Life Insurance
Life insurance is a legal agreement or a contract where an insurance company agrees to pay a sum of money or cash benefit to a beneficiary when an event covered by the policy occurs. In other words, life insurance can help one’s family to stay financially stable, in case he/she is gone or is unable to work anymore.
In order to enforce the contract, life insurance applications must disclose the information about both past and current chronic illnesses and conditions.
Types of life insurance
There are only two main types of life insurance: temporary coverage (term insurance) and permanent insurance (perm insurance). Both term and permanent life insurance have different types to satisfy different needs.
Permanent life insurance is designed to provide coverage for as long as you live. If your needs are long-term like state planning or final expense, permanent insurance is probably what you need.
Term life insurance, by definition, is temporary insurance. It is designed to provide coverage for a limited period of time. Policies in term life insurance are simple and inexpensive. Term life insurance is probably for you if you know that one day you’ll be financially independent or that one day no one will be financially depending on you.
Perm insurance
Permanent life insurance is designed to last forever until your death. As long as you pay your premiums in a timely manner, your family is guaranteed to receive a death benefit no matter when you die.
There are two types of perm life insurance, which are going to be covered below.
Universal life insurance offers a certain amount of flexibility. If you have this kind of life insurance, you can change your premiums and death benefits to keep up with changes in your life.
Whole life insurance is much more expensive than other kinds of life insurance, but it does more. Over time these policies develop significant cash values that are guaranteed and can be accessed at any time. Moreover, each year the cash values grow.
Term insurance
Term insurance only lasts for a certain period of time (usually 10 to 30 years), then it ends. Some of the best life insurance policies are providing long-lasting financial strength and are affordable.
There are several types of term life insurance. They are:
- Decreasing Term. The face value of the policy is going to decrease over time. Decreasing term is most commonly used and most suitable When you want life insurance to cover a mortgage or some type of a loan.
- Increasing Term. The face value of the policy is going to increase over time. It is most often associated with the return of premium policies.
- Annual Renewable Term (ART). The ART is the premium, the face amount, or what is covered for a state level. It needs to be renewed annually. And the level term stays for the same period while a person is covered on the policy. It is also important to note that the premium goes up every year when you renew it.
- Level Term. In level term insurance the face amount stays the same. It is the most expensive the first year
The cost of life insurance
Life insurance premium costs can be influenced by many different factors. There are, of course, some criteria that you have no control over, however, the criteria that can lower the cost before applying can in fact be managed.
The cost of life insurance can decrease if your health gets better. However, if you are in poor health, your premium price will stay the same.
It is important to consider the amount of money your family would need in case of your death. Include such expenses as your children’s college tuition, mortgage, and other debts, as well as funeral expenses. It is also important to think about the income replacement your family is going to need after you are unable to provide for them.
Keep in mind that there are tools online that you can use to calculate the lump sum that can satisfy your family’s possible expenses that would need to be covered by insurance.
What affects life insurance premiums and costs
There are several factors that affect insurance premiums and cost. These factors are:
- Gender: Typically, women pay lower rates than men of the same age because women tend to live longer than men.
- Health: Person’s health conditions need to be evaluated.
- Age: Life expectancy is the indicator of risk for the insurance company.
- Lifestyle: Premiums can become more expensive if one has a dangerous lifestyle.
- Smoking: If a person smokes it can increase their risk-based premiums, since smoking can make them susceptible to various health conditions.
- Driving record: Insurance premiums cost can be significantly increased if one has a history of drunk driving and traffic violation.
- Family medical history: The risk of one developing health conditions if their family members have a history of struggling with them is much higher. Hence, individuals pay rates can be increased.
Buying life insurance
Once you consider the cost of life insurance and assemble all the information necessary, you can gather a lot of life insurance quotes from different providers. Note that different companies have different prices, so you will need to look for the company, which conditions are both affordable and cover your needs. Finding the best policy for your needs can help you save a lot of money, since insurance payments are made during the course of decades.
Tax avoidance
The death benefit of a life insurance policy is tax-free. If you are a wealthier individual, you can purchase permanent life insurance within a trust which will help in paying estate taxes. This is going to help you preserve the value of assets for your heirs.
Unlike tax evasion, which is considered to be illegal, tax avoidance is a legal method of minimizing one’s tax liability.
People who need life insurance
After the client of the insurance company dies, life insurance provides the client's closest family members or other beneficiaries. There are several types of people that may need life insurance.
Parents who have children. In the case of a parent’s death, the rest of the family will lose a stream of income, which can possibly create financial hardship. Life insurance can save a family from financial troubles by providing it with resources until the kids are able to provide for themselves.
