Life Insurance
Replacing lost income due to an unexpected death.
Why buy Life Insurance?
If you’re young and in good health, you probably have never thought much about life insurance. But have you ever considered what financial obligations might still exist if you died? In addition to funeral costs and current bills, what about your family’s living expenses, mortgage payments, long-term debt and college costs? The primary purpose of life insurance is to provide lost income due to an early death.
How does life insurance work?
When a person dies, there are many expenses that will need to be paid. These expenses may include items such as funeral costs, burial expense, current bills and estate taxes. In addition, there may be financial needs the insured would have met if they had remained alive, including family living expenses, mortgage payments, long-term debt and college costs for children. A life insurance policy’s primary function is to provide, upon death of the insured, an amount sufficient to pay for any or all of these costs and expenses. Which expenses or costs are to be provided for, and how much money will be needed, is entirely up to the insured.
How much life insurance should I have?
There are many and varied needs for funds upon an individual’s death, and all must be taken into account to arrive at a proper amount of insurance. For simplicity, a common recommendation is to be five times your annual income. Our Life Insurance Professionals can talk with you about your needs and goals, and illustrate how each item translates into a given amount of money needed at the time of death. We can also share how to account for other sources of income (such as Social Security or retirement plans) that will actually lower the amount of life insurance necessary.
Who will receive money if I die, and how much?
Upon death of the insured, the insurance company pays the policy’s benefit amount to the beneficiary (or beneficiaries) named on the policy. The Life Insurance policy owner determines who the beneficiaries will be. Beneficiaries may be changed or updated at any time.
Does it matter how I die as to how much my beneficiaries will collect?
During the first two years of the policy period, there may be conditions (fraud, misstatement of age, suicide) that can affect the death benefit paid by the policy. After two years, the full policy death benefit is payable, regardless of the cause of death. (Some policies may also pay extra benefits in certain conditions, such as the insured dies in an accident.)
Are there different types of Life Insurance I should consider?
Although there are many types of life insurance policies, nearly all are variations of two basic types—Term Life Insurance and Permanent Life Insurance. A third type, known as Universal Life Insurance, is a combination of Term and Permanent Life Insurance.
Term Life Insurance is exclusively death protection. The policies are written for a specific length of time (the “term” referred to in the name). Common term lengths are one year, five year, ten year, and 30 year. If you die during the term of the policy, the death benefit is paid to your beneficiaries. If you outlive the length of the term, the coverage ends.
Permanent Life Insurance, unlike term insurance, never terminates, as long as sufficient premiums are paid. It also builds cash values in the policy that can provide valuable “living” benefits in addition to the death benefit. Permanent Life Insurance is sometimes referred to as Whole Life Insurance.
Do I have to die to collect on life insurance?
For Term Life Insurance, the answer is always yes . For Permanent Life Insurance, as the “living” benefits accumulate, they may be used to provide funds for financial needs such as loans, premium payments and retirement benefits prior to your death.
How do companies set a price for Life Insurance?
Although there may be a myriad of fees, expenses, interest assumptions and other factors used to develop a given life insurance company’s premiums for a policy, the rates for life insurance are ultimately based upon one factor—the statistical chances of the insured dying in a given year. Such statistics, based upon insurance company experience and government records, are used to calculate an annual “death cost” for each $1,000 of life insurance benefit. Since statistically few people will die at younger ages, the death cost for those years will be extremely low. As people age, the statistical chance of death increases—slowly at first, then more rapidly after the insured passes middle age—and therefore so does the annual death cost.
Which type of Life Insurance is less expensive?
Since term insurance only provides a benefit if the insured dies during the policy term, its premiums will be the closest to pure death cost. This is why term is the least expensive coverage to buy at younger ages. At older ages, however, the cost of a term policy rises rapidly along with the increasing death cost and may soon become prohibitive for many senior citizens. A term insurance policy’s premium will remain the same during the term. Permanent Life Insurance rates are also fixed for the policy term. However, since the policy is permanent, this fixed premium must represent an average death cost over the entire expected life of the insured. The result is that permanent policy rates will often be significantly higher than term rates at the younger ages, but then significantly lower at older ages.
If Term Life Insurance is less expensive, why should I buy Permanent Life Insurance?
There are many reasons. Here are three of the key considerations:
Permanent Life Insurance will always be there. Some final expense needs are permanent, and only permanent insurance is guaranteed, assuming you pay the premiums, to be there when needed. Term Life Insurance, by its nature, is temporary, and at some point will become nonrenewable. In fact, a good life insurance rule of thumb is to buy Permanent Life Insurance for permanent needs (funeral, burial, estate liquidity), and Term Life Insurance for temporary needs (raising kids, mortgages, and college).
Permanent Life Insurance premiums are fixed for life. While the premium may be higher at younger ages than term, it will never go up. And that can be a great comfort upon reaching older age and not having to face the possibility of your term insurance premium increasing beyond your ability to pay, possibly at the very time you need your insurance the most.
Permanent Life Insurance builds cash values. During those early years of your policy, when your “lifetime average” premiums are higher than the death cost, that extra money is set aside to help cover the higher death costs in later years. But in the meantime it is put to good use. In effect, it becomes a form of savings account inside your life policy. This “cash value”, as it grows, can be used as the basis for a loan from the insurance company, used to pay premiums if necessary, or taken as a cash settlement in the event you cancel the policy.