Life insurance financially protects your family and others who depend on your income. If you have life insurance, it will make payments after you die to the person you name on your policy. This person is called your beneficiary. You may name more than one beneficiary. Your beneficiaries can use the money to pay bills and other living expenses, pay off debt, pay for college, etc. Some types of life insurance also build savings that you can use throughout your life.
Do I need life insurance?
Not all people need life insurance. Life insurance is a good idea if you have a family or other people who depend on you financially. There is no formula for deciding how much life insurance you need. To determine the right amount for you, consider your debts, how much income your family needs to replace, and whether you’ll have bills or other expenses.
How can I get life insurance?
You can buy life insurance directly from insurance companies and agents. Insurance companies use underwriting to decide whether to sell you a policy. This often includes having to pass a medical exam and answer questions about your health, work, and habits. A company may refuse to sell you a policy if it believes you are at high risk for your health.
Some employers and groups, such as churches, unions, and other associations, offer their employees and members group life insurance. The underwriting criteria for group life insurance are not as strict. You generally do not have to answer questions about your health. As a result, you may be able to get group life insurance even if you can’t buy directly from an insurance company.
How much does life insurance cost?
The cost depends on your circumstances. Life insurance premiums are based on your age when you purchase the policy. They are usually lower for younger people. Insurance premiums can be high if you are older or have risk factors. A company may charge you more if you smoke or engage in dangerous hobbies such as skydiving or mountain climbing. Your insurance premium will also depend on other things, including the amount of coverage and the features of the policy you choose.
The risk is based on the entire group for group policies, not just one person. The cost is usually cheaper than a policy that you could buy directly from an insurance company.
Types of life insurance
There are two main types of life insurance: term life insurance and permanent life insurance.
What is term life insurance?
Term life insurance offers protection for a set period. This period is called a term. The term can be from one year, or five to 30 years or more. You choose the length of the term. Term life insurance policies pay your beneficiaries a lump sum, called a death benefit, if you die during the policy term. The procedure ends at the end of the term unless you pay to extend it.
Term policies are not meant to provide coverage for your entire life. Most people who buy term life insurance policies want coverage for only a short time, such as starting a family or having children in college.
Insurance premiums will remain the same throughout the term. They will increase if you renew them at the end of the period. Your new insurance premium will be based on your age when you continue, not the age you were when you originally purchased the policy. To help avoid higher insurance premiums, consider purchasing a policy with a longer-term.
Most companies offer term life insurance only up to a certain age, usually into your 70s or 80s.
Characteristics of term life insurance
The two most common features of most term life insurance policies are the ability to convert and renew. They make it easier to get a different type of policy or keep the one you have.
The ability to convert allows you to change the term policy for a permanent life insurance policy without taking a medical exam or answering questions about your health. This can be helpful if your health worsens after purchasing a term policy.
Converting a policy will cause your insurance premium to increase. Companies generally only allow you to convert term life insurance policies for some time, usually until you reach age 65.
Renewability allows you to extend your policy for additional terms, regardless of your health, without going through a medical exam.
What is permanent life insurance?
Permanent life insurance allows you to build savings over time. You can withdraw, invest, or use it to borrow against these savings. You can also use it to pay insurance premiums.
A portion of each insurance premium is applied to an account, known as the cash value. The cash value increases at a fixed or variable interest rate. Some policies tie growth to indices, such as the S&P 500 or subaccounts of your choosing. Subaccounts are invested in stocks, bonds, or both. Your cash value could go up or down, depending on the performance of your subaccounts.
It could take several years for a policy to accumulate cash value. You may pay a surrender fee if you withdraw the money early. And if you start more money than you paid in insurance premiums, you’ll probably have to pay taxes on this money. If you withdraw the total cash value, the company could cancel your policy. If this happens, coverage will end and could affect your taxes.
Permanent life insurance premiums are higher than term life insurance premiums. That’s because of the savings features and buying coverage for a more extended period. But if you buy a permanent life insurance policy at a young age and keep it, your insurance premium will be cheaper than a term life insurance premium you buy when you’re middle-aged or older. This is because insurance premiums are based on your age when you purchase the policy.
Types of permanent life insurance
The two most common variations of permanent insurance are ordinary life insurance (whole life insurance, for its name in English) and universal life insurance.
Ordinary life insurance remains in force throughout your life unless you collect the policy’s value or stop paying insurance premiums.
Some standard life insurance policies may pay an annual dividend. You can receive the compensation in cash, add it to your policy’s cash value, or use it to pay insurance premiums. Prizes are not guaranteed. Your dividend could be lower than the company’s projection. Before buying a policy, ask for the company’s projected dividend history compared to paid bonuses.
Universal life insurance stays in force until your maturity date, generally when you reach age 95 or 100 as long as you have $1 or more in cash value. On the maturity date, coverage ends, and you receive the cash value.
Universal life insurance is more flexible than ordinary life insurance. You can change the amount of your death benefit insurance premium. But any changes you make could affect how long your coverage lasts. If your insurance premiums are lower than the insurance cost, the difference is taken from the cash value. If the cash value reaches zero, your policy could be voided.
The company will send you an annual report with the amount of your cash value and how long the policy can last. The estimate is based on the amount of the cash value and the cost of insurance, and other factors. Regularly review the report. You may have to pay more in insurance premiums to keep the policy in force until maturity.