About half of Americans had life insurance by 2021, according to a report by industry association group LIMRA. If you’re not one of them, you might be wondering if you should watch it. But what is life insurance and who benefits from it?
In exchange for periodic payments made over time to an insurance company or through an employer, the people you designate as beneficiaries receive an agreed amount when you die through your life insurance policy.
Experts recommend that most people have life insurance as part of prudent overall financial planning. Life insurance helps protect spouses, children, family members, and others who depend on your income. It can also be part of an inheritance or philanthropic donation.
If you don’t have life insurance or want to increase the amount 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 an inexpensive way to make sure your loved ones are taken care of,” says Jarrod Sandra, owner of Chisholm Wealth Management in Crowley, Texas and a certified financial planner (CFP ). Life insurance is one of the main things Sandra said she considers part of clients’ comprehensive planning.
Who should buy life insurance?
Just as health insurance is an important part of healthcare and auto insurance is necessary to drive a car, life insurance can be an essential part of your financial picture.
“Married couples, anyone with dependents and business owners” should seriously consider carrying life insurance, said Martin A. Scott, CFP and founder of Lasting Wealth Principles in Freehold, New Jersey, which specializes in advise people between 30 and 40 years old. .
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 professional associations 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 details on their websites.
You can also buy policies online. It is wise to go shopping. Most experts recommend that you consult with a financial advisor with a fee-only CFP who is also a fiduciary. Kevin Lao, CFP and founder of Imagine Financial Security in Jacksonville and St. Augustine, Florida advises clients to also speak with a Chartered Life Underwriter (CLU).
“I recommend talking to a financial planner i an insurance broker together,” says Lao. “That way the recommendations are coordinated and there are multiple eyes on it.”
If you are looking for life insurance, there are several options to choose from based on your personal needs and circumstances.
How much life insurance do I need?
Consider carefully how much. You don’t want to pay a monthly premium that’s too high for your current financial situation or too low for the payment you determine your beneficiaries may need after you’re gone.
Next, consider dependents like children, marital status and your current debts, 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.
Beneficiaries typically collect life insurance payouts tax-free. Lao recommends using an insurance calculator to figure out your needs, and generally advises people to consider coverage valued at a minimum of 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: This covers lifetime (premiums may cost more).
- Time limit: This covers a set period of years until the policy expires.
Here are popular versions of permanent and term life insurance:
whole: Whole life insurance is a common type of cash value policy and often the simplest type of permanent insurance. Premiums are generally paid for life. If you take out a policy at an earlier age, say in your 20s, you pay a lower premium than later in life because you pay cash into the policy for longer. 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 lapse)
- Some policies pay dividends annually (although they are usually not guaranteed)
- You can increase the cash value and you can borrow against the policy (premiums are locked in for life)
- Generally more expensive than temporary life
- Premiums can increase with age, so experts advise starting early
- If you need more coverage later, it can be expensive
Time limit: Term life insurance covers a set number of years. This can be useful during certain periods of your life, such as when you are 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 specific time period (if you start a family, for example)
- It only covers a certain number of years in the policy
- Every time you renew, premiums tend to increase
- If you get sick or develop a high-risk medical condition, you may not be able to renew
Universal: Universal life is a type of cash value policy with flexible premiums that can be changed over time. It deals with the three main parts of the policy separately: premium, death benefit and cash value.
- More flexibility
- Death benefits can be fixed or increase over time
- It can change the value of the premium and the benefit
- The policy can be prepaid
- If you pay less than the premium, benefits may expire
- Easy to lose track and not rely on cash value
- If the value reaches zero, the policy may expire
- It may include “mortality” and expenses that increase with age
Other types of life insurance
- Variable: Profit and cash value can vary, as the name suggests. Insurance companies invest your contributions in areas such as stocks, bonds and other investments, like a mutual fund. As the policyholder, you assume this risk. If the investments prosper, you will get a higher return. If they fall, your premium may increase, reducing the value of your policy.
- Supplementary: Here’s what it looks like: coverage on top of your primary policy. This may include insurance for your spouse, child, or accidental death coverage.
- Set: This usually expensive option covers two or more people with the payment when the first person dies. Insurers consider joint policies riskier because a larger benefit payment is likely to be sooner and generally larger.
In the end, your decision may depend more on who is counting on you financially and other circumstances, said Curtis J. Crossland, CFP and managing member of Suttle Crossland Wealth Advisors in Scottsdale, Arizona.
“Are you building a family or wanting to protect or provide for a significant other? Income replacement issues, debt issues, concerns about unmet future expenses, etc. All of these come into play in the right circumstance,” Crossland said. “If you’re single or single for life, dying with a lot of debt, or not building a full retirement account, won’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 right now.