The 2020 Insurance Barometer Report states that around 41 million U.S. residents want life insurance but don’t have it. Most people are unaware of life insurance coverage and have wrong perceptions about its affordability. The proceeds from life insurance can be helpful for your family when you pass away. Though discussing it is not a pleasing thing, we cannot deny its benefits. An insurance policy will help your family pay their utility bills and manage daily expenses in a better way.
Thus, before you purchase it, it is important to know what an insurance policy covers and what it doesn’t. Besides that, you must also know the types of insurance policies and their costs. Following is a breakdown of what a life insurance policy covers so that it gets easier for you to make an informed decision.
What Does Life Insurance Cover?
Life insurance is a deal between the best insurance company and the insurance policyholder. According to the contract, the company has to pay a death benefit to the policyholder’s family if they pass away. Furthermore, life insurance policies are of different types and cover a wide range of expenses depending on your choice. Policyholders usually get life insurance so that their family meets the financial obligations such as
- Mortgage payments
- Burial and funeral costs
- School and tuition fees
- Daily expenses, including bills and groceries
- Outstanding loans or personal debts
Besides that, you don’t need to obtain life insurance just to meet your financial obligations. Some people also use this policy to build an inheritance for their children and grandchildren. Plus, some people use these funds to manage their expenses even when they’re alive. You can also use a life insurance policy to give charity to an organization of your choice.
However, you must also remember that you can get the full benefits of an insurance policy only when you pay back the amount before dying. You can borrow against your life insurance policy if you’re paying the premium. But these loans also lower the number of death benefits to your family if you don’t repay the loan. If you aren’t concerned about the death benefit, you can also use life insurance to repay loans.
What Doesn’t Life Insurance Cover?
To obtain life insurance policy benefits, you must consider some factors that make it difficult to obtain the death benefits. The policy covers almost all the causes of death, including accidents, natural deaths, homicide, and suicide. However, Dr. Steven Weisbart of the Insurance Information Institute states that two main factors make one ineligible for life insurance. These reasons include misrepresentation of the insurance policy holder’s death or a payment lapse.
Thus, giving accurate information about the policyholder’s health to the insurance company is important. If the information is inaccurate, the insurance company can deny the claim. This holds true for the time that starts after you purchase the policy; it is normally a two-year span called the contestability period.
Besides that, if the beneficiary is involved in the homicide of the policyholder, the insurance company can deny the claim. The life insurance company takes this step to prevent crimes as the beneficiary may plot to kill the policyholder to claim the death benefit.
Insurance companies also have certain rules for suicides because sometimes the policyholder can commit suicide so that their family gets the benefits immediately. Thus, life insurance companies set a particular period for the policyholder to obtain the benefits, normally two years.
Furthermore, a life insurance company can deny death benefits if the policyholder engages in risky activities like mountain climbing or skydiving. Though these limitations are not put forward by all insurance companies, you must consider them before buying an insurance policy.
How to Choose the Type of Life Insurance?
There are different types of life insurance policies that you can choose from; however, you must first determine your requirements. This includes your reason for buying the policy, investment goals, and available finances. Depending on your requirements, you can choose from the following main types of life insurance policies:
Term Life Insurance
What is term life insurance means? Well as the name suggests, term life insurance provides coverage for a particular time. Depending on the insurance company, the duration includes 15 to 20 or 30-year policies. The premiums on term life insurance work are affordable, but it doesn’t contain a cash value. During the term, the policyholder has to pay premiums on agreed and fixed terms for a death benefit. This coverage ends when the term ends, but some insurance providers can also allow you to make it a permanent policy.
This type of life insurance can be useful for those who want coverage if their children are too young or their spouse cannot earn financial protection. As a result, the term life insurance policies are the most purchased due to their affordability. So, the main idea is that if the policyholder passes away during the policy term, the beneficiaries will get the death benefit.
