Life insurance is a contract between you and an insurance company that promises a monetary payout, commonly called a death benefit, to designated beneficiaries — typically family members — after you pass away. As long as you’ve paid your premiums and the policy is active upon your death, the death benefit will be paid out.
A: YES – unless you are single and financially stable without dependents or a business. Life insurance is especially important for parents, sole financial providers, and those paying off debt. Learn more about who needs life insurance here. Or, read on to gain further insight into how life insurance works and get affordable quotes from top companies.
While the exact process might vary slightly from insurer to insurer, there are five steps that you can typically expect when applying for life insurance:
Remember, once you finalize how much life insurance you need and your rate, you must keep paying your premium to keep the coverage in place.
Most causes of death are covered by life insurance, including natural causes, accidents, and illness. Application fraud is the most common reason for denial of life insurance claims. See what is and isn’t typically covered by life insurance below.
Many people are concerned about being denied life insurance coverage due to pre-existing conditions. While there are many conditions that can impact your chance to get coverage, individuals with pre-existing conditions can still find coverage in many instances. Coverage availability and limits for higher-risk individuals will differ from company to company. If you have a pre-existing condition, the best thing to do is to shop around to see what type of coverage you can receive.
Another factor to consider — aside from how much insurance you need — is what life insurance options are best for you and your family members. The two primary differences between these types of life insurance policies are the length of coverage over your lifetime and the potential to increase your death benefit over time via cash value.
Permanent policies remain in effect for your entire life (or at least as long as your premiums are paid). They also offer the benefit of building cash value. While often used interchangeably with “whole life insurance,” cash value life insurance also encompasses other permanent life insurance policies such as universal life insurance.
With cash value life insurance, a percentage of every premium payment you make is diverted as tax-deferred cash value that accrues interest at the rate specified on your policy. This is separate from the death benefit and is available to be used while the policyholder is still living. Beneficiaries should not expect to receive both in the event of the policyholder’s death. Think of it as a savings account built into your whole life policy.
There are several benefits to cash value life insurance including:
The two most common options for permanent life insurance policies are universal life insurance and whole life insurance. The main difference between universal and whole life insurance policies is that the cash value is associated with a specific stock index instead of a fixed percentage. This leaves your cash value vulnerable to decline if the financial markets underperform.
Universal life insurance is often best:
A term life insurance policy only covers you for a set number of years and is considered the most basic level of life insurance coverage you can buy. If you’re lucky enough to still be alive once the term policy expires, you must renew to keep the coverage in place and guarantee your beneficiary gets your death benefit once you do pass. Term life policies tend to be the cheapest type of life insurance. Most group life insurance plans include term life policies.
Term life insurance is often best:
Insurance companies determine your premium based on several individual rating factors, including your age, gender, individual health, your family’s health history, your lifestyle, and even your driving record and credit history. Factors affecting life insurance rates include:
One of the most important rating factors is your age. Unlike auto insurance, the younger you are, the cheaper your premium will be. This is because younger people are generally healthier and thus, less likely to die soon.
On average, women live longer than men. Insurers use this data to help price premiums. Insurance companies charge higher rates for men since they calculate premiums based on mortality risk.
As previously mentioned, a medical exam of your mental and physical health is routine when you enroll in life insurance. This is another significant indicator of your mortality risk: those in poor health may pay higher rates than those who are in good health.
You will face a higher premiums if tobacco use is part of your lifestyle. Smokers are considered high-risk clients due to the myriad illnesses exacerbated by smoking.
Insurers will inquire about your immediate family’s history of illnesses to get an idea of what direction your health will take over time.
Life insurance premiums are generally not tax-deductible. One of the rare exceptions is business owners, who can deduct life insurance premiums paid for employees. However, this comes with a few more provisions; for example, you cannot deduct premiums if you own the business with your spouse and the business must not be named as a beneficiary on the policy.
If anyone is financially dependent on you, life insurance is always recommended — the earlier the better. It’s also worth it if you have assets, debt, or a business. Death benefits can be used by beneficiaries to pay for just about anything following the passing of the policyholder, including funeral expenses, childcare, mortgage payments, business debt, student loan debt, and inheritance or estate taxes. The cash value component can even be used to fund part of your retirement.
Evaluating your life insurance needs, understanding your options, and shopping around for life insurance quotes is the most effective way to find affordable rates. Having this important coverage is one of the best ways to ensure some financial security for your beneficiaries if anything should befall you — whether that be 50 years down the line or five.
