Life Insurance

Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.

For the contract to be enforceable, the life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities.

Key TAKEAWAYS
When the insured dies, life insurance is a legally enforceable contract that provides a death benefit to the policy owner.
To keep a life insurance policy active, the policyholder must either pay a one-time premium or pay continuous premiums over time.
The policy’s named beneficiaries will receive the policy’s face value, or death benefit, when the insured passes away.
Term life insurance policies last for a set number of years and then expire. Permanent life insurance policies last until the policyholder dies, stops paying payments, or surrenders the policy.
A life insurance policy’s financial strength is only as good as the firm that issues it. If the issuer is unable to pay, state guarantee funds may be able to help.

Life Insurance Types

There are several different types of life insurance to suit a variety of needs and tastes. The major decision of whether to get temporary or permanent life insurance is vital to consider depending on the individual to be insured’s short- or long-term needs.

Term life insurance

is a type of life insurance that lasts for
Term life insurance lasts for a set number of years before expiring. When you buy an insurance, you get to choose the term. The most commonly used terms are 10, 20, and 30 years. The finest term life insurance policies strike a compromise between cost and long-term financial viability.

Decreasing Term Life Insurance

—decreasing term life insurance is renewable term life insurance with coverage decreasing at a predetermined rate over the policy’s life.
Convertible Term Life Insurance allows policyholders to convert a term policy to a permanent coverage.
Renewable Term Life Insurance is an annual renewable term life insurance policy that gives you a quote for the year you buy it. Premiums rise every year, and it’s usually the cheapest term insurance at first.

Permanent life insurance

Unless the policyholder stops paying premiums or surrenders the policy, permanent life insurance remains in effect for the rest of the insured’s life. It is usually more expensive than a term loan.

Whole life insurance

is a sort of permanent life insurance that builds its cash value over time. Cash value life insurance lets the policyholder to use the cash value for a variety of purposes, including loans, cash, and paying policy premiums.
Universal Life is a type of permanent life insurance that includes a cash value component that earns interest and has adjustable premiums. Unlike term and whole life insurance, premiums can be changed over time and the death benefit can be set at a fixed amount or increase over time.
Indexed Universal Life Insurance—This is a type of universal life insurance in which the cash value component can receive a fixed or equity-indexed rate of return.

Variable universal life insurance

allows the policyholder to invest the policy’s cash value in a separate account if one is available. It also offers adjustable premiums and can be customized to have a fixed or growing death benefit.

Life Insurance: Term vs. Permanent

In various aspects, term life insurance differs from permanent life insurance, yet it tends to suit the needs of the majority of people. Term life insurance is only good for a specific amount of time and pays out a death benefit if the insured dies before the term expires. As long as the policyholder pays the premiums, permanent life insurance is in force. Another significant distinction is premiums: term life is often significantly less expensive than permanent life because it does not require the accumulation of cash value.

Before you apply for life insurance, assess your financial condition and estimate how much money is needed to sustain your beneficiaries’ level of living or meet the requirement for which you’re acquiring a policy.

If you are the primary caregiver for children aged 2 and 4, for example, you will need enough insurance to meet your custodial responsibilities until your children are old enough to support themselves. You could figure out how much it would cost to employ a nanny and a housekeeper versus using commercial child care and a cleaning service, and then add some money for education. In your life insurance estimate, factor in any outstanding mortgages and retirement needs for your spouse. Especially if one of the spouses has a lower income or is a stay-at-home mom. If you can afford it, sum up these costs over the next 16 or so years, plus inflation, and that’s the death benefit you might want to buy.

How Much Life Insurance Should You Purchase?

The cost of life insurance premiums is influenced by a variety of factors. Certain factors may be beyond your control, but you can manage other parameters to reduce the cost before applying.

If your health has improved and you’ve made positive lifestyle adjustments since being accepted for an insurance policy, you can seek to be evaluated for a risk class change. Your premiums will not increase even if it is discovered that your health is worse than it was at the time of underwriting. You should expect your premiums to drop if you’re deemed to be in better health.

STEP 1:

Work out how much you’ll need.
Consider what expenses would need to be met if you were to pass away. Mortgages, college fees, and other loans, not to mention burial costs, are all examples. Furthermore, if your spouse or loved ones require cash flow and are unable to give it on their own, income replacement is critical.