Whole Life Insurance
Whole life insurance is a kind of permanent life insurance. According to this type of life insurance, the policyholder gets coverage for the whole life, provided they pay the life insurance premiums on time. This is also a very common insurance policy, and people purchase it to obtain death benefits for their beneficiaries. Unlike the term life insurance, this type also offers a cash value.
There are numerous benefits of this insurance; you can take out a loan or withdraw the funds. Plus, the premiums don’t increase and are fixed even if the market conditions change. Another big benefit is that you’re guaranteed death benefits if you make timely payments for the premiums. The separate cash value component keeps growing as you make the premium payments. The policyholder can withdraw this amount against the cash value if they want to meet any expenses while alive.
However, whole life insurance is more expensive than term life insurance. But it has more benefits too because you won’t have limited terms like in-term life insurance. Whole life insurance is a good option if you want a cash value component in your insurance policy.
Universal Life Insurance
Universal life insurance is similar to whole life insurance as it provides coverage for your whole life if you make regular premium payments. This type of permanent life insurance also has a cash value, but unlike whole life insurance, this value changes according to the changes in the market. Consequently, when the market rates are high, the cashback value of this policy will grow faster. But if the market is not performing well, the cash value will grow quickly.
Besides lifelong protection, universal life insurance has several benefits. For instance, you can withdraw your money or borrow against the cash component of the policy. You also get some flexibility with the premiums and adjust the death benefits according to your requirements. In addition, your cash value continues to earn interest. Universal life insurance is a good option if you’re considering a more flexible plan. People choose this insurance because it allows them to adjust the death benefits and be flexible with the premiums.
Other Types of Insurance
Besides these main insurance policies, a life insurance company offers several other types of insurance. For example, there are no medical exam policies that some insurance companies provide which allow you to obtain an insurance policy without any physical exam. Besides that, there is variable life insurance with a cash value and death benefit, just like universal and whole life insurance.
The main difference is that with variable life insurance, the cash value grows through investments, including bonds, mutual funds, and stock options. This means that the cash value will grow quickly when the market condition is favorable but also decrease drastically if the market condition is bad.
Some life insurance companies offer a mix of different types of life insurance, such as combining some features of universal and term life policies. This can also prove to be very beneficial for those policyholders who are looking forward to getting the best of different types of policies.
Is Life Insurance Really Important?
Life insurance can prove to be a worthy investment depending on the type of insurance. Though it can help supplement your current investment strategy, it might not be a good choice for everyone. The investment can prove to be beneficial for insurance with a cash value and tax benefits.
Life insurance is a tax-free investment that your beneficiaries receive, but in some cases, the beneficiary might be asked to pay the taxes. However, most of the time, the amount is not taxed, and the beneficiaries receive the full amount of the policy as a death benefit. Discussing everything with an insurance agent and a financial planner is always good if you’re considering life insurance work as an investment.
When is Life Insurance not Important?
In rare cases, buying a life insurance policy might not be a good decision. For example, it’s no use buying this policy if you don’t have any dependents. Plus, if you have enough savings and investments to prove financial security for your dependents, you don’t need to worry about buying life insurance.
Is Life Insurance a Worthy Investment?
Depending on the type of insurance, life insurance can prove to be a worthy investment. Though it can help supplement your current investment strategy, it might not be a good choice for everyone. For insurances with a cash value and tax benefits, the investment can prove to be really beneficial.
Life insurance is a tax-free investment that your beneficiaries receive, but in some cases, the beneficiary might be asked to pay the taxes. However, most of the time, the amount is not taxed, and the beneficiaries receive the full amount of the policy as a death benefit. It is always good to discuss everything with an insurance agent and a financial planner, too, if you’re considering life insurance work as an investment.
How Much Life Insurance Do I Need?
To figure out the size of the life insurance policy you need, you must determine the reason for purchasing the policy. If your main aim is to buy something that will benefit your family after your death, you must consider the size of the policy that replaces your current income.
