The Smarter Consumer

It’s never fun to talk about death in the family, but it’s a reality we all face that can be dealt with thoughtful conversation with the right people.

As if the grief of a deceased family member wasn’t enough, you might also be responsible for any long-held debts, bills, and other costs he or she accrued throughout life. You might also need to pay for any withstanding hospital bills, funeral costs, and more. At the end of the day, a death in the family can cost thousands of the dollars.

Life insurance is a means to smartly approach the conversation of death. Life insurance is all about planning ahead. Whether it’s for you or a loved one, life insurance makes sure that upon death, the dependents of that person are taking care of.

If you’re in the market for life insurance and are considering buying a policy for you or a loved one, read this guide first. Because life insurance can be deeply complex and confusing, we’ve dealt with the trouble of breaking it down into easily understood words. In this guide, we’ll discuss why it is important to get a life insurance policy, compare the different types of programs available, and the key considerations you should make.

What is Life Insurance?

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.

Why Do I Need Life Insurance?

You may not realize it, but life insurance may be one of the most important purchases you’ll ever make.

Purchasing life insurance can help provide both you and your family with the peace of mind that future needs are anticipated. It can guard against the need for your loved ones to make drastic changes to future plans when you die.

Life insurance payments can be used to:

Cover daily living expenses
Mortgage payments
College tuition
Outstanding loans
Other essential expenses

We know that life insurance can be difficult to talk about. But if someone depends on you financially, it’s a topic you can’t avoid. If someone is dependent upon the money you make to survive, you should purchase a life insurance policy. It’s never too late to shop around locally or online to find a program that suits your needs and your budget.

What Types of Life Insurance are There?

Achieving financial readiness for your family’s future starts with the right amount of life insurance. Unfortunately, deciding on which type is suitable for you is the hardest part of this journey.

To your advantage, however, is the ability to research and compare the options available to you. At the most basic level, you need a solid, affordable protection plan. From there, you can diversify with options determined by age, military status, and pre-existing conditions.

There are two primary types of life insurance: term and whole life. Each offers their own suite of benefits and perks. The benefits and detriments to each may vary depending upon what company you work with, but the general constant is that term life is only for a set period of time, and whole life (hence the name) should last until you die.

Term Life Insurance

Term life insurance policies provide death benefit protection for a specific period of time. Typically, you can purchase a program with protection for up to 10, 15, 20 or 30 years. For most life insurance companies, your policy will automatically renew upon expiration.

When these policies renew, however, keep in mind that they do so annually and at a dramatically increased premium. Many increase as much as 300%. Most term life insurance policies allow the owner to renew until the age of 95, however, it might be a smarter decision to have whole life at this stage, which I’ll explain later. To avoid the rising yearly premiums, shop around online and locally. Some companies might only raise the price in small increments each year or lower the protection value and keep the rate the same.

Term life insurance is the most well-known type of life insurance policy and is more affordable than whole life policies. The general advantages of term life insurance end here, but the money saved in the short-term can be put to greater use elsewhere if you so desire. That money can be put toward investment, stored away for emergencies or a college fund, or for a family vacation.

The point of term life insurance—which makes it different than whole life—is that policies only offer a death benefit which goes to your beneficiaries in the event of your death.

For young people in their 20s and 30s, term life insurance might be a solid choice. On average policyholders could pay only $40 a month for a 30-year, $500,000 policy. Some life insurance professionals would recommend converting over to a whole life program after your term concludes, which is also a smart way to avoid rising premiums.

Whole Life Insurance

Whole Life insurance covers you for life. Not only does it provide the death benefits of term life insurance, but it also builds cash value during the life of the policy that can be withdrawn. It is potentially more expensive than term life insurance but may save you money in the long run if you have the policy for a considerable amount of time.

Also called Cash Life insurance, this brand of policy enables you to build up a cash component to your policy over time. Sort of like a forced savings account, the money put away each month for this policy can potentially be withdrawn in the future. Although these practices may vary from company to company, you could see savings of tens of thousands of dollars after a few decades.

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.

Despite these considerable benefits, it is important to acknowledge that whole life insurance policies can cost up to four times as much as term life programs. Which is why several life insurance experts recommend a whole life policy when you’re older: it is assumed the policyholder will have raised enough capital through a career to afford a premium level of coverage beyond that of a term life policy.

Guaranteed Issue & No Medical Exam Life Insurance

I’ll get straight to the point: life insurance can be expensive. Beyond that, applying for these policies can be time consuming, intrusive, costly, and thorough. It can be disappointing to go through all the discussions and paperwork required to enroll only to be turned away after the background check and medical exam.

Typically, when you apply for life insurance, the insurer will dig into your medical records to determine how risky you are to insure. It makes total sense, since it is there money on the line to keep you safe. However, there are some companies who forgo the health exam and simply accept anyone.

Instead of a medical exam and lab work, you might instead have to fill out a health questionnaire. This survey will include general questions about your habits such as diet and exercise, as well as if you smoke or have been diagnosed with a serious illness.

Some companies take it a step further than simply forgoing the medical exam and will accept any who apply. Called guaranteed issue, as long as you can pay the premium, the insurer will cover you. All they’ll need from you is your age, sex, and state of residence.

Both of these types of life insurance plans are appealing to elderly applications or for those who believe they might be denied protection. While coverage is more likely down this route, there is one considerable tradeoff: price. You can expect to pay considerably higher premiums for coverage.

Key Considerations

If you’re a first-time buyer of life insurance, or just need some information, never fear. Before you shop for a policy, here are some key considerations you should be aware of before you make a purchase.

Term Life vs Cash Value Life Insurance

The two main types of life insurance are pretty different, so you’ll probably want to spend some time studying them before choosing one over the other.

Term insurance generally has lower premiums in the early years but does not build up cash values that you can use in the future. Cash value life insurance may be one of several types: whole life, universal life and variable life. Your choice should be based on your needs now and in the future and what you can afford.

Coverage Amount

To determine the proper amount of life insurance, online calculators can be helpful. You can also get a ballpark figure using any number of formulas. The easiest way is to simply take your annual salary and multiply by 8.

Remember that calculators only allow you to perform hypotheticals and shouldn’t be taken as a final answer. Use online tools you trust to get a better understanding of what you might need out of a life insurance policy but be sure to speak with an agent in person.

Length of Term

Not everyone needs life insurance. If you are young and without dependents, you may not need life insurance. If you plan on having dependents, it can be a good idea to buy insurance when you are young.

Both kinds of insurance have variable policy terms. Term insurance covers you for a set time period. At the end, you will no longer have insurance. Cash value life insurance can be permanent.

What Company Should You Choose?

Companies look at a whole host of information and utilize a variety of methods to vet who they will insure. Shop around for the best life insurance policy you can find and don’t be dissuaded when one provider turns you down. Try to find the best balance between coverage and monthly rate.

You want to make sure you choose a company you can rely on to be around for as long as you'll need your coverage and one that invests premiums in a highly prudent manner in order to pay the claims of its policyholders.

It’s Never Too Late to Buy Coverage

No matter what you face, make sure your family is protected with the right amount of life insurance. Whether you’re fresh out of college, just starting your family, or approaching retirement, there is a life insurance policy for everyone. Admittedly, life insurance policies will become more expensive the older you are, and the cost is determined by what sort of coverage you buy.

It only takes a few minutes to apply online for life insurance. Get started today and have a poignant conversation about it with your loved ones.