Life insurance is one of those things not many people care to talk about, but everyone needs to understand, at least fundamentally.
Until recently, most people realized they needed life insurance at some point, but didn’t know when or where to start.
In recent years, however, there has been a significant decline in the number of households who opt to have any life insurance protection at all.
In some cases, this is decline can be attributed to workplaces dropping life insurance options for employees, although this is not always the case.
- But if your job does offer you a small life insurance policy, do you need something beyond that?
- Do some people benefit from additional coverage more than others?
There is also the question of where you should begin to look for life insurance if you are looking for private coverage. With so many agencies offering so many different options, it’s hard to choose where to begin.
In addition to all of these questions and the confusion surrounding the what, where, when, and why of life insurance, there’s the question of how.
There are a few different types of life insurance policies out there, and finding the right one for you can seem like a daunting task.
Let’s begin by talking about who needs life insurance the most, and when you should start to look at policies.
Who Benefits from Life Insurance?
Short answer: everyone who has debt or who doesn’t want to burden their families or businesses with funeral and burial costs, or some type of loss in income.
Almost everyone needs life insurance sooner or later, at least for a short time.
The problem is many people wait until there is a significant life event which forces them to think about it to actually take the step to go out and purchase it.
Life insurance is a vital part of planning for your future and the future of your spouse and family. This is especially true if you have any type of debt which could be left behind, or income which needs to be replaced.
Many people today feel they can avoid purchasing insurance if they have saved or invested in other ways, but that doesn’t always work out. Investing can be risky, where life insurance is a sure bet, every time.
Having a life insurance policy is especially important if you own a business or if there is a significant difference in the money you make versus your spouse. Maintaining your family’s lifestyle is important as they go through the process of handling your estate and getting back on their feet.
It’s important to remember life insurance isn’t just to cover one thing; it is designed to give liquidity to your assets so your family can cover many costs associated with unexpected death, and set themselves up for future stability.
When You Should Buy a Policy
There is a rule in the life insurance game that the younger and healthier you are, the cheaper it is to purchase insurance.
That being said, some experts argue that those who don’t have a significant amount of debt or who have no dependents may not need to purchase insurance quite yet.
Life insurance is valuable for almost every adult in one way or another, so let’s take a look at who should buy a policy right away.
You should purchase a life insurance policy now if:
- You recently bought or plan to buy a home.
- You are starting a family—married or not your children will benefit from the policy.
- You have student loan debt that may fall on a parent or other cosigner in the case of your accidental death.
- You and your partner both work, and you rely heavily on both incomes.
- You own a business or hold a share of one.
The Advantages and Disadvantages of Life Insurance
Now, there are clear advantages to owning to life insurance, but there are disadvantages, too.
Take each side into account when making a decision so you’re choosing your policy for all the right reasons, and none of the negative.
Clearly, there are lots of benefits of life insurance or it wouldn’t be such a critical purchase for most families.
Here’s a quick snapshot list of the biggest advantages of life insurance:
- covers burial costs
- replaces income
- covers debts
- offers charitable giving
- estate planning benefits
- buys time (great for businesses)
- provides inheritance
- used for cash growth (and potentially tax benefits)
And the list actually goes on.
But, let’s take off the rose colored glasses for a second look at a few disadvantages.
Depending on your situation, there can be drawbacks to life insurance which could override the other benefits listed above.
Here are the possible main disadvantages:
- overall prices
- sunk costs
It Can Be Costly
Life insurance is not always cheap. In some instances, it’s very affordable, but mostly for those who are young and healthy.
If you’re older, unhealthy, or simply require a large amount of coverage, the monthly premiums for life insurance can be a bit of a steep expense.
The main object of life insurance is always to create leverage, by paying a smaller amount now to get a larger amount later, but it’s not always your best bet.
Did you know only a very small percentage of policies ever pay out?
This is because most people buy term, and they never end up using the policy (meaning, they out lived it). While this is good, because you’re still alive, it might seem like the money went down the toilet.
There are products and riders which offer this money back to you if you live longer than your policy but they only increase your premiums.
If you opt for a permanent policy, there can be great benefits, like building up cash value tax free.
However, this often creates illiquidity, at least for a number of years, before this can be accessed.
If you’re planning an estate and have a life insurance policy inside of an irrevocable life insurance trust, there’s actually never access again; this is why planning with these types is so critical.
Benefits of Each Type of Life Insurance
So you’ve officially decided to purchase a life insurance policy. Now what?
There are a few types of life insurance plans you should be aware of before making an official decision and looking for an insurer.
There are a lot of policy types to choose from, but the main types of life insurance are:
- whole/ permanent
- final expense, and
Term Life Insurance
As the name implies, term life insurance is purchased for a specific length of time, whether that’s ten years, 30 years, or even longer. At the end of the term, many carriers will then offer a renewal.
Because of the nature of term policies, they are the most inexpensive way to purchase life insurance. Typically your premiums will remain the same throughout the policy.
Whole or Permanent Life Insurance
The main difference between the whole life and term life insurance is that whole and permanent policies are meant to last for the entire life of the policyholder.
Whole life insurance is a type of permanent life insurance and is by far the simplest. The premium on this policy type will remain the same throughout the life of the policy, which is budget friendly.
Having premiums stay the same throughout the years is most helpful if this type of policy is purchased when you are young and healthy and will get the best rate.
In some cases, pre-existing medical conditions will force you to purchase a whole life insurance policy versus a term policy because you are considered high risk.
This is something to keep in mind when shopping around.
Final Expense Life Insurance
If you’ve ever watched daytime TV and have seen the commercials from companies like Globe Life about life insurance for seniors aged fifty to eighty-five, you have a basic idea of what final expense insurance is all about.
Sometimes called burial insurance, these policies are strictly for older adults who no longer have term life insurance policies and no longer qualify for many other policy types.
Burial costs are constantly rising, and in the U.S. the average cost of final expenses is around $10,000, so depending on your financial situation, it can be extremely beneficial to purchase this type of policy.
Final expense insurance can be purchased in term or permanent policies, and quite often the premiums are low, despite the ages of the target applicants.
Simplified (No Exam) Life Insurance
This type of coverage is best, just as the name implies, for those who don’t want a medical exam to stand in the way of policy approval, or simply want coverage faster.
If you have an existing medical condition which will make it difficult for you to be approved, this may not be the way to go for you.
These policies do tend to be ever so much more than the other policy types listed above since the underwriters have less data to look at.
Although there are many types of life insurance policies out there, the benefits of finding the correct one for you are innumerable.
Remember, the earlier you buy life insurance, the better your rate will be, regardless of the policy type you choose.
Life insurance is not a sexy topic. No one wants to think about accidental death or what their loved ones will do when they are gone, but it is necessary to consider to ensure a stable future for your family.
The first step is getting to know your options and how each one can benefit you.
Now it’s time to shop around to find the best policy for you and your family.