In today’s unpredictable world, safeguarding your family’s financial future is of paramount importance. One way to achieve this security is by investing in life insurance. However, the world of insurance can be perplexing, filled with terms and policies that may leave you feeling overwhelmed. In this comprehensive guide, we’ll demystify insurance, explore its importance, and provide you with essential insights to help you make informed decisions for you and your loved ones.
- Life insurance is a legally binding contract that pays a death benefit to the policy owner when the insured person dies.
- For a life insurance policy to remain in force, the policyholder must pay a single premium upfront or pay regular premiums over time.
- When the insured person dies, the policy’s named beneficiaries will receive the policy’s face value, or death benefit.
- Term life insurance policies expire after a certain number of years. Permanent life insurance policies remain active until the insured dies, stops paying premiums, or surrenders the policy.
- A life insurance policy is only as good as the financial strength of the life insurance company that issues it. State guaranty funds may pay claims if the issuer can’t.
Understanding the Basics of Life Insurance
What is Life Insurance?
Insurance is a contract between an individual (the policyholder) and an insurance company. In exchange for regular premium payments, the insurance company promises to provide a lump-sum payment, known as the death benefit, to the policyholder’s beneficiaries upon their passing. This financial safety net ensures that your loved ones are protected financially when you are no longer around.
Types of Life Insurance
Many different types of life insurance are available to meet all sorts of needs and preferences. Depending on the short- or long-term needs of the person to be insured, the major choice of whether to select temporary or permanent life insurance is important to consider.
Term life insurance
Term life insurance is designed to last a certain number of years, then end. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. The best term life insurance policies balance affordability with long-term financial strength.
- Decreasing term life insurance is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate.
- Convertible term life insurance allows policyholders to convert a term policy to permanent insurance.
- Renewable term life insurance provides a quote for the year the policy is purchased. Premiums increase annually and are usually the least expensive term insurance in the beginning.
Many term life insurance policies allow you to renew the contract on an annual basis once the term is up. This is one way to extend your life insurance coverage but since the renewal rate is based on your current age, premiums can rise precipitously each year. A better solution for permanent coverage is to convert your term life insurance policy into a permanent policy. This is not an option on all term life policies; look for a convertible term policy if this is important to you.
Permanent Life Insurance
Permanent life insurance stays in force for the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. It’s more expensive than term.
- Whole life insurance is a type of permanent life insurance. It accumulates a cash value in order to last the lifetime of the insured person. Cash-value life insurance also allows the policyholder to use the cash value for many purposes, such as a source of loans or cash or to pay policy premiums.
- Universal life (UL) insurance is a type of permanent life insurance with a cash value component that earns interest. Universal life features flexible premiums. Unlike term and whole life, the premiums can be adjusted over time and designed with a level death benefit or an increasing death benefit.
- Indexed universal life (IUL) is a type of universal life insurance that lets the policyholder earn a fixed or equity-indexed rate of return on the cash value component.
- Variable universal life (VUL) insurance allows the policyholder to invest the policy’s cash value in an available separate account. It also has flexible premiums and can be designed with a level death benefit or an increasing death benefit.
Term vs. Permanent Life Insurance
Term life insurance differs from permanent life insurance in several ways but tends to best meet the needs of most people looking for affordable life insurance coverage. Term life insurance only lasts for a set period of time and pays a death benefit should the policyholder die before the term has expired. Permanent life insurance stays in effect as long as the policyholder pays the premium. Another critical difference involves premiums—term life is generally much less expensive than permanent life because it does not involve building a cash value.
Before you apply for life insurance, you should analyze your financial situation and determine how much money would be required to maintain your beneficiaries’ standard of living or meet the need for which you’re purchasing a policy. Also, consider how long you’ll need coverage for.
For example, if you are the primary caretaker and have children 2 and 4 years old, you would want enough insurance to cover your custodial responsibilities until your children are grown up and able to support themselves.