Parents who have adult children with disabilities. Life insurance can ensure that those who cannot provide for themselves and need help from others to fulfill their basic needs, will be provided with everything they will need even a long time after their parents' passing.
Adults owning property together. Regardless if people are married or not, the loss of one of them creates financial hardship for the other. It may be much harder to afford paying property taxes and loan payments for a person with only one stream of income.
Seniors who want their adult kids taking care of them to have money after their death. Since many adult children who take care of their elderly parents sacrifice their time and energy to do so, parents may consider purchasing life insurance to compensate for their children's efforts. Life insurance can make sure adult children are financially backed after their parents passed away.
Young adults whose parents got a student loan for them. In this case a child would need life insurance to make sure that they will be able to pay off the debt their parents got in after their passing.
Wealthy families who are going to owe estate taxes in the future. Life insurance can cover those taxes and keep the value of the family’s assets as they are.
Families who can not afford both funeral and burial expenses. Life insurance can provide assets for those who don't have enough funds to pay final respects to their family members.
Businesses with important employees. In case, if the death of an important employee (for example a Chief Operating Officer) would result in a company’s financial trouble, that company can have an insurable interest that would make it possible for the company to purchase life insurance policy for the important employee or employees if there are several of them.
Married pensioners. Married couples who are on a pension can use a pension maximization strategy. To do so, they accept all their pension and use some of the money to benefit their spouse and get life insurance.
Individuals with medical conditions that started before one’s health insurance became valid. Those medical conditions include diabetes, cancer etc. However, keep in mind that there are insurers who might either increase rates or deny coverage for individuals with such conditions.
Considerations before purchasing life insurance
All policies are unique to the person insured. Before purchasing one consider researching thoroughly for the company and the policy conditions that most suit you and your needs. Life insurance policies are very expensive and you will be paying for them for a long time. It is important to research the company with all due diligence to make sure it has enough financial strength and a good track record.
You will also need to research company reviews. It will help you choose the company whose conditions are more affordable to you.
Life insurance is a great financial tool to protect the people you care about from financial hardships in case you die while the policy is still valid. But note that there are instances in which it makes less sense. So it's important to consider a few extra factors.
It is extremely important to consider the impact of your death on your spouse, even if you don't have children and your spouse's income is higher than yours. Take into consideration that your family or spouse is going to need money to organize the burial and funeral, and also they might need money during the grieving process. In case both spouses income is required to keep their lifestyle the same, spouses need to consider purchasing separate life insurance coverage.
Before applying for life insurance, it is important to determine whether your current financial situation is going to allow you to maintain the standard of living of your beneficiary or if your needs are going to be met after purchasing a policy.
For instance, if you are the only breadwinner of the family of 4, have 2 children who are 3 and 6, you would need enough insurance to cover all the expenses of your children until they are old enough to provide for themselves and retirement needs of your spouse (especially if they are a full-time parent).
You'll need to research the cost of using a nursery school, for example. You will also need to consider adding the money for your childrens’ education. Don’t forget about inflation, you'll need to add some more money to cover for it. Sum up all these expenses and multiply it by about 13 years, and then if you can afford it, you can buy it.
Burial insurance is a permanent insurance policy that provides your family with a small death benefit. Beneficiaries usually use burial insurance at their own discretion.
Life insurance in action
There are two main elements of a life insurance policy—premium and a death benefit. Term insurance has these components as well. Whereas whole life insurance and permanent life insurance also include a component called cash value.
Face value or death benefit refers to a certain amount of money that the insurance company guarantees to the beneficiaries after the insured's death. For example, the beneficiary can be a child and the insured can be their parent. The latter chooses the benefit amount that will satisfy the beneficiary’s needs in the future.
Premium refers to the money that clients pay the insurance company in exchange for an insurance policy. Usually, premiums tend to be higher on people who are at higher risk, policies with a bigger face value, as well as permanent policies that acquire cash value.
Cash value is something that is built into permanent life insurance policies. These cash values can be viewed as investments. These investments allow people to grow their money while it’s sitting in one’s life insurance.
Deductible is another important term in health insurance. Deductible is a number that signifies the annual threshold, and it is distinct for every plan. Deductibles range from a couple of hundred dollars to several thousand. Let's imagine that it is $1500. It is the amount of money that you need to spend out of pocket on healthcare each year before your insurance starts covering your bills.
It is extremely important to annually evaluate your life insurance needs. Especially after major changes in your life. Some might need to either increase or reduce their coverage, and update their policy beneficiaries.
