When you pass away, you want peace of mind that your family will be able to keep up with expenses and have the financial support they need to carry on without you. Whether it be to pay off a debt, to leave an inheritance or for extra support in a time of need, a life insurance policy can ease money circumstances for your family and loved ones when you’re gone.
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There are two different policies when it comes to life insurance — whole life and term life. Whole life insurance will cover you for the rest of your life and term life will cover you for a specific period of time.
Regardless of the policy you decide on, life insurance is necessary if you have a family that relies upon you.
When is life insurance paid out?
Life insurance can pay out a lump sum or an annuity (in installments) if:
- You pass away. A benefit will go to your loved ones in the event of your death.
- You become terminally ill. If you are diagnosed with a terminal illness (you are likely to pass away within 12 months).
Life insurance policies are generally payed out within 30 to 60 days by the insurer. Most states give the insurer a period of 30 days to investigate the claim if need be.
Payouts may be delayed if the cause of death is declared as homicide or if the holder of the policy dies within the first two years of having life insurance — this is the two year contestability clause. This clause gives the insurance company the right to investigate your claim to ensure that you weren’t providing false information in order to get a life insurance policy.
What can a life insurance payout be used for?
Every day living expenses
Other outstanding debts
When shopping for life insurance policies, you’ll have to decide whether you’d like whole life or term life policy. Next you’ll have to research different coverage amounts, the flexibility of the policy, additional features and what insurance company can offer you the best rates. To simplify the process of comparing different policies, follow some of these steps:
Life insurance policy options
|Term Life||Whole Life||Return of Premium Term Life||Universal Life||Variable Life||Variable Universal Life|
|Length of term||1 to 30 years||Life||1 to 30 Years||Life||Life||Life|
|Cost of premium||Level premium or can increase intermittently||Level premium||1 to 30 Years||Can vary at the customer’s discretion (subject to federal tax laws)||Level premium||Can vary at the customer’s discretion (subject to federal tax laws)|
|Guaranteed death benefit||1 to 30 Years|
|Guaranteed cash value||1 to 30 Years||May be exhausted to pay premiums, safeguarded from risk|
|How your money appreciates or depreciates||N/A||Set rate of interest||N/A||Variable rate of interest||Pooled accounts managed by investors||Pooled accounts managed by investors|
|What else you should know||Can’t lose coverage, no premium refund at the end of the term||Not as flexible as other life insurance options||1 to 30 Years||Flexible policy options and premiums||High priced insurance policy with minimal or zero cash appreciation||High priced insurance policy with minimal or zero cash appreciation|
Everybody’s situation is different so theres no perfect answer. Generally, you want to determine an amount that will cover the immediate and ongoing costs if you pass away so that your family or other financial dependents can continue their current way of life.
1. Outstanding debt you don’t want to leave behind
- Outstanding mortgage payments
- Any personal debt you still have (personal loans, car loan, credit cards)
2. Financials you already have that your family can fall back on. Determine how many years you would need to cover these living expenses and offset it against any savings/assets that could be used in the event of your death. This may include:
- Savings you have accumulated
- Assets that may be sold
- Investments (property, stocks, etc.)
- Life insurance you already have in your 401K
3. Your families ongoing living expenses
- Rental payments
- Vehicle and transport costs
- Food and other everyday expenses
- Education/child care costs
- Entertainment and vacations
4. Length of coverage to choose. Some things to consider when determining your length of coverage include:
- Your age and the age of your partner
- Earning capacity of your partner now and in the future
- Number of children and their ages
What affects life insurance premiums?
When insurers are pricing out your life insurance policy, to adjust your premium accordingly, a top to bottom review of your health and lifestyle is conducted. The following factors are what goes into determining how much your policy will cost:
- Age. Age is the number one factor that comes into play when pricing out a policy. The younger you are, the less of a risk the insurer is taking— therefore, the premium will be lower.
- Gender. Women generally live longer than men. This means that the term of their policy will likely be longer, resulting in a lower premium.
- Health. This accounts for your current and past health background. If you’ve been afflicted with health problems in the past, an insurer may see that as a risk, making your premium bump up a few bucks. Any conditions you have that are manageable should be dealt with before shopping for a health insurance policy to help lock in a lower rate.
- Occupation and lifestyle. If you work in a dangerous field or live life like a daredevil, you’ll be seen as someone with high potential for death. In this case, the insurer assumes they’ll likely have to payout so your premium will undoubtedly be high.
- Drinking and smoking. Both drinking and smoking have been proven to cause risks to your health — meaning you’ll likely pay double the amount for life insurance.
- Family health history. If you come from a line of family who has suffered time and time again from the same ailments, insurers figure that you’ll likely succumb to the same fate, which labels you as a risk.
- Driving record. Some insurers may even look at your driving record to see if you’ve been careless behind the wheel in the past.
Should I buy insurance from an adviser or straight from the insurer?
Both options have benefits to consider so it really comes down to your own personal preference.
Purchasing coverage with an adviser
- Access to wide range of products to give you greater choice.
