Life insurance can sometimes be a topic that is difficult to discuss or think about, but it is a smart decision to have a plan in place for your loved ones after you’re gone. Securing the financial future for your loved ones can give you great peace of mind, knowing your family won’t be burdened financially after you’re gone. It can be hard to know where to start with life insurance, with so many options out there. Consider this your guide to life insurance, offering up the basics on everything you need to know about life insurance policies and how to choose the right options for you and your family.
Do I Need Life Insurance?
Lots of people may think that they don’t need life insurance, but it’s a good idea for just about everyone to have a policy. Life insurance is especially important for anyone with a spouse, children or other dependents, as it can provide for these dependents in the case of the policyholder’s death.
The bottom line is that anyone with dependents needs life insurance. Most people think of dependents as children, but they can also be dependent parents, siblings, spouses or even business partners. Additionally, if you have any sort of debt with a co-signer, a life insurance policy is absolutely necessary to protect your co-signer and help them pay off the debt in your absence.
The three main reasons most people get life insurance are:
- Funeral costs and other final expenses: Average funeral costs in America are in the thousands, even just for a simple service and burial. Added services and other memorials drive the cost even higher, and this can be a hardship for many families who do not have life insurance or other financial planning in place. Funeral costs are one of the biggest reasons that Americans choose to purchase life insurance plans.
- Paying off a mortgage: Another big reason many people buy life insurance is to help loved ones manage the mortgage payments in the event of their passing. Mortgage costs can last a long time, sometimes taking 30 or more years to pay off, and it can be difficult for the remaining family to keep up with these payments. The life insurance policy can be set up in a way to help cover monthly mortgage payments or to pay off the remainder all at once.
- Replace regular income: This is especially important for those with spouses and dependents who rely on that regular source of income for the family. It can be hard to make ends meet with the loss of income when a loved one passes, and a life insurance policy can help replace the income and allow the family to maintain the lifestyle they are accustomed to.
Whatever the reason, life insurance helps a family cover any extra costs from losing their loved one. Dealing with a death in the family is hard enough, but suddenly having added expenses or debts can make the grief even worse. Millennials and young adults may not think that they need life insurance yet, but it’s always a good idea. Additionally, you’ll get great protection and affordable prices if you purchase a policy at a younger age. Generally, the premiums go up the longer you wait to purchase.
What Life Insurance Options Are Available?
As a contract between you and an insurance company, life insurance provides benefits to your beneficiary after your death. The beneficiary contacts the insurance company to file all the necessary paperwork, and then is issued the benefits payment. If no beneficiary is named on the policy, the courts will appoint one.
Although there are many different types of life insurance, they mainly fit into two categories:
- Term life insurance: Also called temporary life insurance, term life insurance only pays benefits to a beneficiary if the policyholder dies during a certain term, or up to a certain age. It is sometimes possible to convert a term policy to a permanent one, but as a term policy, it has no value when the end of the term is reached. Term life insurance is good for income replacement purposes and is generally fairly inexpensive.
- Permanent life insurance: In a permanent life policy, coverage lasts for the whole lifetime and benefits are paid out to a beneficiary whenever the policyholder dies, as long as the policy is active. This type of life insurance policy also builds a cash or loan value over time that can be borrowed, withdrawn or invested. Permanent life insurance is best for leaving an inheritance and usually has higher premiums than term life insurance.
Within these two major categories of life insurance, there are some further options for each.
1. Term Life Insurance
People generally choose term life insurance to cover a shorter period of time — between five and 30 years — and most outlive their plans. This type of coverage is best for a lower-cost option for parents of young children or partners with mortgage payments because, after a certain time, the need is not as great at the end of the term. There are two main types of term life insurance:
- Level term life insurance: With this type of insurance, the coverage remains the same for the entire term. The amount of the death benefit does not decrease, and the premiums do not increase. This choice is best for those who want stable payments month-to-month without decreasing the total benefit amount.
- Non-level term life insurance: In this type of life insurance, the policy changes over time in some way. Either the benefits payment decreases over time, or the premiums increase. Non-level term life insurance is best for offering mortgage coverage, as the need for coverage decreases over time.
2. Permanent Life Insurance
Unlike term life insurance, permanent life insurance offers coverage for life. With this type of coverage, you don’t have to worry about not leaving an inheritance or losing coverage in later years. However, it is more expensive and a little more complicated to shop for. There are a few different types of permanent life insurance:
- Whole life insurance: This type of permanent life insurance, as the name suggests, covers you for your whole life. Whole life insurance has a cash value that collects over time in a low-interest savings account. It’s a great way to ensure you leave a solid inheritance, but if you’re looking for an investment, there are other venues that have higher returns.
- Universal life insurance: This is a variable type of permanent life insurance, in which the policyholder can decide how much funding goes into the cash value of the account and how much goes toward paying the death benefit and even choose to have smaller or larger premiums. Unlike other forms of life insurance, universal life insurance plans have a maturity date when the policy ends. At this point, usually a specific age like 95 or 100, coverage for death benefits ends and you would receive a lump-sum payment of the cash value. This type of policy is best for someone who wants to be able to change their policy at different points of their life.
