The ABCs of Life Insurance

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Life insurance is one of the most important parts of personal/family finances. It can ensure that your loved ones don’t have to  struggle financially after your death. 

There’s still a lot of confusion and even fear regarding insurance of life. This may be because people see it as complex or are in denial about the idea of death.

We know it isn’t easy. There are many things to consider when it comes to making a decision as important as getting a life insurance policy. Having the right information can simplify the process and help you make the right choices for your family’s financial needs.

What is life insurance and how does it work?

Life insurance is a contract between you and an insurance company. It provides you with coverage based on your timely payment of premiums. The contract provides a death benefit to your beneficiary (usually a spouse) after your death.

When you pass away, your beneficiary files a claim with the insurance company along with proof (a death certificate). Once  all of the documents are processed and approved, your beneficiary receives the dollar amount stated in the life insurance policy.

If you name a minor as your beneficiary, a policy custodian would need to file the claim. The person you name manages the funds paid from the policy if your beneficiary is a minor upon your death. If, by the time of your passing there is no one chosen, the court will appoint someone.

Key types of life insurance

Life insurance policies can either be temporary (term) or permanent. Temporary insurance is usually called term insurance, and policies are issued for a specific time period (five to 30 years).

Term insurance

Term insurance policies are issued for a specific time period (five to 30 years). They are usually premium term policies, which guarantees your premium will stay the same for a set period of time. 

With a term insurance policy, you can choose between two types of coverage. They are:

  • Level – Premiums remain the same throughout the length of the contract.
  • Decreased – Coverage decreases over the life of the policy at a predetermined rate. 

Permanent insurance

Permanent insurance covers you throughout your life or up to a certain age, usually 100 years.

Two of the most popular types of permanent insurance are whole life and universal life. Most whole life policies provide a level premium, so the rate you pay remains the same throughout the policy.

Other permanent insurance policies available include variable life and variable-universal life. Whatever permanent life insurance policy you choose, you can get a larger death benefit by passing a medical exam.

What determines the rate you’ll pay?

The younger and healthier you are, the less money you will pay. Age is usually the most important factor in calculating the premium rate of your insurance policy. Other essential factors include:

  • Life expectancy (determined by race or gender) 
  • Results from medical exam and lab work
  • Answers to health questions on the insurance policy application
  • Family medical history
  • Location
  • Smoker/non-smoker lifestyle, high/low alcohol consumption or risky hobbies practice

How are life insurance policies issued?

Insurance policies can be either simplified issue or fully underwritten. Simplified issue policies only require you to answer some questions about your health on your insurance application. These usually cost more since the insurance company has less information about your health status.

Fully underwritten policies require you to take a medical exam and complete lab work prior to submitting insurance application. If your results show good health, you’ll get a lower premium.

Do I need life insurance?

Whether you get a life insurance policy or not will depend on your current financial or family situation. Mortgage lenders often require their customers take out a life insurance policy when applying for a mortgage. The purpose is to cover their financial interest.

Other reasons to buy life insurance (and why most people get a policy) is to protect people who rely on you financially, like your children. If you’ve already paid off your mortgage and have no dependents, you may have less need for coverage.

Unmarried individuals may believe they can live without any kind of life insurance coverage because they don’t have to worry about financially supporting dependents after their death.

Younger couples without children, however, generally insist that life insurance is worth paying for especially for the main breadwinner. This safeguards the interests and financial needs of the surviving partner.

Whatever your situation might be, check first to see whether your employment contract includes a ‘death in service’ benefit, which will go to your beneficiary in the event you pass away. 

In short, here are three main reasons to get life insurance:

  • To pay for burial and final expenses
  • To replace your income
  • To pay off a mortgage (if you have one)

How do I to buy the right life insurance policy?

To get the right policy it is very important to know when you should choose term or permanent life insurance. Alchemy Insurance can help you decide the amount and type of coverage that would best fit your financial and family needs. You should:

  • Define your coverage needs
  • Get quotes from different insurance companies
  • Choose a company with a good financial rating
  • Make sure you can afford the premium
  • Read your policy carefully before signing 

Life chart

1.  Young, married couples with small children:

Young families need the greatest death benefit from a life insurance policy because the need for income replacement to cover the expenses for growing children is larger. A term plan would be the best option (and the most profitable) to get the most coverage. 

2.  Young and married without children:

Do you and your spouse share household expenses equally? If so you may not need life insurance. But, depending on your lifestyle, it can be difficult to maintain finances if one of you were no longer around. A modest amount of coverage may be enough to meet your needs. In that case, you can pick a plan with a lower death benefit to get a more affordable rate.

3.  Single parent:

With less income among most single-parent families, it’s more likely there wouldn’t be enough savings available as income replacement if a parent were to die. In this situation, it’d be a smart move to obtain a low cost life insurance policy that can provide good protection. The lower cost of term insurance is one of the best options for single parents.

4.  Retired senior citizen:

During this stage of life it becomes necessary to get a policy that has a death benefit. That way, your spouse can use to cover expenses if you die before he/she does. You can either choose a permanent insurance policy or a term plan that becomes a permanent policy.

Last life insurance considerations

Life insurance helps compensate for the inevitable financial consequences that accompany the loss of a loved one by covering the costs of final expenses, outstanding debts, planned educational expenses and mortgages.

Consider an insurance agency to help you. We recommend you contact an insurance agent who can walk you through the application process. A knowledgeable insurance broker or agent can save you money by helping you choose the best carrier for your particular needs.

If you have a policy, know your options before you consider canceling it.  If you have a policy that you believe isn’t right for you, or you no longer need, it is important to proceed carefully. You don’t want to leave money or coverage on the table.

Make the right decision

There are some of the ABCs. Now it’ll be easier for you to decide what type of coverage you need. A life insurance agent can help guide you and answer questions you may have. Purchasing insurance for life is an important part of your long-term and financial plan. It’s crucial to you and those who depend on you to make the right choices.

 

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