For most of us, making sense of life insurance documents is a lot like reading a book in Mandarin. It can be somewhat tricky and confusing. Some people have questions about whether whole life insurance is better than term life insurance. Then there’s the question about how big your insurance policy should be. And what about other types of insurance like long-term disability, child insurance policies and critical illness coverage?
The important thing is determining whether you need life insurance, and if so, which is best for you. Whole life and term life insurance are the two most common policy types. If you have dependents to protect and don’t have enough savings, you’ll likely need life insurance.
If you’ll soon be in the market for a whole life policy, here’s the meat and potatoes on insurance coverage. Whole life insurance coverage protects your family for your entire lifetime with ongoing income to replace your salary if you die prematurely. It can also provide timely emergency funds for medical, legal and funeral costs should your family need it. Whole life insurance provides coverage for many other situations after death.
Here are common reasons to get a policy:
- It can be used to liquidate consumer or business debts or mortgages, or to create a fund that would enable the surviving family members to service the debts.
- It provides large amounts of cash at death for children’s college expenses or other capital needs.
- It provides cash for federal estate and state inheritance taxes, funeral expenses and administration costs.
- It provides funds for the continuation of a business through a “buy-sell” agreement.
- It can fund inheritances to children, grandchildren or others without the erosion often caused by probate costs, inheritance taxes, income taxes, federal estate taxes and transfer fees.
- It can be used to fund charitable organizations.
- Help preserve confidentiality of financial affairs. Life insurance proceeds payable to someone other than the deceased’s estate are not part of the probate estate and are not a matter of public record.
Whole life is designed to provide financial protection along other living benefits, including a guaranteed cash value accumulation over the lifetime of an insured person. There are different types of whole life policies that have a variety of options. Types include an endowment, limited payment whole life insurance and indeterminate premium whole life insurance.
The policyholder agrees to pay their insurance company a set premium for the rest of the insured person’s life (generally only up to age 100, if the insured lives that long, or in some cases, to age 95). In return, the insurance company agrees to pay a fixed death benefit when the insured person dies if the policyholder has continued to pay the premiums. You, as the policyholder, can change the premiums and death benefits to suit your current budget, so this appeals to a younger generation. Policyholders who discontinue paying premiums and terminate their policies are entitled to the scheduled cash surrender value.
One benefit of a whole life policy is that regardless of your health, the policy can’t be canceled by the carrier as long as premium payments are made regularly on time. Another benefit is that whole life policies offer tax-deferred cash value growth that is accessible via loans. Cash value is the amount available if you surrender a policy before its maturity or your death.
A Few Considerations
When pondering life insurance coverage, buyers should ask – how much income do your survivors need if you aren’t around? Also, take inventory of their assets – job insurance perks, Social Security benefits, IRA accumulations, stocks, bonds and savings accounts. Then consider factors like how many people work in your household and if your need is temporary or permanent. For instance, do you want your spouse to stop working to care for the children?
Talk to your insurance advisor about which type of assessments they use to help you determine how much coverage you need. There are various methods used to determine insurance calculations. Many companies use a capital assessment to determine this. When it comes to premium prices, insurance companies typically use life expectancy tables and risk categories to determine rates, then factor in underwriting costs. They also consider average mortality rates and how they impact rates.
When inquiring about coverage, life insurance companies will ask various questions to identify how likely it is that they will have to pay out for your policy. Each insurer has its own set of criteria to determine price and whether to issue a policy. This is why premiums can vary from one provider to another. Here are some key factors that will affect your premium:
Age – The older you are when you take out life insurance, the higher your premium is likely to be, as you’ll be seen as a higher risk to insurers.
Height and weight – Insurers take height and weight into consideration as an indicator of whether you have a healthy body mass index. If you’re obese, for instance, you’re more likely to suffer from weight-related medical conditions.
Medical history – Whether your medical history has an effect on your premium will depend on the severity of any previous illnesses that you’ve had. Life-threatening conditions, like diabetes, could increase the price of your policy.
Marital status – Your marital status will be taken into account when processing your application and you may want to consider joint life insurance if you’re married, in a civil partnership or cohabiting with your partner.
Number of dependents – The number of people that rely on your income for financial support are your dependents. How many dependents you have will play a major part in calculating how much protection you need. The more protection you need, the higher your premium is likely to be.
Hopefully now you are better prepared to shop for a whole life insurance policy. While many people get life insurance policies through their employer, the coverage is usually lower than individual policies and is only in place while you’re working there. So, exploring a policy is an important safeguard to have in place for your loved ones.
After securing a policy, it’s also important to periodically review your insurance coverage with your advisor to determine whether you still have enough or too much. If you’d like to share other helpful tips, leave them below.
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