- Indexed universal life insurance: Very similar to universal life, in an indexed plan, the policyholder can invest the policy’s cash value in several different stock options. The insurance company will likely have several different choices for an indexed stock plan to match your personal goals and comfort zone regarding growth and risk.
How Are Life Insurance Rates and Premiums Calculated?
Life insurance rates and premiums can vary widely from person to person. So, just how are these amounts calculated? The rates and premiums can depend on several factors, including statistical data gathered on the policyholder. The three main factors that generally determine life insurance rates and premiums are:
- Mortality: Insurance companies use data collected over many years to determine risk and life expectancy of various age groups and health conditions. They use mortality tables to determine the cost of paying death claims and base their rates on this data.
- Interest: The insurance companies invest your insurance premiums in stocks or real estate, so the eventual payout amount will depend on current interest rates of these markets too.
- Expense: Every insurance company has some overhead operating expenses, as any business does. As such, a portion of each life insurance policy must go toward keeping the company running, such as employees’ salaries and office space expenses. This can vary depending on each company’s operation and efficiency.
When you obtain life insurance coverage, you can also choose an underwriting process, and this can partially determine the rates and premiums. Depending on the type of underwriting you choose, the insurance company may take into account your personal health and habits, as well as family health history. The three main types of underwriting are:
- Fully underwritten life insurance: This type of underwriting is probably the most common and is considered to be the industry standard. With fully underwritten policies, the policyholder must take a medical exam. Scheduling the exam and waiting for results can delay the underwriting process, but it can give a healthy individual the best possible rates. However, for those with preexisting conditions or health problems, it can mean much higher rates or denial of coverage.
- Simplified issue life insurance: In this type of life insurance underwriting, family history and personal health is taken into account, but instead of a full medical exam, the policyholder completes a simplified questionnaire. This process can be good for anyone who doesn’t want to take a medical exam for fear of the results or simply to speed up the underwriting process.
- Guaranteed issue life insurance: Also referred to as a “no-exam” type of policy, this is a great option for anyone with preexisting health conditions or who has been turned down for other types of life insurance coverage. In a guaranteed issue policy, there is no medical exam and minimal health questioning.
How to Choose the Right Life Insurance Policy
With all of the various choices out there on types of life insurance plans and types of underwriting, it can be hard to know what type is best for you. Exploring your own motivations for seeking out life insurance can be a good place to start. Whether a person has a spouse or children, and how significant their own financial contributions are to the whole family can help determine what type of life insurance is best and how much coverage is needed. A policyholder will need to decide if it is important to leave an inheritance or have coverage for basic household expenses in the event of their death.
When shopping around for life insurance policies, keep in mind your personal budget and financial state, as these factors will determine how much coverage you need. This can include your number of dependents, your lifestyle and household budget including monthly bills and expenses, and the amount of debt that you carry. You’ll want to make sure to get enough coverage for your family to keep up with monthly expenses and debt payments or to pay off existing debts in your absence.
Although the recommendations can vary person to person, many companies will recommend having somewhere around five to 10 times your annual salary in coverage. This is a good guideline to follow that gives your loved ones enough in benefits to manage the household expenses, but choose an amount that makes sense for you and your family.
Still, it can be difficult to wade through all of the information out there and know what choices to select. It’s always a good idea to find a trusted broker to guide you and answer any questions you may have. A good insurance broker can help you decide which type of life insurance plan is right for your situation, to give you the best rates and coverage for your needs.
What If I Need a New Life Insurance Policy?
Sometimes, even after you have life insurance coverage, your situation may change, and you may want to alter your coverage or obtain a new policy altogether. Maybe you find a new agent, your life circumstances have changed, or you’ve found a better rate. Whatever the reason, when you’re looking to change your life insurance policy, there are a few things to keep in mind.
It’s important to consider any fees or tax consequences for canceling your old policy. Look at the financial benefits of the new plan and make sure that it’s worth the switch and that the benefits are greater than any financial consequences of canceling your old policy. Compare all of the benefits and your rights with each plan to make sure it’s a good decision to switch. You may also want to see if it’s a better idea to add to or amend your current policy instead of replacing it.
If you’re unsure about changing your life insurance plan, ask your agent to outline how the changes would benefit you and what the projected performance is moving forward. Your agent can help guide you to the best decision. If you do decide to replace your life insurance, just make sure to review the new plan and allow time for the new plan to be active before canceling the old plan. You’ll want some time to review all the information and make sure everything is correct — and to avoid any gaps in coverage — before moving on from the old insurance plan.
Choose Strock Insurance
For more than 30 years, Strock Insurance has been a leading provider of life insurance, as well as other types of insurance, in the Central Pennsylvania area. We are committed to providing you with the best service and the best life insurance options to fit your lifestyle and budget. With Strock Insurance, you’ll benefit from having a knowledgeable local agent committed to your insurance needs and finding you the best coverage. Strock Insurance offers service in Camp Hill, Lebanon, Harrisburg, Mechanicsburg, and anywhere else in the Central Pennsylvania area. Contact us today for personalized service and personalized quotes for life insurance options.