You might research the cost of hiring a nanny and a housekeeper or using commercial child care and cleaning services, then perhaps add money for education. Include any outstanding mortgage and retirement needs for your spouse in your life insurance calculation. Especially if the spouse earns significantly less or is a stay-at-home parent. Add up what these costs would be over the next 16 or so years, add more for inflation, and that’s the death benefit you might want to buy—if you can afford it.
What Affects Your Life Insurance Premiums and Costs?
Many factors can affect the cost of life insurance premiums. Certain things may be beyond your control, but other criteria can be managed to potentially bring down the cost before (and even after) applying. Your health and age are the most important factors that determine cost, so buying life insurance as soon as you need it is often the best course of action.
After being approved for an insurance policy, if your health has improved and you’ve made positive lifestyle changes, you can request to be considered for a change in risk class. Even if it is found that you’re in poorer health than at the initial underwriting, your premiums will not go up. If you’re found to be in better health, then you your premiums may decrease. You may also be able to buy additional coverage at a lower rate than you initially did.
How Does Insurance Work?
When you purchase a insurance policy, you select a coverage amount and designate beneficiaries. In the event of your passing during the policy term, the insurance company pays out the death benefit to your beneficiaries tax-free. Premiums are based on various factors, including your age, health, and coverage amount.
The Importance of Life Insurance
Protecting Your Loved Ones
Life insurance provides your loved ones with financial security in the event of your unexpected demise. It ensures that they can continue their lives without the burden of financial hardship.
Replacing Lost Income
If you are the primary breadwinner in your family, insurance can replace your income, allowing your family to maintain their standard of living.
Paying Off Debts and Expenses
Life insurance can cover outstanding debts, such as mortgages, car loans, and credit card balances, ensuring that your loved ones are not left with financial obligations.
Factors to Consider When Choosing a Life Insurance Policy
Your Financial Situation
Consider your current financial situation, including your income, expenses, and debts, when determining the coverage amount you need.
Choose a coverage amount that will adequately protect your family’s financial future. It should cover outstanding debts, future expenses, and income replacement.
Term vs. Whole Life Insurance
Decide whether term or whole life insurance aligns better with your financial goals and long-term plans. Each has its advantages and disadvantages.
Life Insurance Buying Guide
Step 1: Determine How Much You Need
Think about what expenses would need to be covered in the event of your death. Things like mortgage, college tuition, and other debts, not to mention funeral expenses. Plus, income replacement is a major factor if your spouse or loved ones need cash flow and are not able to provide it on their own.
There are helpful tools online to calculate the lump sum that can satisfy any potential expenses that would need to be covered.
Step 2: Prepare Your Application
Life insurance applications generally require personal and family medical history and beneficiary information. You may need to take a medical exam and will need to disclose any preexisting medical conditions, history of moving violations, DUIs, and any dangerous hobbies, such as auto racing or skydiving. The following are crucial elements of most life insurance applications:
- Age: This is the most important factor because life expectancy is the biggest determinant of risk for the insurance company.
- Gender: Because women statistically live longer, they generally pay lower rates than males of the same age.
- Smoking: A person who smokes is at risk for many health issues that could shorten life and increase risk-based premiums.
- Health: Medical exams for most policies include screening for health conditions like heart disease, diabetes, and cancer and related medical metrics that can indicate risk.
- Lifestyle: Dangerous lifestyles can make premiums much more expensive.
- Family medical history: If you have evidence of major disease in your immediate family, your risk of developing certain conditions is much higher.
- Driving record: A history of moving violations or drunk driving can dramatically increase the cost of insurance premiums.
Standard forms of identification will also be needed before a policy can be written, such as your Social Security card, driver’s license, or U.S. passport.
Step 3: Compare Policy Quotes
When you’ve assembled all of your necessary information, you can gather multiple life insurance quotes from different providers based on your research. Prices can differ markedly from company to company, so it’s important to take the effort to find the best combination of policy, company rating, and premium cost. Because life insurance is something you will likely pay monthly for decades, it can save an enormous amount of money to find the best policy to fit your needs.