There are internet calculators that can help you calculate the lump sum that will cover any prospective charges.

What Affects the Costs and Premiums of Life Insurance?

STEP 2: Get Your Application Ready

Life expectancy is the most important indicator of risk for the insurance firm, hence age is the most essential element.
Gender: Because women live longer on average than men of the same age, they pay lower rates.
Smoking: Smokers are at risk for a variety of health problems that can shorten life and raise risk-based premiums.
Most policies include screening for health disorders such as heart disease, diabetes, and cancer, as well as other medical metrics that can suggest risk.
Lifestyle: Risky lifestyles can drive up premiums significantly.
Family medical history: If you have a history of significant sickness in your immediate family, you have a substantially increased chance of developing specific conditions.
Driving record: If you have a history of moving offenses or driving while inebriated, your insurance prices will skyrocket.

Guide to Purchasing Life Insurance

Personal and family medical histories, as well as beneficiary information, are typically required on life insurance applications. You’ll almost certainly have to undergo a medical examination and declare any pre-existing medical disorders, traffic tickets, or DUIs, as well as any dangerous hobbies like auto racing or skydiving.

Standard kinds of identification, such as your Social Security card, driver’s license, and/or U.S. passport, will be required before a policy may be written.

STEP 3:

Compare Insurance Quotes

You can obtain numerous life insurance quotes from different companies based on your research once you’ve gathered all of your relevant information. Prices might vary significantly from one business to the next, so it’s crucial to shop around for the best policy, company rating, and premium price. Because you’ll be paying for life insurance on a monthly basis for decades, finding the right coverage to meet your needs can save you a lot of money.

Life Insurance Benefits

There are numerous advantages to owning life insurance. Some of the most important benefits and safeguards provided by life insurance policies are listed below.

The majority of people buy life insurance to provide money to beneficiaries who would be financially disadvantaged if the insured died. The tax advantages of life insurance, such as tax-deferred growth of cash value, tax-free dividends, and tax-free death benefits, can give extra strategic opportunities for affluent individuals.

Avoiding Taxes—a life insurance policy’s death reward is normally tax-free.

Wealthy individuals may get perpetual life insurance through a trust to help pay estate taxes after they pass away. This method aids in the preservation of the estate’s value for their heirs. Tax avoidance differs from tax evasion, which is criminal, in that it is a law-abiding approach for reducing one’s tax liability.

Who Needs Life Insurance in the First Place?

After the death of an insured policyholder, life insurance offers financial support to surviving dependents or other beneficiaries. Here are some persons who might require life insurance:

If a parent with minor children dies, the loss of their income or ability to care for their children may cause financial hardship. Life insurance can provide the financial resources the children require until they are able to support themselves.
Parents with special-needs adult children—life insurance can ensure that their children’s requirements are covered after their parents pass away if they require everlasting care and will never be self-sufficient. The death benefit can be used to fund a special needs trust that will be managed by a trustee for the benefit of the adult child. 2
Adults who own property together—married or not—should consider purchasing life insurance if the death of one adult would leave the other unable to make loan payments, maintain the property, or pay taxes on it. An engaged pair, for example, might take out a joint mortgage to purchase their first home.
Seniors who wish to leave money to adult children who care for them—many adult children give up time at work to care for an aging parent who requires assistance. This assistance could also offer direct financial assistance. When a parent passes away, life insurance can help pay for the adult child’s expenses.
Young adults without dependents rarely need life insurance, but if a parent will be responsible for a kid’s debt after their death, the child may want to carry enough life insurance to pay off that obligation.
Children and young people who want to lock in cheap rates—the younger you are and the healthier you are, the lower your insurance costs will be. If a 20-something adult expects to have dependents in the future, he or she may get an insurance even if they do not have them now.

Stay-at-home couples

Stay-at-home spouses should obtain life insurance because their labor at home has a considerable economic value. According to Pay.com, the economic value of a stay-at-home parent in 2018 would have been similar to a $162,581 annual salary. 3
Life insurance can offer funding to cover estate taxes and keep the whole worth of the estate intact for wealthy families who expect to owe them.
A small life insurance policy might give funding to honor a loved one’s passing for families who can’t afford burial and funeral costs.

