If you’re thinking about signing up for life insurance, or you’ve already done a bit of research, you’ve probably noticed that the types of insurance and their options can be confusing. You may start to think that life insurance isn’t for you or that the policy options are too complicated.
With the proper life insurance in place, you can bring peace of mind to yourself and your loved ones. But, that still doesn’t make the concept of death easier, nor does it clarify what type of benefits you need. For these reasons, we created this FAQ list, so you can find the right policy.
The best way to learn about life insurance is to get a quote based on your age, health, and income. But if you don’t want to speak to an agent just yet, ask yourself these questions.
Despite what an insurance salesperson may tell you, not everyone needs a life insurance policy or a trust to accompany their policy. Here’s how you’ll know if life insurance is right for you:
Other People Depend on Your Income: If you have dependents, like children or older family members, you have a spouse that could survive on their income alone, or you plan to have children or a spouse in the future, you should purchase life insurance.
I Have Debts Under Mine and Another Person’s Name: If you currently have a mortgage or loan that’s under both your and your spouses, children, or family member's names, a life insurance policy can cover your portion of the debt when you pass.
Despite what debt collectors may tell you, your family members aren’t responsible for your debts after you pass in most cases. Some exceptions include co-signers, joint credit account holders, and certain state laws for spouses. Be sure to explain this fact to your family members.
Some people who hold a life insurance policy may create a trust agreement to help their beneficiary distribute their assets when they pass. Trusts are usually combined with a will for the purpose of giving direct instructions to their loved ones, something a will can’t provide.
An irrevocable life insurance trust (ILIT), on the other hand, is created to own and control permanent or term life insurance policies when the insured is alive. People who have a high amount of assets or expensive assets use an ILIT to minimize estate taxes and avoid gift taxes.
ILITs can be a powerful tool for high-income earners, but lower-income earners should just settle on a trust that’s connected to a will because it’s more affordable and suits their needs.
Most life insurance companies will use the “Human Life Value” method to calculate the amount you’ll need over a 10-30 year period. It’s expected that your income will increase as you age, so the calculation will multiply your income from ages 18-40 by 30, then lower it after 40 or 50.
Here are other ways you can determine the amount of life insurance you’ll need:
Multiply Your Income by 10: If you make $75,000 a year, you’ll need $750,000 in coverage. If you make $100,000 a year, you’ll need $1,000,000 in coverage.
Multiply by 10 Plus College Funds: If you make $75,000 a year and require $750,000 in coverage, but you have children or plan to have them, add $125,000 for each child.
Use the DIME Formula: DIME stands for Debt, Income, Mortgage, and Education. By adding these together, you can estimate the sum of your financial obligations.
After estimating your coverage amount, you can use life insurance calculators to determine what your policy will cost per month based on insurance type, age, income, and health.
There are 6 types of life insurance. Term, whole, and universal are the most common, while final expense, simplified, and group life are less common. Let’s look at each type in detail:
Term Life Insurance: Protects you for a limited time, usually for a span of 10 to 30 years. Term has a tier system where premium payments will increase periodically.
Whole Life Insurance: Protects you permanently. As long as your premiums are paid, the policy continues. Whole life can build cash value for loans or as retirement income.
Universal Life Insurance: Similar to whole life insurance, expect policyholders can adjust their monthly payments. This type is perfect for freelancers or business owners.
Final Expense Insurance: Only covers end-of-life expenses, like burial and funeral costs. Death benefits are minimal, but costs are low for most policyholders.
Simplified Insurance: Doesn’t require an exam like other life insurance policies. They offer lower levels of coverage and have high rates, but they’re good for older applicants.
Group Life Insurance: Also doesn’t require a health exam (at lower levels) and is typically taken out by an employer. Offers minimal protection and low monthly payments.
If you’re young, whole life or universal life insurance offers the most protection and bang for your buck. If you’re an older individual or you have health problems, simplified or group life insurance is optimal. Term life insurance and final expense insurance can be used for specialty purposes.
Most life insurance policies require a physical exam because companies need it to assess your risk. People who don’t smoke, drink, and are generally in good health get the lowest rates. If you have pre-existing health conditions or select a non-exam plan, your premiums will be higher.
Some life insurance policies offer zero cash value, like term life insurance. These types are designed to provide your beneficiaries with a payout during the term. If you want your life insurance to build cash value, you should purchase whole life or universal life insurance.
Just about anyone can be your beneficiary. However, your spouse or a common-law partner is typically the best option if they provide consent. You cannot name children under the age of 18 as beneficiaries. Your beneficiary should be someone you trust with your assets.
If you’re worried you’ll change your mind, you can choose a revocable policy. This way, you can add or remove a beneficiary whenever you’d like. Keep in mind that irrevocable trusts typically offer better benefits as a consequence of being locked into your policyholder or beneficiary.
Death benefits are paid in income-tax-free lump sums unless the beneficiary chooses to take out the funds in installments. However, certain employee benefit plans only allow benefits to be paid in pre-tax dollars. Policyholders can divide benefits between multiple beneficiaries.
There are a few life insurance policies that lock in your premiums. Term life insurance requires you to pay the same amount during the whole term, while whole life insurance remains the same for life. Other policies will become more expensive to account for a higher degree of risk.
Several policies will waive your premiums if you become disabled or can’t work for a period of time. However, this feature comes at an additional cost. If you want a policy that replaces your income if you become disabled or too sick to work, consider long-term disability insurance.
The consequences of late payments or missed payments depend on your contract and your state. You’ll usually have a grace period where you can still pay your premiums without surrendering your coverage. Some insurers will reinstate your coverage when you’re up to date.
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