If you’ve ever thought about buying life insurance, you wouldn’t be the only one. Almost 60% of all Americans are covered by some sort of life insurance coverage, though about one in five feel they need more. Do you think you need more coverage? How much life insurance coverage do you actually need? And what exactly is covered by which kind of life insurance policy?
Unfortunately, life insurance is often misunderstood, and people aren’t quite sure about its benefits. Even those with coverage may not completely understand how life insurance works. And many of us find it an uncomfortable topic to discuss, so our questions go unanswered.
As you start to shop around, ask these questions of yourself and use our answers as guidance. If you do this, you’ll find you have a better understanding of the ins and outs of life insurance.
Why do I need life insurance?
Life insurance is often thought of as being more complicated than it is. Simply put, it’s a form of financial protection for surviving loved ones and family members if you die. The most common benefit of life insurance is money being paid out to beneficiaries upon the policyholder’s death.
Although life insurance may not be right for everyone, there are many situations in which it could be beneficial. For these situations, life insurance is worth it:
- Parents of young children want to make sure their families will be taken care of if anything were to happen.
- Students who have a co-signer on their student loans and don’t want to leave a financial burden behind for someone else to take care of.
- Spouses who want to provide for the surviving spouse in the event of their death.
Each situation is unique, but they all address the issue of what happens to your debt after you die. In most cases, there will still be bills, expenses, and other financial obligations to cover after someone passes away. These debts usually fall to loved ones, who are already feeling a heavy emotional burden, so it’s essential they have the financial means to pay these debts and bills.
Who should be my beneficiary?
Your life insurance beneficiary is the person you name in your policy who will receive the life insurance benefits upon your death. You can name one or multiple beneficiaries. Most of the time, policyholders name their loved ones as their beneficiaries. These are the people who would most need financial assistance if there was a sudden change in income.
For example, a family of two parents and two children might take out life insurance policies on both parents. Each parent might name the other as a beneficiary on their policies. If one parent is the primary breadwinner and dies, the other parent would be able to replace that income with the life insurance benefits. If one parent is the primary caregiver and passes away, the other parent would be able to use life insurance benefits to pay for childcare services.
In this example, it would make sense for both parents to name their children as beneficiaries as well, contingent on the fact that both parents die at the same time. That way the benefits would take care of the children financially in that case.
Whom you name as beneficiary depends on your situation. If you don’t have a spouse or kids, you can name someone else as a beneficiary. You can also name a nonprofit organization or charity.
Doesn’t my employer cover my life insurance?
Employers will often offer group life insurance policies to their employees. You usually don’t have to take a medical exam or answer any questions about your health or medical history to qualify for these plans. Even better, they’re generally less expensive than an individual policy you’d buy yourself.
There’s no real disadvantage to taking group life insurance through your employer, especially if it’s offered at no cost to you. However, the coverage amount may be limited so you might want some additional insurance to satisfy what you project to be your life insurance needs.
In most cases, basic group life insurance will offer a death benefit that equals your annual income or a lesser fixed amount. This amount is usually $50,000 or less. If you think you need additional coverage, you would need to look into individual policies.
How much life insurance do I need?
If you’re married and have young children, what do you think they would need financially if you were no longer around? If you are leaving behind a spouse, how much will they need to live without stress? Your salary will end upon your death, but there will still be expenses your family members will have to take care of, and knowing how much they’ll need isn’t always as simple as replacing your annual income.
How much life insurance you need will be determined by a number of factors:
- Marital status
- Number of dependents
- Future education expenses
- Family income
- Funeral and burial expenses
You can figure out the amount of life insurance you may require by following a few simple steps:
- Determine how long you want the benefits to last. For example, if you have preteen children and they’ll be done with college in 10 years, you may want to aim to cover 10 years of expenses with your life insurance benefits.
- Calculate your income. Multiply your annual income by the length of time you came up with in the first step.
- Examine your expenses. Will your annual income multiplied by the years you want covered be enough to pay for the mortgage, car payments, and other debts? What about your funeral and burial expenses? Add the cost of expenses to your income total. Don’t forget about future college expenses, if applicable.
- Factor in your savings. If you have savings and investment accounts, you can subtract their totals from the amount you came up with in step three. This final number should give you an estimate of how much life insurance you might need.
Here are two examples of how to use these steps
- A family of four (two parents and two children) with a household annual income of $60,000: They want enough benefits to cover them for 10 years, based on the current age of their children. They calculate 10 years of income to be $600,000 and that should cover general expenses, such as mortgage, car payments, and other debts. For funeral and burial expenses, they add $8,000. For college expenses for their two children, they add $100,000 each. They currently have no savings or investment accounts, so their total estimate on the necessary life insurance coverage for their needs is $808,000.
- A married couple without children with a combined household annual income of $150,000: They want benefits coverage for 10 years, based on current expenses and annual income. They calculate 10 years of income to be $1.5 million and that should cover their expenses, such as mortgage, car payments, and other debts. For funeral and burial expenses, they add $8,000. They have $250,000 in savings and investment accounts, which they can subtract from their total coverage estimate. Their total estimate on the necessary life insurance coverage for their needs is $1.258 million.
