Signing up for a life insurance policy is one of the most important things you’ll ever do. It can make all the difference to your loved ones’ continued quality of life when you are no longer there to look after them. Having life insurance can even help you take out a mortgage and buy a house.
There are various types of life insurance, and, like other types of insurance, it also has unique terminology. This can make it confusing for people who are new to life insurance. But don’t despair. It’s easier to navigate life insurance basics than you think.
What Is Life Insurance?
Like other types of insurance, a life insurance policy is a contract between an insurance company and the insured person. The insured person makes monthly payments, called premiums, and while they do so, the policy remains active.
However, unlike health insurance or auto insurance, only the insured person’s spouse, partner or family usually benefits from this contract. That’s because the insurer pays a sum of money to one or more named beneficiaries of the policy upon the death of the insured person.
What Does Life Insurance Cover?
Life insurance covers the insured person in the event of death. This can be an accidental death, death with homicide, or death because of natural causes. With a claim after a suicide, there is usually a waiting period involved before such coverage applies.
Some policies also cover the insured for serious disability and dread diseases like cancer. The type of policy you have and the terms and conditions determine what’s covered. They also decide if there are waiting periods and how long they are.
Who Needs Life Insurance?
Almost everyone needs life insurance. Here are some examples of who needs it and why.
Couples
If you’re married or cohabiting and your partner is financially dependent on you, you need life insurance. This will help them when you are no longer around to support them financially. Even if you have nothing else to leave them, your life insurance payout will be there to meet their needs.
Parents Of Young Children
If you didn’t take out life insurance after getting married or forming a partnership, you’ll want to do so when you start a family. If something happens to you while your children are still young, your life insurance policy will help with expenses such as schooling.
Single Parents
As a single parent, you have an even greater financial responsibility to your children than you would if you were raising them with a partner. You may have nominated someone to take care of them if you die while they are still young. However, a life insurance payout will help them with the expense of child-rearing.
Adults With Significant Debt
Do you have significant debt? If you die while still in debt, you will leave your family with those debts. A life insurance payout can help them settle those debts when they are gone.
Business Owners
Business owners have financial responsibilities that don’t go away when they die. If you have a life insurance policy, business expenses can be settled while your business affairs are passed onto the next in command, or the business is sold.
Older Adults
Older people sometimes think they don’t need life insurance because they no longer have young children to look after.
But with the inevitability of your mortality approaching, you need life insurance more than ever. The payout can help your remaining relatives with the cost of your funeral and burial.
Life Insurance Terminology
Risk Class
Life insurance risk factors are the information the insurer uses to underwrite a life insurance policy. These may include age, sex, health status, medical history, tobacco, alcohol, or other substance use, and even occupation and extreme hobbies.
Premium
The premium is the monthly amount you will pay to keep the policy in force. Your premium is set at the beginning of your policy. Certain conditions may affect your premium, depending on the type of policy you have (see below).
Beneficiary
The beneficiary is the person who receives the death benefit payout when you die. There can be more than one beneficiary. You decide who the beneficiary will be.
Death Benefit
This is the amount your beneficiary/ies will be paid in the event of your death. It is the payout they will receive. This is usually determined at the outset of the policy.
Types of Life Insurance Policies
Term
Term life insurance provides coverage for a specified term or period. Unlike permanent life insurance policies, term life insurance does not accumulate cash value over time. Instead, it is designed to provide a death benefit to beneficiaries if the insured person passes away during the term of the policy.
Term life insurance provides coverage typically for 10, 20, or 30 years. Once the term expires, the policyholder can choose to renew the policy, convert it to a permanent policy, or let it lapse.
Term life insurance does not accumulate cash value. This means that if the policyholder outlives the term, there is no return on investment, and the premiums paid are not refunded.
Permanent
Permanent life insurance is sometimes also referred to as ‘whole life’ insurance. It pays out the death benefit when the insured person dies, at any stage as long as the policy is still active. If you keep paying your premiums, you are covered throughout your whole life.
This type of coverage, too, can operate in different ways.
Traditional
In the traditional form of whole life insurance, the death benefit and the premium remain the same for the duration of the policy.The insurance company sets a premium that’s deliberately higher than the immediate cost of a claim.
Initially, the premium might seem excessive because it’s calculated to cover potential payouts many years down the line when the insured is older. However, the difference is invested to supplement the payout expense if the insured person lives to an old age.
If you decide to end the policy, and these ‘overpayments’ have reached a certain amount, the law requires that you receive them as a cash value.