Businesses with key employees

if the death of a key person, such as a CEO, would cause a company considerable financial hardship, the company may have an insurable interest that allows it to obtain a life insurance policy on that individual.
Married retirees can take their full pension and spend some of the money to buy life insurance for their spouse instead of deciding between a pension payout that includes a spousal benefit and one that does not. Pension maximization is the term for this method.
Those who have a history of pre-existing diseases, such as cancer, diabetes, or tobacco use. It’s worth noting, though, that some insurers may refuse to cover such people or demand exorbitant prices.
Before purchasing life insurance, there are a few things to think about.
Because life insurance plans are such a large investment and commitment, it’s vital to conduct thorough due diligence to ensure that the firm you choose has a good track record and financial strength, especially since your heirs may not get a death benefit for decades. Investopedia has rated the best in a variety of categories after evaluating a number of companies that offer various types of insurance.

Life insurance can be a wise financial instrument for hedging your chances and providing security for your loved ones if you pass away while the policy is active. However, there are times when it makes less sense, such as when you buy too much or insure people who don’t need their income replaced. As a result, it’s critical to think about the following:

What expenses would you be unable to cover if you died? If your partner makes a good living and you don’t have any children, it might not be necessary. It’s still crucial to think about how your death may affect your spouse, and how much financial help they’d need to grieve without having to worry about returning to work before they’re ready. If both spouses’ incomes are required to maintain a chosen lifestyle or satisfy financial obligations, each spouse may require individual life insurance coverage.

If you’re obtaining a life insurance policy for a family member, you should ask yourself, “What are you trying to insure?” Children and seniors don’t have much money to replace, yet burial costs may need to be covered in the event of their death. A parent may desire to protect their child’s future insurability by getting a moderately sized insurance when they are young, in addition to burial costs. This permits the parent to ensure that their child’s future family is financially secure. Parents are only authorized to get life insurance for their children up to 25% of the value of their own active policy.

Is it possible to make a higher return on the money spent on premiums for permanent insurance during the length of a policy? If a big income isn’t needed to be replaced or if policy investment returns on cash worth are unduly conservative, constant saving and investing—for example, self-insuring—might make more sense in some situations as a hedge against unpredictability.

What is the Process of Life Insurance?

A death benefit and a premium are the two major components of a life insurance policy. These two components are present in term life insurance, but permanent or whole life insurance contracts also have a cash value component.

The death benefit, also known as face value, is the amount of money guaranteed by the insurance company to the beneficiaries named in the policy after the insured passes away. For example, the insured could be a parent, and the beneficiaries could be their children. The insured will select the appropriate death benefit amount based on the expected future needs of the beneficiaries. Based on the business’s underwriting requirements pertaining to age, health, and any hazardous activities in which the proposed insured participates4, the insurance company will decide if there is an insurable interest and if the proposed insured qualifies for the coverage.
Premiums—premiums are the amounts paid by policyholders for insurance coverage. If the policyholder pays the requisite premiums, the insurer must pay the death benefit when the insured dies, and premiums are set in part by the likelihood that the insurer will have to pay the policy’s death benefit based on the insured’s life expectancy. Age, gender, medical history, work dangers, and high-risk hobbies are all factors that affect life expectancy. 4 A portion of the premium is also allocated to the insurance company’s operating costs. Premiums are greater for policies with larger death benefits, for high-risk clients, and for permanent policies that accrue cash value.
Permanent life insurance has a cash value that serves two functions. It’s a savings account that the policyholder can utilize for as long as the insured lives; the money grows tax-free. Depending on how the money will be utilized, some policies may place restrictions on withdrawals. For example, a policyholder may take out a loan against the cash value of the policy and be responsible for interest on the loan principle. The cash value of the coverage can also be used to pay premiums or acquire additional insurance. The cash value is a living benefit that the insurance company keeps after the insured passes away. The death benefit of the policy will be reduced if there are any outstanding loans against the cash value.
In most cases, the policy owner and the insured are the same person, however this is not always the case. For example, a company might purchase key person insurance for a key employee like the CEO, or an insured individual might sell their own policy to a third party for cash in a life settlement.
Riders and Policy Changes in Life Insurance
Many insurance firms allow clients to tailor their plans to meet their specific requirements. Riders are the most popular technique for policyholders to amend or modify their coverage. There are a lot of riders, however availability varies per service. Although some plans include specific riders in their base premium, the policyholder will normally pay an additional premium or a fee to exercise the rider.