Keep in mind these are examples only and may not account for everything your family members could need money for. Many people will add some money onto their estimate simply to account for unforeseen expenses.
What is term life insurance?
Term life insurance is one of two common types of life insurance coverage, with the other being whole life insurance. With term life insurance coverage, the policyholder is covered during the course of the term, which can last a number of years, typically from one to 30. This means the policyholder must die within the course of the term for any benefit to be paid out.
If your term ends and you still want life insurance coverage, you have a few options:
- Extend the policy. Most policies don’t typically expire, even once you’ve hit the end of the term. You can keep paying for life insurance, but your premiums will most likely be a lot higher.
- Convert from term life to whole life. Your current term life policy may have an option for converting it to whole life. If you go this route, you can expect to pay more on your premiums because whole life insurance is more expensive.
- Start a new policy. Often, the least expensive option will be to shop around for a new life insurance policy, whether with the same company or a new one. If you’re still relatively healthy, there are plenty of options to choose from.
Unlike term coverage, whole life insurance is a type of life insurance that covers the policyholder for life. This insurance is often called permanent life insurance because there’s no set term, so benefits will come into play whenever the policyholder dies. Because this coverage could last well over 50 or more years, the premiums are generally higher on whole life policies compared to term life insurance policies.
In general, term life insurance is less expensive and more straightforward. It’s how most people understand how life insurance works. If the policyholder dies within the term, beneficiaries can receive a tax-free lump sum payout.
Universal life insurance is a type of whole life insurance that typically has a cash account attached to it. The cash account can act as a form of savings or investment account that can earn interest or investment gains (or possibly incur investment losses). The policyholder can access the cash account during their lifetime, though any withdrawals or loans from the account may affect the policy’s death benefit. In most cases, the cash account is built up by the premiums you’re paying on the policy.
What is a death benefit?
The tax-free lump sum payout associated with term life insurance is called a death benefit. This is what is paid to any beneficiaries listed on the life insurance policy. The amount paid depends on how much coverage you signed up for. The total amount can be divided among beneficiaries as you see fit.
In most cases, the coverage you signed up for will be what’s paid out as the death benefit. So if you bought a $500,000 life insurance policy, that should be the amount paid out upon your death.
What is an underwriter?
An underwriter is a person who works for or on behalf of a life insurance company. They assess your life insurance application and calculate how much your premiums will be by reviewing the provided information. You may be required to take a medical exam, provide medical records, and/or answer questions about your health and medical history, habits, and occupation during the application process.
If the life insurance quotes you receive when you are shopping for life insurance come back higher than you expected, it may be because of concerns the underwriter has about your health and/or lifestyle. Let’s say you smoke or have a serious health condition. The life insurance company is taking on more risk by insuring you compared to someone who doesn’t smoke or have a serious health condition. You would have a higher likelihood of dying while under coverage and it would have to pay out money.
Why do I need a medical exam to get life insurance?
In some cases, you may have to take a medical exam to qualify for life insurance. It’s a common practice for many life insurance companies because it helps the underwriter assess the amount of risk you present. If qualified medical professionals find something wrong with your health or lifestyle choices, an underwriter may deem you a higher risk and your premium payments could be more expensive.
Many companies require a medical exam, but some do not. Group life insurance policies offered by an employer will often not require a medical exam or even an application. Their coverages are limited, so the requirements are less.
However, you can also find life insurance companies that offer high amounts of coverage with their insurance policies, yet still don’t require a medical exam. Bestow Life Insurance is a company that provides affordable coverage through a quick and easy application process that doesn’t involve an exam. All you have to do is fill out an online application and you’ll get a quote within seconds.
Where do I buy life insurance?
These days, life insurance policies are widely available. You can easily contact an insurance company and talk to one of its agents about the life insurance products offered. A life insurance agent will answer any questions you may have and hopefully walk you through the entire application process as well as what you and your loved one will need to know about the implementation of the policy in the event of your death.
A more modern way of buying life insurance is getting online and using comparison shopping tools to find the best deal from a variety of insurance carriers. This way may be more efficient because you can see all the available policies (and their prices) in one place, which allows for an easy side-by-side comparison of the best life insurance companies.
You can also combine both approaches. You can do your research online and then if you are interested in a particular company or life insurance policy, you can call up an agent to get your specific life insurance questions answered. You’ll go into that conversation more prepared because you’ve already looked at the competition and know what’s available.
Bottom line on your life insurance questions
Life insurance doesn’t have to be complicated. It’s a form of financial protection that exists to help your loved ones and family members when they need it most. If you can better understand how life insurance works, you can better plan for unforeseen circumstances.
Remember, asking yourself the above list of life insurance questions will help you learn more about life insurance in general, as well as what you and your family members might need. Many of these are also great questions to ask if you speak with a life insurance agent.