Universal
This is a more flexible form of whole-life coverage, also known as ‘adjustable’ life. Here, that cash value account earns a money market rate of interest. Once a certain amount has accumulated in the account, you can adjust your premium payments.
Variable
A variable whole-life policy combines the death benefit with a savings account that can be invested in money market mutual funds, stocks, and bonds.
The value of the policy may rise more quickly. There is also the risk that the cash value and death benefit may decrease because of the innate uncertainty of investments. Because of this risk, some policies have a minimum level for the death benefit and guarantee it will not fall below that amount.
What Does Life Insurance Cost?
As with health insurance costs, your monthly premium will depend on various factors, such as the insurance company you choose, and the type of insurance policy you get. Term life insurance has the lowest premiums.
Your age and lifestyle choices (smoking, for example) can also affect what you pay. Your health status and family history of disease are also key factors in calculating what you need to pay. The younger and healthier you are, the more likely you are to live long and pay many years of premiums.
Men pay slightly higher premiums than women, as they have a lower life expectancy.
That aside, the average monthly premium for a 20-year, $250,000 term life insurance policy for a healthy 30-year-old is $12 to $13. This can be higher, depending on the factors listed above and the amount of the death benefit required.
Life Insurance Exclusions
Insurance companies often have exclusions in their policies. These protect them from financial risk but could mean bad news for the insured person. In cases governed by these exclusions, there may not be a payout on the person’s death.
For example, suicide exclusion may mean that the death benefit does not get paid off if the insured person takes their own life.
Death due to illegal activity, or high-risk activities like extreme sports, are other common exclusions. So, for a death because of driving while intoxicated or committing a crime, there may be no payout. The same could apply to accidental death in a bungee jumping accident.
The exclusions may differ from one policy to the next and usually apply to accidental death situations or suicide.
However, there are other reasons your death benefit could be withheld, particularly within the first two years ( the contestability period). This is most common in cases of misrepresentation of health status, such as an undeclared diagnosis of a terminal illness.
How To Get Life Insurance
The first step to getting life insurance coverage is to look at what is available in your state and narrow down your choice from there. Here are some factors to consider when making your choice.
Determine The Benefit You Need
Someone with a mortgage to pay, a spouse to support, and young children in school has different financial needs than a single person with no responsibilities. Therefore, the money needed to sustain their loved ones after they die will vary dramatically.
Determine the total amount your loved ones would need if you were to die soon. Include costs like rent/mortgage payments, schooling, and other living expenses. If your partner is not working, or you’re a single parent, you’ll need a higher death benefit to absorb those costs.
Check The Requirements
Check to see if you meet the policy requirements. Is there an age limit? Are there exclusions that you know would affect you? Insurers often hide those exclusions away in the fine print. Ask if there are exclusions or waiting periods, and ensure you know exactly what they are.
It is up to you to ensure that you meet all eligibility requirements and understand the terms and conditions of the policy. This will save your loved ones further heartache later if the insurer does not pay out because of a technicality. Most importantly, always give honest and accurate information.
Application Process
It’s possible to sign up for life insurance online. Besides filling in a form, the insurance company may contact you telephonically and ask a series of questions.
Many of these questions will relate to your health and lifestyle. Your answers will help the insurer calculate their risk, and your resulting premium.
They will ask you to submit certain documents to prove your identity, health status, and other important information. Emails and certified copies will usually suffice. Do not send any original documents in the post.
Medical Requirements
Before your policy can become active, you may need to undergo a medical check-up and possibly a blood test, and even a urine test.
Such tests are at the insurer’s cost. They do this to screen you for illness, drug use, and other risk factors that may exclude you from coverage, or raise your premiums. Failure to submit to these tests means you won’t be insured even if you met all other requirements.
Life Insurance And Taxes
Because health insurance premiums are sometimes tax deductible, people often wonder if the same is true for life insurance.
Death benefit payouts are generally not taxable or tax-deductible. However, there are a few exceptions.
- Should you withdraw the cash value portion of your policy (if applicable) these withdrawn amounts may be subject to income taxes.
- If you transfer a policy to a qualifying charitable organization, you might receive a tax benefit.
- Life insurance premiums, as part of an employee benefits package, might be a deductible business expense for the employer.
Conclusion
Life insurance is essential whether you are still young and starting your family, or a senior enjoying your retirement years. Life is unpredictable, but with adequate life insurance coverage, you and your loved ones will handle life’s challenges with total peace of mind.
Signing up for life insurance is the responsible and caring thing to do, to provide for your loved ones after you are gone. And at Enhance Health, we make it easy to sign up for a life insurance policy. Our team of experts will help you find the right one that suits your needs. Contact us today.