Since your income acts as financial security when you’re alive, after death, the life insurance will take care of that for your family. Apart from that, you must add the funeral and burial expenses to it, which your family will have to pay later.
Additionally, to figure out the size of the policy, you must also consider any expenses that you’d want to cover in the future. For example, if you want to arrange something for your child’s education expenses or to pay the mortgage, you must decide on the cost of the insurance policy accordingly.
In the end, the amount of money will depend on the amount necessary to meet your beneficiaries’ requirements. Always discuss these things with a financial planner or advisor to come up with the right amount of life insurance policy.
How Much Does Life Insurance Cost?
The amount of life insurance depends on various factors, varying from person to person. Before purchasing a life insurance policy, you must consider a few factors that might influence the premium payments:
A life insurance policy is cheaper for young people or those who are healthy. However, as the person grows older, the premiums on the policy also increase. So, it is good to consider buying a life insurance policy when you’re young because buying a new policy at an older age comes with high premiums.
This is too predictable; premium payments for healthy people are lower than for those who are suffering from an illness. Healthy people can get insurance policies at good rates, and thus the insurance companies conduct physical exams. During this exam, the insurance provider verifies if you have serious health conditions like heart disease or cancer.
A bit odd, but it’s a fact that life insurance companies charge higher premiums to men as compared to women. Perhaps this is because men are mostly the sole-earner in the family, and they purchase insurance to provide financial security to their families. Plus, statistics also say that men have a shorter life expectancy than women. Maybe the insurance providers have read this already and come up with higher premiums for men.
The type of insurance policy can make or break your experience as a policyholder. The insurance type is also the main factor affecting the premium payments. Term life insurance is the most affordable, with long-term policies a little more expensive than short-term ones. Besides that, permanent life insurance policies include whole life and universal insurance, which are more expensive than term life insurance. However, the coverage is for the entire life of the policyholder.
The insurance cost also impacts the occupation and hobbies of the policyholder. Some jobs are riskier than others; thus, a policyholder with a risky job will have expensive life insurance. This is because some occupations and hobbies are too risky, and they can end up in an accident easily. These jobs increase the chances of death; thus, insurance companies mostly avoid policyholders with such occupations or ask them to pay more.
Smoking and Tobacco Usage
Smoking and tobacco usage are linked to an increased risk of health conditions such as lung diseases, asthma, strokes, and heart attacks. Thus, according to the CDC, a policyholder who smokes or uses tobacco has a higher risk of death as compared to a non-smoker. So, as a policyholder, you’ll have to pay more for life insurance if you’re a smoker.
Cost Comparisons for Different Life Insurance Policies
Below is a comprehensive chart that explains the cost comparisons of different life insurance policies according to the above factors. While going through the table, you’ll notice how the rates change according to the change in gender, age and if the policyholder is a smoker or non-smoker.
The chart shows that life insurance is more expensive for males whether they smoke or not. So, a 30-year-old healthy male policyholder will have to pay more to get life insurance than a 30-year-old woman.
|30-year-old male||30-year-old female||40-year-old male||40-year-old female|
|Universal Life Policy||$457.23||$390.52||$673.81||$578.85|
|Whole Life Policy||$791.94||$666.92||$1224.72||$1003.06|
As you can see, the chart explains the difference in rates according to gender. Let’s consider the Universal Life policy, which costs $457.23 for a 30-year-old male, while the same policy costs $390.52 for a 30-year-old female. Some people explain that this difference is due to life expectancy. It is said that males have lower life expectancy than females; thus, the insurance provider charges more than a male. Similarly, if we look at the Whole Life Policy, it costs $1224.72 for a 40-year-old male and $1003.06 for a 40-year-old female. Now let’s have a comparison of life insurance policies for non-smokers:
|35-year-old male||35-year-old female||45-year-old male||45-year-old female|
|Preferred Plus Non-Smoker||$39.51||$33.61||$93.87||$72.68|
|Standard Plus Non-smoker||$72.52||$57.09||$158.75||$121.89|
The cost difference between males and females is still huge for the different tiers of non-smokers. For non-smokers, the insurance providers have set categories: Preferred Plus, Preferred, Standard Plus, and Standard. The Preferred Plus tier is for those in good health, and thus it is the cheapest. These policyholders don’t have any health issues, including high blood pressure, obesity, diabetes, heart diseases, and more.
