I Need?
The answer to this question depends on many things, including how much money will be needed for burial, your loved ones' living expenses, late-stage medical expenses and a miscellany of factors that go from college tuition to kids' future income prospects.
Use Bankrate.com's comprehensive Insurance Calculator to estimate how much life insurance you would need to buy. For example, based on the below questionnaire and hypothetical answers, you need to purchase an approximate amount of life insurance of $254,030.88.
How Do I Get the Best Policy at the Best Price?
Life insurance expert Richard Weber, of the California Institute of Finance at California Lutheran University in Thousand Oaks, recommends that consumers talk to their insurance agents to figure out the most effective way to get the best policy at the best price.
Mr. Weber suggests that you, as a potential policyholder, figure out whether you really need life insurance, how much and for how long, what kind of policy suits your circumstances, and what insurance company to trust.
Besides reaching out to your insurance agent, try to shop around for premiums on term life insurance to get the lowest quote. Beyond the quoted premium price, make sure the insurance company is the best one for you, and check factors like financial stability, credit rating, registration and the latest annual report. Contact your state's Department of Finance Services and the Office of the Insurance Commissioner.
The goal here is to make sure you're dealing with a reputable company that will still be around when you're no longer here and that will be able to provide benefits to your survivors.
How Should I Evaluate Life Insurance Premium Quotes?
To evaluate life insurance premium quotes, you can do it the hard way or the easy way. The hard way is that you canvass the offices, or call the customer service departments, of different insurance companies and talk to a "live" staff member. Alternatively, you can compare the quotes online – a procedure that not only is the easiest way but also saves you time, money and energy.
Portals such as AccuQuote, Insure, and Insurance Hot Line give you helpful resources and information to make a relevant life insurance decision. Before visiting the site, make sure you have handy things like medical history, pre-existing conditions, type of policy preferred, and policy term.
Key questions you should keep in mind as you shop around for quotes include:
- Does the insurance company increase premiums each year? If not, how often?
- Will my benefit level decrease?
- Will I derive dividends from the cash value portion of the policy?
- Will I be able to convert a term policy into a whole life policy if I so want?
- Does the insurance company charge policy fees separately from premiums?
- What is the maximum amount of cash value I can accumulate with the policy?
- Does the insurance company guarantee all benefits and premiums? If not, what part is not guaranteed?
What Are Effective Ways to Reduce My Life Insurance Premium?
You can decrease the premium amount you fork over by following a few measures:
- Stay fit – Consider joining a health and fitness club in your neighborhood or, if you can afford it, enlist the help of a professional fitness coach. Alternatively, you can give into daily walks, say, 30 minutes, in the local park or around your neighborhood.
- Reduce risk events – Lessen the risk level that insurance companies would assign to you. Insurers typically would ask that you undergo a medical exam before giving you a premium quote, and the healthier you are, the lower the premium rate they will offer you – everything else being equal. Besides a medical exam, a life insurance company uses a longevity chart as part of the evaluation process. A longevity chart comprises statistical tables showing mortality rates of people.
- Lessen cholesterol risk by adopting a well-balanced diet.
- Avoid tobacco and other substances that could pose a health hazard to you now or in the future.
- Don't go solo – You can decrease your life insurance premium if you purchase the policy from the same company that covers you on other risk events. Simply put, buy all your coverage from the same insurer, but make sure the company is financially strong and has a good credit rating. The last thing you want is to entrust your money to an organization that would not be around when you are no longer here. Talk to your insurance agent to have more information about cash you can save by bundling life, property, health and car insurance with a single company.
Life Insurance Questions
Is My Life Insurance Policy Annulled if I Don't Pay the Required Premiums?
You policy may be annulled if you don't pay your premium by the due date, but there are ways to avoid that. The insurance company will give you a 30-day grace period within which you can pay your premium and bring your policy back into the "Status: Current" category. If you don't remit the premium money after the grace period, your policy typically would lapse.
Have a conversation with your insurance agent or read the fine prints as well as the terms and conditions of your policy to better understand policy lapsing.
If you have a permanent policy, your insurance company would cover the late premium payments with whatever cash value there is in the policy. Remember to opt for a "waiver of premium" provision when filling your application; that way, if you become disabled, you would not have to pay premiums for the length of time you remain disabled.
Can I Have Multiple Life Insurance Policies?
You can have multiple life insurance policies from one or multiple insurers; the choice is yours. For example, you could buy a term life policy from one insurance company to address short-term needs, and purchase a permanent life insurance policy from another insurer to achieve other goals. Be mindful, though, that the insurance company might ask why you need more than one or two coverage plans if it figures out that you apply for more insurance than you need.
Who Can I Name as Beneficiary in My Life Insurance Policy?
Many people choose their spouse as the sole beneficiary on their life insurance policy, but you can choose who you want. Remember, you also can name multiple beneficiaries on the policy, depending on your family dynamics and the need to ensure the welfare of specific loved ones, among other reasons. For example, say you have a $250,000 individual life insurance policy. You could name your spouse and child to divvy up the policy equally at $125,000 each.
What Types of Information Life Insurance Companies Scrutinize in Medical Exams?
Talk to your insurance agent before you take the medical exam required as part of your life insurance application. That way, you know upfront the medical restrictions on the policy, what is out of the coverage scope, and how any personal health condition would affect your premium quote.
A medical exam helps collect information on things like blood sample, height, urine sample, and blood pressure, along with your health history, family, gender, age, and fitness level. The insurance company uses this collection of data to figure out the rate class in which you fit. Note that you can always reduce your rate by improving your health and fitness level, and this is something your insurance company can explain to you more.
What if I don't Die?
When purchasing term life insurance, you are hoping your family never has to collect the death benefit.
If you don't pass on while your policy is active, you have a few options as your policy comes to an end:
- Let it drop if you don't need coverage any longer
- Purchase a new policy (doesn't have to be term life)
- Upgrade the policy, if you have a conversion clause that allows you to do so
Simplifying Life Insurance Recap
Buying the best life insurance policy can help you have peace of mind – or, rather, have your soul rest in peace – when you're no longer alive. Key questions to consider when embarking on the life insurance bandwagon include the coverage amount needed, the types of insurance you can afford, and the best policy and premiums.