How well do you understand Life Insurance. Can you answer basic questions about the topic? The average American consumer is often surprised to learn fundamental facts and costs of Life Insurance.
WHY DO I NEED LIFE INSURANCE?
Life insurance has several purposes. Its most important function is to replace the earnings that would cease at the death of the insured. For businesses, life insurance is a way to protect key employees and the business itself. A third purpose is to use life insurance to pay potential estate taxes.
If you die during your earning years, your family could suffer a severe economic loss as a result of losing your current and future income. Unfortunately, your family would still have to pay its regular bills, the mortgage, and outstanding debts, and perhaps even continue saving for college and retirement. Unless you’re independently wealthy, achieving these goals may be virtually impossible for your family with the loss of your steady income. Life insurance offers a way for your family to continue living comfortably and without worry.
Employers often purchase life insurance policies on key employees to insure against the loss of services or income that might result after an employee’s death. Here, the proceeds from the policy are paid to the company. Life insurance works for business partners too, where one business partner purchases a policy to insure against the financial loss that might result from the other partner’s death or to buy out the partner’s heirs.
Life insurance is also used to pay potential federal estate taxes. Since these taxes must be paid in cash, life insurance can be a good way to ensure the fulfillment of this obligation.
WHAT ARE THE PROS AND CONS OF BUYING LIFE INSURANCE THROUGH MY EMPLOYER RATHER THAN BUYING MY OWN POLICY?
Many companies offer their workers employer-sponsored life insurance coverage as part of their employee benefits package. If you are offered this opportunity, it is probably in your best interest to accept. Buying life insurance through your employer can be a relatively inexpensive and hassle-free way to get some of the life insurance coverage you need.
With a group life insurance plan, your employer purchases a single policy that covers all employees. This policy is subject to a single group premium payment. Some employers may pay the entire cost of the group policy (which is tax deductible to the employer). But if the plan requires you to pay a portion of the group premium, that amount will probably be lower than what you would pay for an individual insurance policy. And you generally don’t need to pass a medical exam when applying for group life insurance.
The major disadvantage of employer-sponsored life insurance is that it isn’t portable. If you leave your job, your group life insurance coverage will end, unless you’re allowed to convert your group coverage to an individual policy (which may cost significantly more). This could leave you under-protected if you’re unable to qualify for a new policy at a reasonable cost because of your age or changes in your health. And if you’re required to pay the group premium out of your own pocket, you could decide not to participate in the group plan if you find a less expensive rate with an individual policy.
Another disadvantage to group life insurance is that the policy may not be tailored to your individual needs. For example, the amount of coverage may be less than what you require to be fully protected. If so, the group policy may give you the option of purchasing more coverage for an additional cost and for which you may be asked to answer medical questions. But even if you end up buying supplemental insurance through a separate company, your employer-sponsored plan gives you a head start in meeting your life insurance needs.
DO I NEED LIFE INSURANCE IF I AM SINGLE?
Single people with no children often don’t need life insurance because no one is relying on their income. But there are some reasons why you might need life insurance if you’re single.
If you died, who would pay for your funeral? Even a simple ceremony could be costly. If you don’t have life insurance, someone else (e.g., your relatives) may have to foot these bills. Even if you have only a small policy, the death benefits could be used to cover these expenses.
Do you have debts in excess of your assets, or do you owe money together with someone else? Perhaps you’re a joint debtor with your sister on her mortgage. If you died, she’d be responsible for the entire debt. Would she be able to make the monthly payments on her own? A life insurance policy naming her as your beneficiary could give her enough funds to cover your share of the mortgage, or perhaps to pay off the entire debt.
Finally, is it possible that your health will deteriorate? Maybe you have a family history of cancer or heart disease. If that’s the case, you might have trouble buying life insurance later when you’re older, especially if your health has begun to decline. Even if you’re single now, you may be wise to buy life insurance now before it gets too expensive or you become uninsurable. After all, you may not stay single forever
HOW CAN I REDUCE THE COST OF LIFE INSURANCE?
The price you pay for life insurance depends on your age, your health, and your lifestyle. However, there are ways to lower your insurance premiums. The following are some simple suggestions.
Often, you’ll actually pay less for a little more insurance as you approach multiples of $250,000 in coverage. For example, $240,000 of coverage might cost $275 per year, while $250,000 in coverage might cost only $260 per year. Find out the rate per $1,000 of coverage, which often drops when you pass a certain level of coverage.
More life insurance companies offer competitive rates for conditions such as diabetes, heart disease, and cancer. These companies employ underwriters who are trained in analyzing people on a case-by-case basis, rather than combining everyone with a particular condition into one group. If you have a health condition, ask your insurance agent to shop for an insurance company that specializes in covering your condition.
You might be surprised to find out how much you can save on your insurance premiums if you quit smoking, start exercising, and lose weight. Many insurance companies charge smokers double the nonsmoker rate for insurance. Similar discounts can apply if you lose enough weight to fall into a preferred category. If you quit smoking or lose weight, contact your current insurance company to see if it will reduce the premiums accordingly.
Riders can add value to your life insurance policy by covering situations that a standard life insurance policy does not insure. However, when purchasing a rider, you should be careful not to duplicate your existing coverage, resulting in wasted premiums.
Your insurance could end up costing you more if you choose to make convenient monthly payments rather than pay the entire premium annually. Before you choose a payment plan, compare the single payment price to the total cost of the monthly payments.
Some life insurance contracts automatically provide the waiver-of-premium benefit. For most contracts, the benefit is optional, and when you apply for coverage, you must ask that a rider be attached to your policy to receive the benefit. In the latter case, you will pay an additional premium. Call your agent or check your policy to find out if you have this benefit.
Life insurance policies specifically require that the disability be total. The definition of total disability depends on your contract. Most contracts define it as disability resulting from injury or disease that prevents the insured from engaging in any occupation for which he or she is trained by education and experience. Read your policy carefully to be sure you understand your insurance company’s definition.
The waiver-of-premium provision has a waiting period of six months. That is, the insurance company waits six months from the beginning of your disability before it actually waives the premium. So, you must continue to pay life insurance premiums until the six months have passed, regardless of the severity of your disability. If the waiting period is over and you are still totally disabled, the insurance company will waive the premiums retroactively.
IS IT LESS EXPPENSIVE TO BUY LIFE INSURANCE WHILE I AM YOUNG?
Your insurance premiums will increase as your life expectancy decreases–the older you get, the more life insurance is going to cost you. Whether you buy permanent or term life insurance, it will usually cost you less while you’re young.
If you’re at high risk for a medical condition that might make it too expensive or impossible for you to get insurance later (e.g., a family history of cancer), consider buying life insurance while you’re still young and healthy.
If you buy term insurance, ask about a renewability provision. Although your premiums may increase at renewal time because your life expectancy is shorter, you’ll be able to renew your policy without having to prove your insurability again. Please note that several factors affect the cost of life insurance, such as your current health, whether or not you are a smoker, and any pre-existing conditions.
HOW MUCH INSURANCE DO I NEED?
The amount will vary based on your personal financial situation. How much debt do you have? What are your monthly expenses? What are your family goals?
As an Independent Insurance Advisor, we help determine the right amount and the best company to meet your needs. Setup a free consultative meeting to find out the best options for you.
Prepared by Broadridge Investor Communication Solutions, Inc.
Dan Kuderer 