Sun. Jun 26th, 2022

According to the 2020 Insurance Barometer Report from industry organisations LIMRA and Life Happens, there are 41 million individuals in the United States who feel they need life insurance but do not have it. People’s inclination to overestimate the expense is a part of the reason behind this.

Life Insurance
Life Insurance

People may avoid purchasing life insurance because of misconceptions about the cost and benefit of the policy. A $250,000 term life insurance policy for a healthy 30-year-old would cost $500 a year or more, according to the Insurance Barometer Report. However, the typical annual cost is closer to $160. In terms of perceived cost against real cost, that’s a considerable difference.

For those who want to make an informed choice on life insurance, here’s a summary of the information you need.

To put it simply, what does life insurance cover?

Insurers and policyholders enter into a life insurance contract. A death benefit is a lump amount that the insurance company will give to your beneficiaries in return for your premiums.

There is no restriction on the use of the money that your beneficiaries receive from you. Often, this involves things like paying the rent or mortgage, raising a family, or sending a kid to school. Your family will be able to remain in their house and pay for the things you had planned if you have life insurance in place.

Term and permanent life insurance are the two most common forms of life insurance. In contrast to term life insurance, permanent life insurance such as whole life insurance or universal life insurance may offer coverage for the rest of one’s life.

What Are the Different Types of Insurance for Life?

For a limited time, you may get a term life insurance policy

Insurance Barometer’s Insurance Barometer Report found that term life insurance is the most common kind of life insurance sold (71 percent of buyers).

When you get term life insurance, your premiums are fixed for the whole term of the policy’s lifetime. Policy duration options include 10, 15, 20, 25, and 30 years.

If you die within the policy’s term, your beneficiaries may submit a claim and receive the policy’s death benefit, tax-free.

You may be able to renew the insurance in one-year increments, known as assured renewability, once the policy’s term ends. However, the rate of renewal will rise with each passing year.

Insurance that lasts a lifetime

Permanent life insurance protects you for the rest of your life. As a result, it is more costly than term life insurance.

  • The effects of this medication might endure for the rest of your life.
  • In most cases, monetary value increases.

A portion of the policy’s cash value grows tax-deferred throughout the policy’s term. It serves as a fraction of the policy’s savings. Loans or withdrawals from the policy’s cash value are often available. There is no surrender price if you wish to terminate your insurance.

Depending on the policy, cash value may grow slowly over time, so don’t expect to be able to access a lot of it right once. Cash value projections are included in your policy illustration.

Several types of permanent life insurance are available:

  • Whole life insurance offers a fixed death benefit and cash value component that grows at a guaranteed rate of return. Many whole life insurance policies pay out dividends that can be used to reduce premium payments or can add to your cash value.
  • Universal life insurance often offers more flexibility than a whole life insurance policy. You may be able to alter your premium payments and death benefit, within certain limits. With a universal life insurance policy, the cash value will build depending on the policy type. For example, an indexed universal life insurance policy will have cash value tied to an index such as the S&P 500. A variable universal life policy will typically have investment subaccounts that you can choose and manage.
  • Burial insurance is a small whole life policy with a small death benefit, often between $5,000 and $25,000. Burial insurance is designed to cover only funeral costs and final expenses.
  • Survivorship life insurance or “second to die life insurance”  insures two people under one policy, usually a married couple. When both spouses have passed away, the policy pays out the death benefit to the beneficiaries. Typically, survivorship life insurance is part of a larger financial plan to fund a trust or pay federal estate taxes.

How to Choose a Life Insurance Policy Type

With all of the life insurance options available, it may seem complicated to choose the right one.

Start by deciding between term life and permanent life insurance.

Consider a term life insurance policy if you need life insurance for a specific amount of time. For instance, if you want insurance to cover your working years as possible “income replacement” if you were no longer around.

Term life insurance is also a good choice if your budget is limited. Since term life insurance provides protection for a specific amount of time, and it’s not a cash value life insurance policy, the rates will be lower than permanent life insurance.

As you enter different stages of life, your life insurance needs may change. Many term life insurance policies are convertible to a permanent policy. The options will depend on your policy and insurer. Term life conversion allows you to switch to a permanent policy without re-applying or taking a life insurance medical exam.

On the other hand, a permanent life insurance policy will last for the duration of your life. If building cash value is important to you, look at permanent life insurance options. But if you’re purchasing a permanent policy only to capitalize on the cash value accumulation, depending on the policy, you’re better off putting your money into a savings or investment vehicle, so you’re not paying for the life insurance and charges within a permanent policy.

And cash value isn’t typically intended for beneficiaries. Upon death, any cash value generally reverts back to the life insurance company. Your beneficiaries get the policy’s death benefit, not the death benefit plus cash value. That said, some policy types will offer the death benefit plus cash value, but for a higher price.

How to Decide the Amount of Life Insurance to Purchase

Estimating how much coverage you need is a solid rule of thumb:

  • Add up all of your financial needs, including income replacement for your job, a mortgage, and the cost of your children’s education.
  • Subtract from it the amount of money your family has available to pay such costs, such as savings and life insurance policies. Keep retirement money out of the equation if your spouse may need it in the near future.

To get the amount of life insurance you need, multiply your age by 100. It may seem excessive, particularly if you’ve taken into account the loss of revenue over a long period of time. Life insurance quotes are free, so it’s not a bad idea to have an idea of how much coverage is necessary.

If you can’t afford it, you can purchase what you can afford now and lock in a reasonable interest rate if it becomes unaffordable later. Buying more in the future is OK, but keep in mind that your rate may be affected by your age and any health issues you may have acquired at the time of purchase.

To help you figure out how much life insurance you’ll need, here is a calculator.

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