Life Insurance

Understanding Life Insurance

Life insurance may be one of the most undervalued and under purchased financial planning products, yet it is one of the most important for ensuring those you love are taken care of when you are no longer around to support them.

Do I Really Need Life Insurance?

When you think about financial planning, you likely begin by thinking about your future needs. How will you live during retirement? How will you pay for your kids’ college? These are questions you are likely already asking, but you may not think about what will happen if you pass away.

While this may not be a pleasant thought, it is an essential part of your estate planning process. If a wage earner in your family is lost, how will your surviving family members continue to survive without significant debt or an overwhelming financial burden? These questions are what make life insurance essential as part of a healthy financial plan. With a life insurance plan in place, your dependents can keep their assets, using the death benefit to pay expense that may remain upon your death. Keep in mind that no taxes are required from proceeds paid from most life insurance policies, which adds to their value as an estate planning tool.

How Much Insurance Should I Buy?

Calculating the amount of life insurance you need requires careful planning. Take some time to review your family’s needs and your personal financial information. Here are some factors to consider as you choose the amount of benefit on your life insurance policy:

• What will your family need to cover costs at the time of death? Remember to consider potential medical bills if you should have an illness, costs for burial, and the costs of any applicable state and federal taxes.
• How will your family fund the adjustment period? Your family members may need time to find work if you are the primary wage earner, or they may need money to move.
• What money will your family need for day-to-day expenses, housing costs, daycare costs, and educational expenses? Do you want to leave behind money to fund your spouse’s retirement?

The only real way to determine the amount you need on your policy is to figure out the answers to these questions. However, the industry often recommends the following rule: plan to buy a policy that has a value equal to five to seven times your current annual gross income. Keep in mind that as your income changes, your life insurance needs may change as well.

Which Plan Is Right for Me?

Life insurance products fit into two basic categories: Term and Permanent Life. Term life insurance provides coverage for a set period of time, such as 10 or 20 years. It is typically cheaper because it has an “end” in sight. It also does not offer any cash value. If you do not die during the term, you lose the money you have invested into the insurance. Permanent life insurance lasts for your entire lifetime. It may gain a cash value over time that you can tap into through loans.

Life insurance is not a one-size-fits-all product. You are purchasing something that will provide financial security for those you love after you are gone. You need to choose the product that will best meet the financial needs and goals of your family. Take the time to talk to an agent to understand the various options available to you, and see how they best fit into your financial goals.

Frequently Asked Questions

Here are some questions those who purchase life insurance commonly ask.

1. Will my policy be canceled if I miss a payment?

In order to ensure that your policy remains in effect, you need to pay it each month. However, you will receive a grace period, typically around 30 days, in which to pay the premium if you miss the payment. If you do not pay during the grace period, your policy will become inactive. You can reinstate it if the provisions allow you to do so. If you have a permanent life policy with a cash value, your life insurance provider may be allowed in the policy plan to draw from the cash value to cover the premium. This will lower the cash value of the policy, but will allow it to continue to be in effect even though the payment was skipped.

2.What if I cannot pay my premium when I am disabled or hurt?

Life insurance premiums must be paid, even if you are unable to work. However, you can purchase a rider for your policy that allows you to skip your premiums for a period of time if you become disabled and cannot work. This rider will add an additional cost to your policy, but it will provide peace of mind.

3. When will my coverage begin?

This will be dependent on the terms outlined in the policy. The policy may not be effective on the same date it is issued, so find this out before you buy.

4. What riders can I purchase?

In addition to the disability rider, you can purchase the following:

• Child rider – This provides a small coverage amount for your children, which is typically used to cover funeral costs if your child should die. It is typically quite affordable.
• Accidental Death Benefit – This rider provides an additional payment to your beneficiaries if you die in an accident. The terms will vary depending on your insurance provider and from state to state.
• Accelerated Benefits – This rider allows you to receive payments from your life insurance policy while you are still living, usually for events such as catastrophic illness, long-term nursing home care, or other similar medical needs.

Keep in mind that riders always add an additional cost to your premium amount.

5. If I choose accelerated death benefits, how do they work?

Accelerated death benefits pay some or all of the policy’s benefit amount prior to the death of the policy holder, but only under specified circumstances. These circumstances may include the need for extended medical care, such as in a nursing home, or a catastrophic, terminal but extended illness. Keep in mind that these payments reduce the amount your beneficiaries will receive, and also affect your ability to receive Medicare and may change your tax status, so thoroughly research your options prior to purchasing a policy.

6. How do I choose my beneficiaries?

• Select a specific beneficiary, such as your spouse, rather than sending your life insurance to your estate, where it could get tied up in probate court. This ensures it is paid immediately to your beneficiaries. They will need the money right away.
• Chose a secondary beneficiary, known as a contingent, just in case your primary beneficiary is no longer living.
• Be clear when naming beneficiaries, and make sure to change your policy to include children born after the policy effective date. You can do this with a simple phone call, but you must remember to do so.

7. What is the purpose of medical testing?

Insurance providers often request medical tests before approving an application for life insurance. These tests provide current information about the health of an individual. The goal is not necessarily to eliminate applicants who are prone to a serious health condition, but rather to set the premiums at a level that reflects the risk the individual’s health represents. Certain medical conditions do represent a large risk making it harder for the insurance provider to offer coverage.

8. Is it ever a good idea to replace my current policy?

If you are considering replacing a current, in-force policy, do your research carefully.

Never drop your policy until the replacement policy is in effect and paid for. Here is what you need to consider before you replace any policies:

• Has your health changed? Even small changes, such as significant weight gain over the years, can change your health and premium category or make you uninsurable under the new policy.
• Does your policy have a cash value? Your new policy’s cash value will start out very small, and you may have to pay a surrender charge for the first policy. If you are looking for a policy that pays dividends, you may have to wait several years before your new policy’s dividends are equal to the one you have now.
• Are the two policies equal? You need to see details about the premiums, cash value, death benefits, and other details of the policies. Compare all of these features, not just the premium amount.

9. Do I need insurance if I am single?

Single individuals do need many types of insurance. For instance, they need disability insurance to ensure their needs would be met if they could no longer work, since they do not have another adult to depend on for support. They need health insurance to protect against the cost of care if they should be injured or sick.

Life insurance is often overlooked by single individuals who do not have dependents, but it is something worth considering. Those who are still young and single can lock in a low premium rate while they are in good health. Then, if they do have beneficiaries in the future, they will already have coverage. Also, someone will have to pay your funeral costs if you die, even if you do not have a spouse and children. Even just a small life insurance policy ensures no one is left holding that bill.