Life Insurance Explained
Buying life insurance is no easy task, and at times, it can be a really tedious process. Advisors may unfortunately attempt to sell you more than you need, and might actually leave out important details about the policy you purchase. The reason life insurance is so difficult to choose, is due to the fact that there are so many different plans out there. Plus, unlike auto or health insurance, you’ll be leaving money behind for your estate and heirs.
This is exactly why it is important to know what you’re signing up for, and who the product is coming from. When it comes to preventing an emotional tragedy from becoming a financial catastrophe, you’ll want to know that the life insurance company you have chosen will help you in your time of need. So, let’s take a quick look at some of the options you’ll have, and how life insurance tends to work. Remember, every policy is different, so the right product for your friend might not be the perfect one for you.
How Life Insurance Products Work
To put life insurance simply, it is designed to ensure that your final expenses are covered and your income is supplemented for your family. During the procedure, you generally need to take a medical exam, and once you’re approved for the benefits you apply for, the company will issue a premium price. These premiums can be paid monthly, quarterly, or even annually. In exchange for the premium, you’re assigned a death benefit and some other features as well. Once you pass away, this claim is paid out to your beneficiaries. While there are many other types out there, this is life insurance at its core.
How the Payout Is Processed
The payout generally has a processing period. During this period, the company will evaluate the cause of death, and in most cases, will issue a payout. The payout is entirely tax free, and tends to come in the form of a lump sum. This lump sum can then be made to work like an income.
If you happen to pass away shortly after purchasing a life insurance policy, the company has the ability to contest the payout. During this period of time, the company will check to see if any information was omitted on the application. If they find discrepancies, they can withhold the payout or offer you less. This is why it is important to be truthful on the application. For strategies in regard to death claims, you should definitely consult with an advisor.
Can You Cover Your Kids?
The answer can be broken down in two ways. The first way you can do this is by implementing a survivorship policy. This type of policy will actually transfer the left-over death benefit onto your children or spouse. The second way to do this would be to place a life insurance plan on your children themselves. While you can be the original owner, this will allow your kids to have coverage. You can even transfer ownership when they’re old enough.
What If I Don’t Have A Beneficiary?
Most applications require you to have a primary beneficiary, and generally a contingent beneficiary as well. This will allocate funds to the person of your choosing. However, if you don’t have a beneficiary, the death proceeds will go to your next of kin.
Is There An Easy Way To Cancel?
When it comes time to cancel, for whatever reason, the process is actually quite simple. All you need to do is to pick up the phone and call the company you have coverage with. They’ll provide you with the guidelines you need to follow, and will typically send you some paperwork to fill out. If you have any cash value, they’ll send you a check for the amount.
Why You Need Life Insurance
At the end of the day, everyone needs life insurance at some point in their life. If you have a family, a house, debt, children, or expensive taste, you’ll need to make sure you have a financial plan in place. When someone passes away, the process is incredibly painful. Your family will have to deal with the loss of a loved one, but if you’re not covered, this emotional tragedy will quickly turn into a financial catastrophe.
If you’re a parent, and the top earner in your household, your family has been used to live with those means. Take your income out of the picture and then, what will happen? An absolute disaster! That car you may have loved will end up being sold, and your spouse might lose the house due to the cost of a mortgage.
Sure it is sad! But at the end of the day, your bank doesn’t care about what has happened. They want their money.
If you don’t want your family to lose the house, your kids to switch school districts, and your spouse to work multiple jobs, it is advisable to hire a financial advisor to help you do the right thing sooner and make sure your income is securely covered. In this way, when you pass away, you have made sure that your family is financially well off.
However, if you’re not completely sure on the best type of life insurance plan to purchase, that is not an issue. Contact one of the reps at ABC Financial Advisor today to setup a free consultation. The last thing you want your family to worry about is money in the case of an unexpected loss of a breadwinner. Having a life insurance policy will give your family time to mourn in peace.