In the event that the insured’s death is caused by an accident, the accidental death benefit rider offers additional life insurance coverage.
If the insured becomes disabled and unable to work, the waiver of premium rider relieves the policyholder of paying premium payments.
In the event that the policyholder is unable to work for several months or longer owing to a serious sickness or injury, the disability income rider pays a monthly income.
The accelerated death benefit rider allows the insured to receive a portion or all of the death benefit after being diagnosed with a terminal disease.
When the insured requires assistance with activities of daily living, such as washing, eating, and using the bathroom, the long-term care rider is a type of accelerated death benefit that can be used to pay for nursing-home, assisted-living, or in-home care.
A guaranteed insurability rider allows the policyholder to acquire further insurance at a later date without having to undergo a medical examination.
Borrowing Money—Most permanent life insurance policies accrue cash value, which the policyholder can use to borrow money. In a sense, you’re borrowing money from the insurance business and using your financial value as security. Unlike other types of loans, the credit score of the policyholder is not taken into consideration. The loan interest is credited to the policyholder’s cash value account, and the repayment periods are variable. However, policy borrowing can lower the death benefit of the insurance.

Each insured and insurer have their own policy. It’s critical to read your policy document to understand what risks are covered, how much your beneficiaries will receive, and under what conditions.
Retirement Income—cash value or investment-based insurance can be a source of retirement income. Due to the high fees and smaller death benefit, this option may only be suitable for those who have exhausted all other tax-advantaged savings and investing options. Another method life insurance can help fund retirement is through the pension maximizing strategy mentioned previously.

Annually, or following major life events like divorce, marriage, the birth or adoption of a child, or substantial purchases like a house, it’s a good idea to reevaluate your life insurance needs. You may need to change the beneficiaries on your insurance, raise your coverage, or even decrease your coverage.
Life Insurance Eligibility
Insurers assess each life insurance application individually, and with hundreds of insurers to choose from, practically everyone can find an affordable policy that fulfills at least some of their demands. According to the Insurance Information Institute, there were 841 life insurance and annuity businesses in the United States in 2018. 5

Furthermore, many life insurance firms provide a variety of policy kinds and amounts, and others specialize in specialized needs, such as policies for persons with chronic illnesses. Brokers that specialize in life insurance and are familiar with the various firms’ offerings are also available. Applicants can work for free with a broker to find the insurance they require. This means that practically everyone may obtain life insurance if they look hard enough and are ready to pay a high enough premium or accept a death benefit that is less than ideal.

Because the insurance market is far larger than many customers assume, buying life insurance may be accessible and inexpensive even if past applications have been declined or bids have been too expensive.

In general, the younger and healthier you are, the easier it is to qualify for life insurance, and the older and less healthy you are, the more difficult it is to qualify. Certain lifestyle choices, such as smoking or participating in high-risk activities like skydiving, make it more difficult to qualify or result in higher rates.

Is life insurance really necessary?

People who need to provide security for a spouse, children, or other family members in the case of their death should consider life insurance. Depending on the policy amount, life insurance death benefits might help beneficiaries pay off a mortgage, finance college tuition, or save for retirement. Permanent life insurance also has a component that accumulates financial value over time.

What Factors Influence the Cost of Life Insurance?

Age \sGender
Smoking
Health \sLifestyle
Medical history in the family
Driving history
What are the advantages of having life insurance?
Death benefits are paid in one lump amount and are not subject to federal income tax because they are not considered income by beneficiaries.
Most policy calculators recommend a multiple of your gross income equal to seven to ten years, which can cover key obligations like mortgages and college tuition without requiring the surviving spouse or children to take out loans.
Final expenses can be covered—funeral costs can be substantial and can be avoided by purchasing a burial policy or a regular term or permanent life insurance policy.
Permanent life insurance policies, such as whole, universal, and variable life insurance, can provide cash value in addition to death benefits, which can supplement other retirement assets.

How do you know if you’re eligible for life insurance?

Anyone can get life insurance, but the cost or premium amount depends on the risk level a person poses, which is determined by characteristics such as age, health, and lifestyle. Customers who apply for life insurance are usually required to present medical records and a medical history, as well as to undergo a medical examination. Some types of life insurance, such as guaranteed approval life insurance, do not require medical tests but have substantially higher premiums and a longer waiting time before taking effect and paying out a death benefit.