The Application Process
Health and Medical Examinations
Most insurance policies require a medical examination to assess your health. The results impact your premium rates.
You will need to pay regular premiums to keep your policy active. Failure to do so may result in the policy’s termination.
Carefully choose your beneficiaries and keep your designations up to date to ensure the right individuals receive the death benefit.
Who Needs Life Insurance?
Life insurance provides financial support to surviving dependents or other beneficiaries after the death of an insured policyholder. Here are some examples of people who may need life insurance:
- Parents with minor children. If a parent dies, the loss of their income or caregiving skills could create a financial hardship. Life insurance can make sure the kids will have the financial resources they need until they can support themselves.
- Parents with special-needs adult children. For children who require lifelong care and will never be self-sufficient, life insurance can make sure their needs will be met after their parents pass away. The death benefit can be used to fund a special needs trust that a fiduciary will manage for the adult child’s benefit.2
- Adults who own property together. Married or not, if the death of one adult would mean that the other could no longer afford loan payments, upkeep, and taxes on the property, life insurance may be a good idea. One example would be an engaged couple who take out a joint mortgage to buy their first house.
- Seniors who want to leave money to adult children who provide their care. Many adult children sacrifice time at work to care for an elderly parent who needs help. This help may also include direct financial support. Life insurance can help reimburse the adult child’s costs when the parent passes away.
- Young adults whose parents incurred private student loan debt or cosigned a loan for them. Young adults without dependents rarely need life insurance, but if a parent will be on the hook for a child’s debt after their death, the child may want to carry enough life insurance to pay off that debt.
- Children or young adults who want to lock in low rates. The younger and healthier you are, the lower your insurance premiums. A 20-something adult might buy a policy even without having dependents if there is an expectation to have them in the future.
- Stay-at-home spouses. Stay-at-home spouses should have life insurance as they have significant economic value based on the work they do in the home. According to Salary.com, the economic value of a stay-at-home parent would have been equivalent to an annual salary of $162,581 in 2018.
- Wealthy families who expect to owe estate taxes. Life insurance can provide funds to cover the taxes and keep the full value of the estate intact.
- Families who can’t afford burial and funeral expenses. A small life insurance policy can provide funds to honor a loved one’s passing.
- Businesses with key employees. If the death of a key employee, such as a CEO, would create a severe financial hardship for a firm, that firm may have an insurable interest that will allow it to purchase a life insurance policy on that employee.
- Married pensioners. Instead of choosing between a pension payout that offers a spousal benefit and one that doesn’t, pensioners can choose to accept their full pension and use some of the money to buy life insurance to benefit their spouse. This strategy is called pension maximization.
- Those with preexisting conditions. Such as cancer, diabetes, or smoking. Note, however, that some insurers may deny coverage for such individuals, or else charge very high rates.
Common Myths and Misconceptions About Life Insurance
“I’m too young for life insurance.”
Insurance is beneficial at any age, and younger individuals can often secure lower premium rates.
“I’m healthy, so I don’t need life insurance.”
Insurance is not solely for those with health issues; it provides financial protection for everyone.
“Life insurance is too expensive.”
There are affordable life insurance options available, especially when purchased at a younger age.
Life Insurance and Financial Planning
Insurance offers certain tax advantages, such as tax-free death benefits and potential cash value growth.
Whole insurance policies can accumulate cash value over time, which can be used for various financial purposes.
Life insurance can be part of your retirement planning strategy, providing financial security during your golden years.
Tips for Choosing the Right Life Insurance Policy
Get quotes from multiple insurance providers to compare coverage options and premium rates.
Reading Policy Documents
Thoroughly review policy documents to understand the terms, conditions, and exclusions of your chosen policy.
Consulting with a Financial Advisor
Seek advice from a qualified financial advisor who can help you make informed decisions based on your unique financial situation.