Is There A Case Where I Would Not Need Coverage?
The only time you won’t need coverage is if you have no substantial liabilities, and you have no family to accommodate when you pass way. This may also be true if your assets can cover the cost. However even in those cases, your assets can be put to a better use. People who are under 20 generally don’t need life insurance, but believe it or not, your 20’s is a prime time to pick up a policy. The cost is extremely lower, and you’ll have a lot more options.
At What Age Should I Look Into Life Insurance?
A common time for people to start thinking about life insurance is in their thirties. Why? Because this is when most people start to purchase home, finance a mortgage, start a family, and have children. When you’re paying for all of these expenses, you’ll start to ponder what could happen if your income ceased to exist. After all, your most important asset is you. So once these life events take place, the thought will typically start to cross your mind. This is a great time to look into life insurance, because the younger you are, the less expensive it will be.
Your thirties are definitely a great time to make sure you obtain coverage, but you should actually look into this at a much earlier age. This is especially true if your parents have consigned on any student loans you may have. It would be horrible for your parents to deal with the loss of a child, and then on top of that loss, be responsible for thousands of dollars in debt. Plus, the younger you are, the more affordable it will be. For someone in their 20’s, starting a whole life may actually be a great idea. You can end up getting quite a bit of coverage for $100 a month, and if you ever need more, you can layer your permanent plan with term and convert as you obtain more income.
If you’ve already missed the life insurance boat, and are finding yourself lacking coverage during your elder years, you still have options left. Typically, your need for life insurance decreases as you get older. So, when you reach a certain age, all you need is the cost to cover your burial expenses. So, if you’re 65 and worried, take a look at some small whole life plans that feature a death benefit between $10,000 and $50,000. Even at 65, these plans are affordable, and will provide you with the coverage you need.
How Much Does It Cost?
The cost is entirely dependent on the type of plan and rating that you have. Permanent plans will be higher in cost, but tend to be more forgiving if you use tobacco products. A term life policy will generally be much cheaper, but certain ratings can dramatically increase the price.
For some basic term insurance plans, you can get roughly $100,000 in death benefit for about $15 per month in your 20’s. When it comes to permanent insurance, that same $100,000 death benefit could end up costing you $1200 per year in your 20’s. This would also be for people who have exceptional health. If you’re a smoker, that $15 term plan can turn into $30 per month.
The Reason You Should Consult With An Advisor
Consulting with an advisor should always be one of your top priorities. Why? Because they’ll help you establish exactly what you need and what to buy. Most advisors can take a look at your budget, and help you find a life insurance plan that will have little or no impact. This can ensure you to save some money, while being protected in the case of your death. Plus, when the time comes, your advisor can help you determine the time to convert or drop your coverage.
When it comes to shopping for life insurance, before we get deep into the details, there are two main types: a) term and b) permanent. You can think of term insurance, as a temporary product with an expiration date, whereas a permanent life insurance plan means that you own it. Permanent life insurance tends to be the better option, but it comes at a higher price. You should also be aware of the fact that many term life insurance products come with the option of converting into a more permanent plan. So let’s take a look at the key differences.
What is Term Life Insurance?
Term life insurance tends to be less expensive than permanent life insurance, and can also have higher payouts. For a term plan, you pay the company premiums during the term period. The premium may be level, depending on the product, but you’ll be in the contract for a given amount of years. Once that time comes to a close, you’ll find yourself without life insurance. Before this occurs, you can choose to convert, or you can end up renewing your contract at the new attained age that you have. So when it comes to term, think of it as renting a house as opposed to buying one. There is no equity, and if you survive, you will have no payout at all.
Some common things you’ll find in term life insurance are as follows:
- Level premiums throughout a given period of time (10-30 years is the industry standard)
- The ability to convert a term policy to a permanent one
- Some companies offer term policies that are not level, and actually increase in premium as you get older
- Lower cost at lower ages, and once you reach age 65, the price begins to grow exponentially
- High payout amounts for a lower cost
- Some companies may offer blended products
What is Whole Life Insurance?