Besides that, if you’re a Preferred policyholder, you are healthy, but your tests indicate that you’re closer to the upper limits. Policyholders in the Standard Plus category are those getting medical treatment for a health condition, but their health metrics are still within the normal range. However, the Standard policyholders are those treated for a health condition and have family members who have died from cancer or heart disease before 60.
Frequently Asked Questions
How to file a life insurance claim?
Life insurance companies have different methods for filing claims. If you have to file a claim for life insurance, you can contact the insurance provider via email or call. However, before you make a claim, you must gather relevant information to obtain the death benefit. The information includes the policyholder’s SSN, date of birth, original death certificate, and insurance policy number.
After gathering this information, you can call the insurance company or contact them through email or on their official website. If you have an insurance agent, you can also file a claim in person. When someone files a life insurance claim, the company provides a form that one must complete and return to the provider. While providing the information, the beneficiary should also state how they would like to receive the death benefit.
Once you’ve filled out the form and completed all the documentation, you can send it along with the death certificate and other important documents. The insurance company will review your claim and approve it; if it’s valid, then they will issue the payment, which you can receive as the beneficiary.
How to purchase life insurance?
To purchase life insurance, you must first determine your requirements and then find the right insurance provider. You can compare different insurance providers and their policies to see what’s the best match for you.
Once you have selected an insurance company and the policy type, you can complete your application by filling out a form. The insurance provider will ask you to undergo a physical exam to determine your health. When your application is processed and approved, you’ll start making the premium payments according to the schedule you and the provider have agreed upon.
Does life insurance coverage include death by suicide?
Insurance providers do not promote suicide, so most companies approve a claim only if the policy has been active for two years. According to the fine print of insurance companies, it is not necessary if the policyholder is termed sane or not. The policyholder has to fulfill the two-year window for their beneficiaries to obtain the death benefit.
Suicide is never a solution, even if you’re trying to help your family with death benefits. Having you around is more important to your family than having the life insurance benefits they get after your death. Since there are so many clauses and conditions for insurance coverage for suicide, one must never consider it as an option.
Is life insurance taxable?
The death benefit from life insurance is not usually taxable, but sometimes you’ll have to pay taxes on the death benefit you receive as a beneficiary. For instance, if the policyholder has paid for the death benefit in installments, the beneficiary will have to pay the interest that remains for the amount. Sometimes the beneficiary is the estate instead of an individual; in this case, you’ll have to pay taxes if the estate’s total value exceeds the limit the IRS has set.
Are there any drawbacks to life insurance?
There are a few drawbacks of purchasing life insurance that you must consider before making a decision. The first disadvantage is that life insurance is expensive, especially if you’re still struggling financially and are young. Besides that, the premium payments can increase over time, making it difficult to make timely payments. In addition, life insurance companies have a window for providing death benefits to the beneficiaries, and if the policyholder dies before that window, the beneficiaries won’t receive anything.
What is permanent life insurance?
A permanent life insurance policy is a type of life insurance that covers your entire life, which means it never expires. This policy also includes a growing cash value component which you can withdraw or borrow against over the period. The main types of permanent life insurance include whole and universal life insurance.
Conclusion: What I Require To Know About Life Insurance?
There are numerous benefits of purchasing life insurance; most importantly, your loved ones will benefit from it. Your family and dependents get financial security once you’ve passed away, and this is the best you can do for them to have a secure future. The amount your beneficiaries receive as the death benefit is very helpful as they can use it for meeting their expenses. Coverage gives peace of mind to the policyholder as they know their loved ones will have some strong financial security even if they aren’t there.