Welcome to the latest edition of our comprehensive life insurance guide. We’ve got you covered from A to Z when it comes to all things life insurance because let’s be honest, it can be a little overwhelming.
When it comes to your family’s security, having life insurance in place can give you priceless peace of mind.
No financial plan is ever complete without at least considering if life insurance is right for you. After all, with the different types of policies available, it’d be hard not to find one that fits your specific needs and budget.
Most importantly, remember that life insurance isn’t just for you. While it should bring you peace of mind, the true value it provides is helping your family maintain the same lifestyle if, god forbid, something were to happen to you.
With that said, let’s jump to our complete life insurance guide to get you moving in the right direction.
Top Reasons to Buy Life Insurance
There are a lot of reasons why people buy life insurance, especially since it can fill a wide range of needs. That’s why it’s perfectly understandable that nearly 70% of Americans deem it a necessity.
The main reason people get life insurance is so they can help their family maintain their current standard of living. Other reasons can include funding funeral costs, retirement savings, and estate planning amongst others. We’ll dig into each within our life insurance guide.
Types of Life Insurance Policies
Now that you’re familiar with some of the most common reasons we buy it, it’s now time to understand the different types of life insurance policies. There are quite a few to choose from and it can certainly be confusing.
However, know that term and permanent life insurance are the foundation for all other types. All life insurance at its core is either a term policy or a permanent policy.
Term is only for a certain term and is typically very inexpensive.
Permanent, as the name implies, is permanent which makes it more expensive.
Let’s take a look at each in more detail within our life insurance guide.
Term Life Insurance
If you are looking for affordability, value, and temporary financial protection, a term policy is the way to go. And, in my opinion, term is the best type of life insurance for most people. It’s cheap and provides exactly what is needed.
Also known as pure life insurance, it provides coverage within a specific time period – the term. Again, it is the least expensive but prices can vary by company so make sure to check out our free instant term life insurance quotes.
One thing you need to know about term life insurance is that it only guarantees a death benefit—savings aren’t accumulated. So, if you pass away within the term period, your beneficiaries will receive the death benefit. If you live through the term period, then it simply expires. Terms typically vary in range from 10 years to 30 years.
Your insurance policy is good as long as you continue to pay your premium. What’s more, your premium will never increase should your health unexpectedly decline. This is what’s known as a level term policy and is by far the most common.
However, there are types of term policies where the premiums will increase or decrease annually. These are much less common. I much prefer a level term policy compared to the others.
Permanent Life Insurance
This type of insurance is also called whole life insurance since it will cover your whole life as long as premiums are paid. Regardless of age, once you pass away, your beneficiaries will receive the death benefit.
Premiums will vary by company depending on the type of permanent policy you choose. Of course, your health will play a major factor as well as with all types of life insurance. The premiums for these types of policies can be paid in a number of different ways. You could pay for an entire policy in just a few years or you could stretch the payments over your lifetime.
All things being equal, permanent policies are going to be more expensive than term but, as long as premiums are paid, the policy will always be in force.
Also, unlike term insurance, a permanent policy typically includes a savings component known as cash value. This cash value continues to accumulate over time as long as the premiums are paid.
How Life Insurance Policies Work
Let’s face it, life insurance can be confusing. It’s hard to know where to begin if you don’t understand how it works. With that said, a life insurance policy has three main components: the death benefit, premium payments, and cash value.
The death benefit is the payment that goes to the beneficiaries upon the death of the policyholder.
The death benefits paid are tax-free – although there are rare instances where this money could be taxed. As for receiving the benefits, there are really two main payout options: lump-sum or annuity payments.
When it comes to life insurance, the premium just means the amount of money required to keep the policy in force. Premiums can be paid in a number of ways with the most common being monthly or annually. The type of policy will determine how long premiums are paid.
There are several main factors that influence the premium amount. The biggest being the insured’s age, medical history, and personal risk tolerance. Once these factors are known, the insurance company will then issue what’s called a rate class that will determine the premium amount.
For term policies, premiums include the cost of insurance (COI) only. For permanent policies, the amount will include the COI and a cash value component. Know that cash value is only associated with permanent policies. We’ll talk more about it later.
Other Life Insurance Factors
As mentioned above, rate classes are based on your overall health status, medical history, and lifestyle. These factors could either increase or decrease your risk rating which in return, would increase or decrease your premium. However, these do not affect the amount or the length of the coverage of the insurance; that’s up to you to determine.
Again, cash value is only available in permanent policies. A permanent policy has two purposes: to provide life insurance as well as a savings account. It’s basically a way to force you to save money if you’re not so good at doing it yourself.
The savings account, which could also be invested depending on the type of policy, grows on a tax-deferred basis. For folks who make a lot a money, some form of permanent policy could serve as a tax-deferred savings vehicle for retirement.
Life Insurance Guide Need To Knows
Life insurance is definitely helpful when it comes to planning your family’s finances. You’re not just buying life insurance with benefits—you’re buying priceless security for your family in the untimely event of your death.
From helping with burial and funeral expenses to covering your family’s future living expenses, life insurance can provide invaluable advantages. But, as with all insurance, we hate paying for it but were grateful to have it when it’s needed.
Life insurance could also help strengthen the financial security of single-parent families. Since there’s only one source of income, the sudden passing of the sole breadwinner means the children will be left with little to no support. Having life insurance in place means your children can still maintain their current lifestyle.
Top Factors That Affect Life Insurance Quotes
Applying for a life insurance policy means that you’ll be assessed based on a host of different factors. This will then determine the amount of your premium. Here is what the insurance company is looking at:
Since research shows that women live longer than men on average, this means that they get to pay a lower premium.
Age plays a major role. The older you are, the higher your premium simply because of your shorter life expectancy.
Coverage Term and Amount
The amount and term will also play a part in your premium rate. The longer the coverage period or the higher the death benefit, the higher your premium.
Height and Weight
Your height and weight are also deciding factors when it comes to your insurance policy’s premium rate. Obviously, the heavier you are the more the premium. It’s all based on a table that the underwriters utilize.
What State You Live In
Believe it or not, but the state you were born in and the state you live in are also factored. Different states have different standards of living.
Health and Smoking Status
These two are definitely crucial factors when it comes to determining your premium. For smokers, they pay a multiple of the usual premium due to their decreased life expectancy. As for your current health status, most insurance companies will require some kind of medical exam.
Your lifestyle also plays a part when it comes to your premium. You’ll be assessed for any potential extreme hobbies or pastimes. This includes skydiving, race car driving, hang gliding, and flying a plane amongst others. Since these activities are considered risky, expect to pay more in premium.
These are different coverages that can be added or removed from your policy. The more riders you add, the more expensive your premium.
Just recently, insurance companies have also started taking into account your driving record. If your driving record shows a potential risk then that will certainly be factored into your premium.
Riders on a Life Insurance Policy
By definition, riders are the benefits that can be purchased and added to your insurance policy. The premium increases, terms and conditions, and coverage of riders may differ depending on the insurance company.
There are various types of riders available in the market and we discuss the most common types below.
Guaranteed Insurability Rider
This type of rider lets you purchase additional life insurance within a certain period without having to take a medical exam.
If you’re worried about unexpected things happening, this rider can be a nice option. If your health declines as you age, you could apply for extra coverage without giving any evidence of insurability. However, this type of rider will end at a certain age.
Accidental Death Benefit Rider
This type of rider allows your beneficiaries to be paid additional death benefits if you pass away due to an accident.
The additional amount is typically 1x the death benefit, which means your beneficiaries would receive 2x the original death benefit. There are, however, restrictions to the term “accident” referred to in the rider.
Despite that, if you’re working at a location that is prone to accidents, adding this type of rider to your policy would be something to consider.
Term Insurance Rider
This is commonly added to various types of permanent policies since it provides term insurance on top of your current plan. Adding this rider is recommended for individuals who want additional life insurance in addition to their current policy.
Child Term Rider
This is a benefit providing life insurance for your child. At some point in the future, it could also be extended into permanent insurance up to a maximum coverage. This coverage typically ends at age 25.
Waiver of Premium Rider
If you’re no longer employed or receiving a paycheck after an injury or accident, this rider would allow you to stop paying premiums and still keep coverage.
But, you’ll have to prove it before being approved for it. It’s especially worth getting in cases where your premium is high and you’re required to have insurance.
Accelerated Death Benefit Rider
Under this rider, you are allowed to use the death benefit in case you suddenly suffer from terminal illness. The benefit received, along with the interest, would be deducted from the total death benefit allowing you to pay for expenses while still alive.
Depending on the insurer, some of these riders could already be included in your policy. Be sure to check so you’re not paying double coverage. Hey, we can’t cover everything within our life insurance guide.
Why Life Insurance Quotes Differ
Insurance premiums can vary widely by company. This is because every insurance company assesses risk in their own way. That’s why it’s important to shop around first before making a decision. This ensures you’re getting the best deal on life insurance and you’re saving money in the process.
What you can do is work with someone who has access to various life insurance carriers so you can better compare policies. See the policy quoter to the left to get a free quote.
Taking Into Account Insurance Company Ratings
When looking for life insurance, you might also want to consider the insurance company’s ratings.
It’s not always about finding the cheapest rate. After all, you could get a low premium now but find out later that the company isn’t all that financially stable.
That’s an unfavorable situation to be in and could lead to financial losses for you and your family
You can also find out more about insurance companies through your state’s insurance department or with the Better Business Bureau (BBB).
Life Insurance Guide Wrap Up
If that’s exactly what you’re looking for, check out some more of our blogs or get a free life insurance quote from our super quick quote engine. Be sure to let us know if you have any questions or if you’d like to see any additional resources within our life insurance guide.