Whole Life Insurance is often referred to a permanent life insurance plan. This product comes with the ability to receive dividends and also, helps the policy grow overtime. This type of coverage can take care of you throughout your whole life, build equity, and be used to help you exceed your retirement goals. Let’s take a look at the features of whole life:
- The ability to build equity and withdraw the equity, when the time comes
- The ability to receive dividends
- Creditor protection, which is a death benefit, grown over time
- A cash value pool, which can be borrowed
- The ability to purchase riders that allow for additional benefits
- Higher premiums
- Tax-free saving
Why is the Cash Value Important?
The term cash value might be unfamiliar to you, but it is actually quite simple. Think of it this way:
For the first 10-15 years, you hand the company $1, and they give you back 50 cents. After the first 10-15 years, you give the company $1, and they give you back $1.50 for the rest of your life.
Whole life is a great way to set money aside for your retirement, pay final expenses, and gain tax advantages on your savings.
Difference between Term & Whole Life Insurance
When it comes to shopping for permanent or term life insurance, you’ll want to know which one is better. Why should I buy a less-efficient product, right? Well, believe it or not, both products can be equally as effective, depending on your situation. So, let’s take a look and see which product may be right for you.
Why Term Is Better In Some Cases
Term life insurance can be great, if you want to avoid high premiums. Whole life insurance offers you with a lot more options as well as the possibility of growth, but sometimes it is just not in the budget. Luckily, that is absolutely okay. You don’t need to harm your budget to obtain the coverage you need. Here are some reasons why term life insurance may be a better option for you:
- Lower premiums
- Level premium for a specified period
- Higher amounts of coverage at a lower price
- The ability to convert a term product to a permanent one (but at a higher rate)
- It is easier to understand
- You set it and forget it
- Simple coverage and rider options
What about Permanent Life Insurance?
Now that you know why term life might be right for you, let’s take a look at why going the permanent route may be in your best interest. Some key reasons you should opt for permanent life insurance are as follows:
- The ability to build equity in the policy
- Creditor protection
- The ability to take a loan out of the policy
- The coverage will typically last longer than your life period
- The policy has a “pop” period, and during this period, you’ll no longer need to pay any premium
- The ability to receive dividends
- The possibility of additional riders that allow more flexibility
- Some policies have long-term care built-in
- You own the policy
- The ability to incorporate financial planning ideas to help you sustain the retirement easily
Why Whole Life Insurance Is the Best Option
While both plans may be appealing in their own ways, the ultimate goal should be to eventually purchase a permanent plan. Think of it this way: if you have a permanent plan, the company ends up paying you. You’ll end up with living benefits, and have a good chance at actually seeing the money you’ve paid, while you’re still alive. If you go for a term life plan, and survive the term, you’re out of whatever money you have paid into the plan. So at the end of the day, whole life insurance should be your goal. If it is not in the budget, don’t worry, because you can purchase a plan that allows you to convert the term insurance to whole life, when the time comes.
It is important to consult with an advisor, because they can help you determine which product is right for you. It can get very confusing and expensive. So, make sure that someone is giving you a proper guidance. This can lead you to save some money now, and earn more in the long run. So, before you choose a life insurance plan, make sure you seek guidance before doing so.