The Insurance Consumer Journey Begins Online — Often with a Search
1. 69% of insurance consumers ran a search before scheduling an appointment. For many insurance shoppers, search is the first step to assess their options. (Source: LSA)
2. Over 50% of insurance searches are performed on mobile devices. In our mobile-first world, many insurance searches are run on smartphones, which makes calling an agent more seamless than ever before. (Source: Blue Corona)
3. Mobile queries that contain “insurance near me” have grown by over 100% in the past two years. More than ever, insurance shoppers are placing local searches and researching agents in their area. (Source: Google)
4. 68% of insurance consumers did not have one company in mind when they started searching. This presents an opportunity to convert these undecided consumers with search ads. (Source: LSA)
5. $867 is the average amount insurance consumers spent after a search. Each undecided searcher is a major revenue opportunity — without a strong search marketing strategy, you’ll leave dollars on the table. (Source: LSA)
6. 38% of 10,000 surveyed US insurance policy holders were NOT taken out online, as of June of 2023. That means there’s potentially an opportunity to target a third of the nation who are either calling directly, going into an office in person, or using snail mail to meet their insurance needs. (Source: Statista.com)
7. 89% of customers are scouring the internet to find out what customers are saying before they commit to your service, so make sure your company’s reputation is up to speed. Managing your online review is crucial so you put your best foot forward. (Source: sagefrog.com)
Insurance Marketers Are Investing More in Digital Ads to Acquire Customers
8. Insurance keywords are among the most expensive in Google Ads and Bing Ads and some can cost $50 or more per click. Insurance customers have high lifetime values and, as a result, paid search competition is fierce. (Source: WordStream)
9. The average conversion rate for an insurance search ad is 5.10%. For an insurance display network ad, it’s 1.19%. Despite the comparatively high cost of insurance ads, their conversion rates are consistent with most other industries. (Source: WebFX)
10. The US insurance industry is projected to spend over $15 Billion is digital ad spend in 2024. If you haven’t allocated a budget for advertising yet, you may want to start! (Source: insiderintellegence.com)
11. 78% of customers surveyed said they’re more likely to respond to personalized messages. Having enough first-party data to tailor your marketing is critical. (Source: Salesforce)
Most Insurance Consumers Convert by Calling
12. 78% of insurance consumers call a business after running a search. Since insurance is a complex purchase, the next step after a search is often a call to an agent to put together a plan. (Source: LSA)
13. 74% of consumers research insurance purchases online, but only 25% end up making a purchase online. Though most insurance consumers start their journey with a search, they prefer to speak to a live agent to make a purchase. (Source: J.D. Power)
14. Only 24% of small and medium businesses purchased their commercial insurance online. Businesses also prefer to speak to an agent to make insurance purchases. (Source: PwC)
15. Insurance shoppers are most likely to call during the purchase phase of their journey. Though calls are important throughout the multitouch insurance journey, they are most common when consumers are making a purchase. (Source: Google)
Life insurance is a crucial tool for securing your family’s financial future. It provides peace of mind, knowing that your loved ones will be taken care of in your absence. By understanding the basics, dispelling myths, and carefully choosing the right policy, you can make a confident decision to protect your family’s financial well-being.
- What is the minimum age to purchase insurance?
- There is no specific minimum age for purchasing life insurance. It is available to individuals of all ages.
- Can I have multiple insurance policies?
- Yes, you can have multiple life insurance policies from different providers to increase your coverage.
- Are the premiums for life insurance tax-deductible?
- Generally, life insurance premiums are not tax-deductible. However, the death benefit is usually tax-free.
- What happens if I miss a premium payment?
- If you miss a premium payment, your policy may lapse. Some policies offer a grace period for payment, but it’s essential to stay current to keep your coverage active.
- Can I change my beneficiary after purchasing a policy?
- Yes, you can change your beneficiary at any time by contacting your insurance provider and updating your policy’s documentation.
Now that you have a comprehensive understanding of life insurance, take the necessary steps to secure your family’s financial future by investing in a suitable policy. Don’t wait; protect your loved ones today.