- Can use their knowledge of the market to help you find coverage suitable for your situation.
- Can help you assess your situation to determine what type and how much coverage you require.
- Can offer advice regarding life insurance and annuity.
- Advice-based products generally offer higher coverage levels and greater range of features.
Purchasing coverage direct from the insurer
- Usually no medical exams are required on direct products
- Coverage can be put in place entirely online or over the phone.
- You know right away if your application is successful.
- Immediate death coverage once application is received.
- Direct products are beginning to become more and more competitive – with some coverage amounts up to $15 million.
- A number of general insurance products are now offering coverage for involuntary unemployment.
I’ve already got life insurance in my retirement plan, is it enough?
Most retirement plans will provide members with a default level of coverage which can be increased, decreased or cancelled altogether. If your employer is making contributions through a 401K, you most likely have a default level of coverage. The coverage provided may be sufficient for your situation, but you need to weigh up the benefits and drawbacks of this option and whether you require an additional level of protection.
Benefits of investing through your retirement plan
- Generally cheaper as coverage is purchased in bulk.
- Premium payments may be tax-deductible if paid with pre-tax dollars.
- Self-employed workers under the age of 75 may be eligible to claim a tax deduction for personal contributions.
- In some cases, employees can arrange for an employer to make contributions directly to their 401K for an amount that will include the premium of life or disability coverage.
- Payments are made automatically and directly from your 401K and not your after tax income.
- Reduced requirement for health checks.
Drawbacks of investing through your retirement plan
- The types of coverage available are limited.
- Benefits paid to non-dependents can attract tax.
- Payment of benefits can be more complicated and drawn out as the benefit is paid to a trustee first who then distributes funds.
- Coverage is generally more comprehensive and flexible for policies .
- Coverage expires around age 70 (most policies outside of a retirement plan will continue to provide coverage until age 90 or 100).
Am I eligible for coverage if…
- I am a non-US resident? Yes. There are a number of insurers willing to provide life insurance if you are a non resident. You must have a purpose for being in the US, whether it be work or family. Also, you must apply for the policy in the US and be willing to take a medical exam in the states.
- I am over 70? Yes. Most insurers provide life insurance to applicants up to age 75. There are a number of insurers that offer coverage for applicants up to age 80 or even 90. Most brands will reduce the level of coverage that older applicants are eligible to receive.
- I have a pre-existing condition? It will depend on the nature of the condition and any treatment you have or are currently receiving for it. The insurer will either exclude the condition from coverage, request you submit more details about the condition or automatically accept it. Requirements for how long ago you experienced the condition will vary between different companies so it can be worth speaking with a consultant to find options suitable for your situation.
- I work in a high-risk job? Yes. You will probably be required to pay a higher premium for coverage than an office worker – but it is still possible to get coverage. Again, it’s worth discussing your occupation with an insurance consultant to give yourself the best chance of finding an insurer willing to offer competitive coverage for your occupation.
Here are some tips to get quality coverage that won’t break the bank.
- Buy young and lock in a competitive rate. Taking out coverage when you are younger and likely in good health means you can lock in a more competitive rate as opposed to when you’re older and more prone to pre-existing conditions.
- Find out how much coverage you actually need. Take the time to properly assess what will need to be covered in the event of a death or serious injury and how this figure could change in the future.
- Find out what coverage you already have. You may already have some coverage in place from your annuity or employers 401K program. Find out what you stand to receive in a claim and if extra coverage is necessary.
- Take the time to shop around. Comparing policies with a consultant from a range of insurers will give you a better chance of finding something tailored to your needs that is well priced.
- Keep an eye out for special offers. Competition among insurers has resulted in an increase of special offers to help you save further on your coverage. This may include free coverage for the first year, access to health rewards programs and premium discounts.
Can life insurance fit into my budget?
You’d be surprised how little a life insurance policy can cost when you compare it with your other expenses. It may sound like “just one more expense” but if you ever need it, you’ll be glad it’s there. Here’s how it might compare to some of your other monthly budget items:
|Monthly Expenses||Monthly Cost|
|Term Life Insurance||$30|
|Cell phone bill||$100|
|Credit card bill||$100|
How do annuities work?
An annuity is periodic payment that is a similar to a regular income that can either be fixed or variable and immediate or deferred.
A fixed annuity is a set amount of money that you can count on receiving from your health insurance company. On the other hand, a variable annuity is a form of investing. Your money goes into a subaccount and it’s than managed by a pool of investors and what you’re paid is dependent upon the investment.
When it comes to how quickly you’ll get paid, you can either set up an immediate annuity that pays right away or a deferred annuity that disperses cash at a later, agreed upon date.
It’s important to keep in mind that your annuity is only valid as long as your insurer is in business. That means that when you’re looking for a policy, only shop with highly rated companies.
Whether you need it
Receiving a life insurance quote
Applying for coverage
Making a claim
What are the best life insurance brands?
|Company||BBB Rating||A.M. Best Rating||JD Power Rating|
|Mutual of Omaha||A+||A+||—|
|New York Life||B-||A++||828|
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