Universal Life and How It Woks
Universal life insurance is its own animal. Think of it as a cross between whole life and term life insurance. Most universal life policies tend to cost less than whole life, but more than term. The reason for this is simple. Universal life holds a cash value, and as you get older and the premium goes up, the policy will draw money from that cash value. This helps them keep the cost of premium level over the course of the policy. If you’re not worried about the cash value, and want to ensure your family is covered after your death, a universal life plan may be the most cost-effective plan for you. The benefits of universal life include:
- The ability to skip a premium payment, if you have enough accumulated cash value
- Lower premium than the whole life insurance plans
- Universal life insurance, when used properly, can cover you as long as whole life insurance
- The ability to withdraw the equity in case of need
- Customization options, which can be unique to your individual needs
While universal life is a great product, there are definitely some considerable downsides that can haunt you, if you overlook them. Universal life gets more expensive as you get older, and most people don’t realize this, because in some policies, the money will be drawn from the cash value. If you don’t properly plan out the life of this policy, it can actually end up imploding on itself. This means that the premium will skyrocket on you, and you’ll be unable to afford the cost. All of that money is then wasted, and you’re left without any coverage. We recommend you to consult with one of our financial advisors to understand your options. A competent advisor will map out the length of the policy for you, and ensure that your coverage remains adorable for the life of the policy.
Like a whole life policy, the rate of growth is entirely dependent on each insurance company. The dividends a company decides to payout can be a huge factor, when it comes to growth. While you may be guaranteed a small rate of interest, some of the stronger companies with solid dividend histories will offer you more growth in your universal life policy.
Variable Universal Life
Variable universal life is another option for people, who have a greater risk threshold. This policy is unique, because you can actually bet the cash value against the market. This means that your cash value can be exposed to exponential growth, and can possibly outgrow a whole life plan. This may sound great, but it definitely comes at a risk. Any type of market exposure leads to risk, and if not handled properly, this policy could be a regrettable choice. While this might be tempting to investors, you need to understand the risk.
Depending on your finances, this is definitely a policy that you should consult about it with an insurance specialist before you commit to any company. Setting up your own plan can lead to huge losses, and while there is usually a guaranteed rate of return, you can still lose the policy. While investing in life insurance may sound unfamiliar and complicated, it is fairly simple and profoundly beneficial for everyone. The tax benefits may need some considerations, and if you make a profit, you may have some tax liabilities to pay.
What is Supplemental Life Insurance?
If you have a group life plan with your employer, then you may have heard of the supplemental life insurance. This type of life insurance is designed to fill any gap in your current life insurance plan. If you have a plan through your employer, you can generally get more coverage without the need for a medical exam. Plus, if you dislike your current provider or plan on leaving your employer, you can purchase a supplemental plan from an outside company. Let’s take a look at some of the reasons, people may use supplemental life insurance:
- To fill any gaps in their current life insurance plans
- To avoid being left with no coverage, when planning a job change
- To obtain more insurance through their group life plan
- To ensure you have enough money to leave behind, or to layer your current term plan with a more permanent option
- Distrust in current life insurance provider
When Should I Supplement My Life Insurance Plan?
When it comes to supplementing your current life insurance plan, there are some things you should first consider. If your gaps are filled, and you’re adequately covered, you may want to just leave your coverage plan alone. If you may be switching jobs or if your current income is not covered enough, you may then want to supplement your current plan. In below, we discuss some common indicators to figure out that you’ll need a supplemental plan:
- Your income is not at least 3 times of your annual income
- You’re looking for a more permanent insurance plan
- You need a more portable option, in case you plan on switching your occupation or retiring
- You would like to leave behind additional money to your heirs
While supplemental life insurance may seem rather simple, this is a case, where you may absolutely need an advisor. In fact, the advisor will take a look at your current plan and help you to determine exactly what gaps need to be filled. This task can be challenging on its own, but advisors can help you gain a clear understanding of why you might need a supplemental insurance.
Life Insurance Calculator
If you’re unsure of the amount of coverage you’ll need, you can turn to a financial need calculator. There are plenty of such calculators you can find online, and you can also download a mobile app on your phone. These calculators will break down your income, liabilities, and assets, to help you determine exactly how much insurance coverage you will need.
Best Life Insurance Advisor
When it comes to picking up a life insurance plan, you’ll want to make sure you go with the best option. No matter which life insurance plan you choose, they have all have different strengths and weaknesses. If you need any additional help, feel free to reach out to a consultant at ABC Financial Advisor for more information.