About half of Americans will have life insurance in 2021, according to a report by industry association group LIMRA. If you’re not one of them, you might think you should check it out. But what is life insurance and who benefits?
Instead of regular payments made over time through an insurance company or employer, the people you designate as beneficiaries receive an agreed amount on death through your life insurance policy.
Experts recommend that most people get life insurance as part of a prudent overall financial plan. Life insurance helps protect your spouse, children, family members and others who depend on your income. It can also be part of an inheritance or charitable gift.
If you don’t have life insurance or want to boost how much you already have, now is a good time to start. You can get started with a price estimate today.
“Most people don’t expect to die unexpectedly. And it’s usually the cheapest way to make sure your loved ones are taken care of,” says Jarrod Sandra, owner and certified financial planner (CFP) of Chisholm Wealth Management in Crowley, Texas. . Life insurance is one of the main things, Sandra said, that she considers part of a comprehensive plan for clients.
Who Should Get Life Insurance?
Just as health insurance is an important part of health care, and auto insurance is necessary to drive a car, life insurance can be an essential part of your financial picture.
“Married couples, dependents and anyone with business owners” should seriously consider life insurance, said Martin A. Scott, a CFP and founder of Lasting Wealth Principles in Freehold, New Jersey, who specializes in advising people in their 30s and 40s. .
How do I get life insurance?
You can buy life insurance individually or through a group. Insurance companies offer policies to individuals. Employers and groups, such as trade unions, also offer group policies as part of a benefits package.
Insurance companies are regulated by states. The National Association of Insurance Commissioners has a directory of licensed agents and companies. Many states also provide detailed descriptions of life insurance ins and outs on their websites.
You can also buy policies online. It is wise to shop around. Most experts recommend that you consult with a financial advisor who is a fee-only CFP who is also a fiduciary. Kevin Lao, a CFP and founder of Imagine Financial Security in Jacksonville and St. Augustine, Florida, advises clients to also talk to a chartered life underwriter (CLU).
“I recommend talking to a financial planner and An insurance broker together,” says Lao. “That way recommendations are coordinated and there are multiple eyes on it.”
If you are looking for life insurance there are many options to choose from based on your needs and personal circumstances.
How Much Life Insurance Do I Need?
Consider carefully how much. You don’t want to pay monthly premiums that are too high for your current financial situation, or too low for the payments your beneficiaries may need after you’re gone.
Then take into account dependents like children, marital status and your current debt, experts say. Consider what they need and for how long, taking into account your lost income. You may also want to leave an inheritance to someone for future expenses.
Generally, beneficiaries collect life insurance payments tax-free. Lao recommends using an insurance calculator to figure out your needs and generally advises people to consider coverage worth at least 10-times your gross income. It all depends on your situation.
What are the different types of life insurance?
There are two main types of life insurance, offered in different forms:
- permanent: It covers entire lifetime (premium may cost more).
- Duration: It covers a set period of years until the policy expires.
Here are the popular versions of permanent and term life insurance:
the whole: Whole life insurance is a common type of cash value policy and the most common type of permanent insurance. Premiums are usually paid for life. If you take out a policy at an earlier age, for example, in your 20s, you’ll pay lower premiums than later in life because you’re paying cash into the policy for a longer period of time. The cash value of the policy increases based on a fixed rate set by the company.
- Effective for life (as long as you pay on time and don’t cash in the policy)
- Some policies pay dividends annually (although usually not guaranteed).
- You can build cash value and be able to borrow from the policy (premiums are locked in for life)
- Generally more expensive than term life
- Premiums can increase with age, so experts advise starting early
- It can be expensive if you need more coverage later in life
Duration: Term life insurance covers a fixed number of years. That can be useful during certain periods of your life, such as when you’re raising a family. But you have to renew term life policies, and premiums often go up.
- Less expensive than whole
- You pay for what you need
- Good for a certain period of time (if raising a family, for example)
- Only a specified number of years are covered in the policy
- Each time you renew the premium usually increases
- If you become ill or have a high-risk medical condition, you may not renew
Worldwide: Universal life is a type of cash value policy with flexible premiums that can be changed over time. It deals with the three main components of the policy separately: premium, death benefit and cash value.
- More flexibility
- Death benefits can be fixed or increase over time
- Can change premium and benefit price
- The policy can be paid off quickly
- If you pay less than the premium, benefits may end
- Easy to lose track and not build in cash value
- If the value reaches zero, the policy may expire
- May include “mortality” and costs that climb with age
Other types of life insurance
- variables: Benefits and cash value may vary, as does the name. Insurance companies invest your contributions in mutual funds such as stocks, bonds, and other investments. As the policyholder, you assume that risk. If the investment is successful, you will get high returns. If they fall, your premiums may climb, reducing the value of your policy.
- Supplement: What it sounds like: Coverage on top of your primary policy. This may include insuring your spouse, child or accidental death coverage.
- joint: This usually expensive option covers two or more people with the payout coming when the first person dies. Insurers view combined policies as risky because larger benefit payouts are likely to be sooner and larger overall.
Ultimately, your decision may depend on who you trust with financial and other circumstances, says Curtis J. Crosland, a CFP and managing member of Suttle Crosland Wealth Advisors in Scottsdale, Arizona.
“Are you starting a family or wanting to protect or provide for a significant other? Income replacement concerns, debt concerns, future exposure expense concerns, etc. All of these come into play in the right circumstances,” Crosland said. “If you’re an accepted graduate or undergraduate for life, dying with a bunch of debt, or not building a full retirement account, doesn’t have the same impact on others.”
Have more questions about which life insurance policy is right for you? You can get started by getting a quote now.