There are 41 million people in the US. uu. who say they need life insurance but don’t have it, according to the 2020 insurance barometer report from industry groups limra and vida pasa. this may be partly explained by people’s tendency to overestimate their cost.
Perceptions of affordability and value can deter people from buying the life insurance they need. More than half of those surveyed in the Insurance Barometer report said a $250,000 term life insurance policy for a healthy 30-year-old would cost $500 a year or more. but the average cost is closer to $160 a year. that’s a pretty big discrepancy in perceived cost versus actual cost.
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Here’s a breakdown of what you need to know about getting the best life insurance so you can make an informed decision.
what is life insurance?
Life insurance is a contract between you and an insurance company. Essentially, in exchange for your premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death.
Your beneficiaries can use the money for whatever purpose they choose. often this includes paying everyday bills, paying off a mortgage, or sending a child to college. Having the safety net of life insurance can ensure your family can stay in your home and pay for the things you’ve planned.
There are two main types of life insurance: term life and permanent life. Permanent life insurance, such as whole life or universal life insurance, may provide coverage for life, while term life insurance provides protection for a set period.
see the full list: best life insurance companies of 2022
main types of life insurance
term life insurance
In addition to being the most affordable type of life insurance, term life insurance is the top-selling type of life insurance (71% of buyers) according to the Insurance Barometer report.
Term life insurance provides coverage for a certain period of time and premium payments remain the same for the life of the policy. typical options are 10, 15, 20, 25 or 30 year policy duration.
If you die within the term of your policy, your beneficiaries can file a claim and receive the death benefit money, tax-free.
Once the policy term expires, you may be able to renew coverage in one-year increments, known as a guaranteed renewal. but each renewal year will be at a higher rate.
permanent life insurance
Permanent life insurance provides coverage for life. is more expensive than term life insurance because:
- can last your whole life.
- generally builds cash value.
- whole life insurance offers a fixed death benefit and a cash value component that grows at a guaranteed rate of return. Many whole life insurance policies pay dividends that can be used to lower premium payments or added to your cash value.
- universal life insurance often offers more flexibility than a whole life insurance policy. you may be able to modify your premium payments and death benefit, within certain limits. With a universal life insurance policy, the cash value will accumulate based on the type of policy. For example, an indexed universal life insurance policy will have a cash value linked to an index such as the S&P 500. A variable universal life policy will typically have investment subaccounts that you can choose and manage.
- burial insurance is a small whole life policy with a small death benefit, often between $5,000 and $25,000. burial insurance is designed to cover only funeral costs and final expenses.
- survivor life insurance or “second to die life insurance” insures two people under one policy, usually a married couple. When both spouses die, the policy pays the death benefit to the beneficiaries. Survivor life insurance is usually part of a larger financial plan to fund a trust or pay federal estate taxes.
- age. The younger you are when you buy a policy, the less you’ll pay. that’s because your chance of death is lower.
- sex. Women have a life expectancy that is nearly five years longer than men, according to the National Center for Health Statistics. This means that men generally pay more for life insurance than women (except in Montana, where insurers must provide gender-neutral life insurance rates).
- health. Your health has a big impact on your life insurance rates. the insurer will evaluate your past and current medical conditions to calculate your life expectancy.
- lifestyle. Your driving record (such as a DUI conviction), criminal record, and dangerous occupations and hobbies (such as scuba diving) can result in higher life insurance rates.
The cash value component accumulates tax-deferred over the life of the policy. acts as a savings portion of the policy. You can usually borrow against the policy’s cash value or make a withdrawal. if you decide to cancel the policy, you can get the cash value less any surrender charges.
In some policies, the cash value can build up slowly over many years, so don’t count on having access to a large amount of cash value right away. your policy illustration will show the projected cash value.
There are several varieties of permanent life insurance:
what does life insurance cover?
Life insurance covers all causes of death, with one main exception: suicide within the first two years of owning the policy. In addition to that exclusion, life insurance covers death from illness, disease, accidents, and homicide.
Regardless of the cause of death, a life insurance company may deny a claim if it believes there was a misrepresentation on the life insurance application, especially if the death occurs within the first two years of owning the insurance. policy. For example, if someone lies about her health or other information on the application, the life insurance company could deny a beneficiary’s claim.
In other extremely limited cases, a life insurance claim may be denied if the beneficiary killed the insured person, or if the claim is disputed by someone who says the policyholder was forced to change the beneficiary.
how to choose the right type of life insurance policy
With all the life insurance options available, it can seem difficult to choose the right one.
Start by deciding between term life insurance and permanent life insurance.
Consider a term life insurance policy if you need life insurance for a specific period of time. for example, if you want insurance to cover your years of work as possible “income replacement” if you were no longer around.
Term life insurance is also a good option if your budget is tight. Since term life insurance provides protection for a specific period of time and is not a cash value life insurance policy, the rates will be lower than permanent life insurance.
As you enter different stages of life, your life insurance needs may change. Many term life insurance policies are convertible to a permanent policy. options will depend on your policy and insurer. Term life insurance conversion allows you to switch to a permanent policy without reapplying or undergoing a life insurance medical exam.
