Life Insurance 101
You’ve watched the commercials enough to know that you need life insurance, but may still be uncertain as to how much you should buy. When is the right time to invest in a policy, anyway? How do insurance companies determine premium rates? These questions and more are answered in the guide below!
Life Insurance Defined
Life insurance is a contract between you and an indemnity company that guarantees monetary payment to your loved ones in the event of you passing away. You must name a beneficiary as the recipient of the policy and make premium payments promptly every month.
Upon your death, the benefiting family member or friend must inform the insurance company that you have passed away. The indemnity provider then sends documents that must be completed for funds to be released. Policyholders who do not name loved ones as beneficiaries will have funds from their contract regulated by a mediator appointed by the courts upon their death.
Two Main Types of Life Insurance
There are two central types of life insurance: term and permanent indemnity. Term insurance gives your beneficiaries payouts in the instance of your death, if it occurs before the term of your insurance policy has convened. Terms can be anywhere from five to twenty years, but do not cover individuals beyond 95 years old.
One central benefit of term insurance is its cost. Another advantage of the policy is its ability to convert to permanent indemnity in the future. You can purchase term life insurance at a low rate when you start your career and upgrade to a standing policy when you move up the corporate ladder.
Permanent life insurance is different from term indemnity as it sometimes gives dividends while you are living. The plan builds cash value with every timely payment and lets your beneficiaries receive monetary gains at your death regardless of when you pass away. Many middle-aged individuals go the extra mile to buy a permanent policy because of the savings benefit associated with the plan.
Types of Term Life Insurance
The most popular type of term insurance is the level premium policy. This contract guarantees the monthly price of your plan remains the same regardless of inflation and other economic increases. Many young adults invest in these sorts of plans to lock in a low monthly rate for the next twenty years.
Other term insurance policies that are less common are the annual renewable term, and decreasing coverage. Many indemnity companies do not offer these plans to individuals and families since they are not suitable for seekers who need a substantial financial cushion in the event of death.
Types of Permanent Life Insurance
Whole and universal life insurance are two of the most popular permanent indemnity plans around. Whole life policies come with the benefit of monthly payments remaining the same along with other perks that older customers enjoy. Universal life insurance is similar as it also comes with benefits that you cannot receive from a term indemnity policy. Variable and variable-universal life insurance are two other policies from which customers can benefit.
How Indemnity Companies Provide Life Insurance
Indemnity plans are either simplified issue or fully underwritten. Simplified issue policies require you to complete a questionnaire concerning your health but do not call for a complete medical examination. Most indemnity companies charge more for simplified issue contracts because proof of good health is not necessary for guaranteeing coverage.
Many customers exchange the fast process of a simplified issue plan for the lengthier fully underwritten policy. An underwritten policy requires applicants to undergo a medical exam that includes lab work for approval. Individuals in good health are typically given lower premiums, while those with a few complications are granted a contract with higher monthly payments. Persons with chronic illnesses sometimes face denial of underwritten plans because of poor health.
Factors that Determine Premium Rates
Age is usually the greatest factor that providers use when determining how much to charge customers for monthly premiums. Younger applicants tend to get lower quotes for payments, while senior citizens are charged more on a monthly basis because of the varying life expectancy between the two groups.
Other factors that influence premium rates are as follows:
- Family medical history
- Marital status
Women usually receive lower premium quotes than men because of their longer life expectancy. Individuals who are not married also pay less because they have fewer obligations than their married counterparts. Lifestyle choices significantly impact monthly payments for life insurance as smokers shovel out double in premium rates than those who are not addicted to nicotine. Athletes who participate in extreme sports, such as skydiving, may also find themselves paying more for life insurance as such activities negatively impact life expectancy.
How Should You Choose a Plan?
Different stages of life call for different life insurance policies. How much insurance you need depends on life changes that include whether you plan to have a large family in the future.
Here is a brief breakdown of how to purchase insurance based on four of the more popular stages in life.
Married Couples with Small Children
Young families usually purchase more coverage because of the risks associated with parenting. At any time, your small child can develop a life altering illness that requires you to become a stay-at-home mom or dad. You need an insurance policy that lets you use interest earned as a form of income replacement so that household expenses do not become overwhelming. It is for this reason that most young families start out with a term insurance plan and convert it to a permanent policy when finances are stable.
Married Without Children
Couples who share the burden of household expenses may not need as much life insurance coverage since both parties are earning enough to take care of bare necessities apart from the other spouse. Purchasing the cheapest term life insurance to pay for final expenses may be the best option for these applicants.
Studies show that single parents are at a financial disadvantage because they earn nearly three times less than households where both parents are present and working. Single moms and dads, however, need a life insurance policy that is large enough to cover funeral expenses and household expenses in the event of their death. The best policy for such parents, then, is a term plan that offers a good rate for the most cash payout.
Retired Senior Citizens
You’re under the age of 80, and ready to enjoy life as a retired citizen. Purchasing term life insurance is the best option since your retirement earnings coupled with savings should be enough to meet your basic needs. You may want to consider a permanent policy from which you can borrow against if you are one of many retirees with outstanding loans and other financial obligations.
Nothing is for certain except death and taxes. Life insurance is a necessary purchase for every household.