On the other hand, a permanent life insurance policy will last your entire life. If building cash value is important to you, look into permanent life insurance options. But if you’re buying a permanent policy just to capitalize on the cash value buildup, depending on the policy, you’re better off putting your money in a savings or investment vehicle, so you’re not paying for life insurance and fees. within a permanent policy.
and the cash value is not usually earmarked for the beneficiaries. Upon death, any cash value generally reverts to the life insurance company. Your beneficiaries get the policy’s death benefit, not the death benefit plus cash value. That said, some types of policies will offer the death benefit plus cash value, but for a higher price.
how much does life insurance cost?
The cost of life insurance varies significantly depending on a number of different factors. One of the biggest cost factors will be the type of life insurance you buy. For example, a term life insurance policy is significantly less expensive than a whole life insurance policy for the same amount of coverage.
These are some of the most common factors that affect life insurance rates:
how to choose a life insurance coverage amount
A good rule of thumb to estimate how much coverage you need is:
- Add up all the expenses you want to cover, such as replacement income from your job, a mortgage, and your children’s college expenses.
- From that, subtract amounts your family could use to cover those expenses, such as savings and existing life insurance. Skip retirement savings if your spouse will need them later.
The resulting number is how much life insurance you need. It may seem high, especially if you’ve factored in income replacement for many years. Still, life insurance quotes are free, so it doesn’t hurt to price in the coverage you need.
If it turns out to be unaffordable, you can buy what you can afford now to secure a good rate. you can buy more later, just keep in mind that several years from now your rate will be based on your advanced age and any health conditions you’ve developed.
Here’s a calculator to help you estimate how much life insurance you’ll need.
how to get life insurance quotes
According to the Insurance Barometer report, 15% of people believe they cannot afford life insurance. at the same time, many consumers overestimate the cost. the only way to know how much you’ll pay is to get life insurance quotes from a few companies. quotes are free. An experienced life insurance agent will know which companies tend to offer the best prices based on your age, health status, and amount of coverage desired.
expect to be asked about your age, health status, tobacco use, family medical history, driving history, and any dangerous occupations or hobbies.
When you have a quote you like, you can start a formal request. answers more questions in detail and requests a specific policy type, coverage amount, and policy length (if you’re buying term life insurance).
Once you have submitted the application, some insurers may require a life insurance medical exam. These tests can be done at home, at work, or sometimes at a local testing office.
The time it takes to process an application varies significantly between companies and policy types.
- some insurers offer fast life insurance, including instant approval, to people who qualify, who are generally younger (under 60) and without medical problems.
- Some insurers use “expedited underwriting” to skip the medical exam and process applications in a day or a week, depending on the company.
- and some insurers use a traditional process with a medical exam and approval process that can take over a month.
- Death Certificate: To start the claim process you must submit a certified copy of the death certificate. the insurer will not return it. therefore, you may want to order some certified copies if you need them for various purposes.
- Contact the insurance company right away: While you may have a lot to do after the death of a loved one, the sooner you contact the insurance company, the sooner you can get the money.
- verify that you have met all the claim requirements: once you have finished with all the claim paperwork, make sure you have all the supporting documentation attached. this may include a claim form and death certificate.
- cover regular household expenses
- pay off a mortgage or other loans
- fund children’s education
- keep a family business going
- pay for funeral and other final expenses
how to choose a beneficiary
A life insurance beneficiary is the person who can claim the death benefit after you pass away.
You can name multiple beneficiaries and decide what percentage each will receive when you die. In addition, you must add contingent beneficiaries who will receive the death benefit if your primary beneficiaries are deceased.
Not everyone names people as beneficiaries. some people appoint trusts. By creating a revocable living trust and naming it as the life insurance beneficiary, you can ensure that the money is used according to your wishes. for example, trust money could be used to care for children.
If you decide to name a trust as the beneficiary of your policy, be sure to work with an attorney to structure the trust correctly. It’s also wise to work with a financial planner to make a trust part of your larger financial plan.
It is crucial to update and review your beneficiary selections regularly. for example, life events such as marriage or divorce may affect your selection.
To update your beneficiaries, contact your life insurer and submit a change of beneficiary form. Making changes to just a will won’t affect life insurance.
How does a beneficiary make a claim?
Claims can be paid quickly, in about a week, assuming the insurer has all the documents they need. don’t assume a life insurance company will contact you. they are unlikely to know that their relative died. While some insurers are proactive in following up with deceased insured clients, they won’t discover a death right away.
Claims are generally paid within 30 days after the insurer receives the necessary documents.
You do not need an original copy of the life insurance policy to make a claim. you just need to know the name of the insurance company and contact them to start the claim.
That’s why it’s important to let your beneficiaries know you have a policy and tell them the name of the insurer. and insurers are contractually obligated to pay only the people listed on the policy.
Life insurance beneficiaries have no restrictions on how they can use a life insurance payment. Life insurance money can be used to: