Understanding Life Insurance Fees And Their Impact

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person passes away. The purpose of life insurance is to provide financial security to your loved ones upon your death. The cost of a life insurance policy depends on factors such as the type of policy, the amount of the death benefit, the riders you add, and your overall health. Life insurance policies fall into two categories: term and permanent. Term life insurance covers you for a set number of years, while permanent life insurance does not expire and will cover you for your whole life.

The cost of life insurance

There are two main types of life insurance: term and permanent. Term life insurance is usually the cheaper option, as it only covers a set number of years, whereas permanent life insurance covers you for your whole life and includes a cash value component.

The cost of term life insurance depends on the length of the term and the amount of coverage. For example, a $50,000 policy for a healthy 25-year-old woman will cost approximately $14 a month, while a 55-year-old woman would pay around $60 a month for the same amount. For men, the same policy would cost a 25-year-old approximately $22.50 and a 55-year-old $86.50.

Permanent life insurance is more expensive than term life insurance because it lasts for the policyholder's entire life and includes a cash value component. The three most common types of permanent life insurance policies are whole, universal, and variable. Whole life insurance policies don't have an expiration date, and a portion of the premiums you pay builds cash value over time. Universal life insurance provides the same lifetime coverage and potential to build cash value, with the added flexibility to skip a premium payment if you have enough cash value in your policy. Variable life insurance has the potential for even greater growth over time, as it can increase the value of certain subaccounts within the policy.

Life insurance is often more affordable than people think, and it's worth getting a quote to see how much you would pay for the coverage you need.

Term vs. permanent life insurance

Life insurance is a contract between you, the policyholder, and a life insurance company. In exchange for regular premium payments, the company will provide your beneficiaries with a death benefit or payout when you pass away.

There are two types of life insurance: term and permanent. Term insurance covers you for a specified time period, such as 10, 20, or 30 years. Permanent insurance, on the other hand, provides coverage for your entire life.

Term Life Insurance

Term life insurance is a simple and relatively inexpensive way to get life insurance coverage. If you die while the policy is in force, your beneficiaries will receive a payout. If you don't, the policy stays in force until the end of the term. Term life insurance is often compared to renting an apartment—you plan to use it for a limited period of time, it's less expensive than other options, and you don't build equity.

Term life insurance is best suited for those who:

• Only want coverage for a specific period of time, e.g. to replace income or pay off debts
• Are looking for the most affordable coverage option, especially if they are young and healthy
• May want permanent life insurance in the future but cannot afford it at the moment
• Do not want to use life insurance to accumulate cash value and would rather invest their money elsewhere

Permanent Life Insurance

Permanent life insurance provides protection for your entire life and doesn't expire like term life insurance. It is often compared to purchasing a home—you own it for life as long as you continue to pay premiums, it is typically more expensive, it has equity (cash value) that grows over time, and it can be borrowed against.

Permanent life insurance is generally more expensive than term insurance, but it can be used as a financial tool during your lifetime. The cash value can be withdrawn, borrowed against, or listed as an asset when applying for credit.

Permanent life insurance is a good option for those who:

• Need long-term financial protection
• Want to create an inheritance for their heirs
• Are looking for a tax-advantaged way to save for future expenses
• Prefer stable premiums

Choosing a beneficiary

There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person first in line to receive the death benefit from your life insurance policy. Typically, this is your spouse, children, or other family members. A contingent beneficiary, also known as a secondary beneficiary, is a backup beneficiary who will receive the death benefit if the primary beneficiary dies before or at the same time as you.

When choosing a beneficiary, it's essential to consider your reasons for having life insurance in the first place. Ask yourself: Who relies on you financially and would need help with ongoing bills if you die? Who would need financial support to cover costs incurred by your death, such as funeral expenses? Who would you like to leave money to, regardless of whether they rely on you, such as a charity or a trust for your children?

It's also crucial to be as specific as possible when designating a beneficiary. Instead of writing "spouse" or "child," include identifying factors such as the beneficiary's full name, Social Security number, relationship to you, date of birth, and address. This helps the insurance company locate your beneficiaries quickly.

Additionally, keep your beneficiary designations up to date as your life changes, such as in cases of marriage, divorce, or the birth of children. Most financial services companies provide forms or websites to designate your beneficiary, and you can typically change, add, or remove revocable beneficiaries at any time.

When and how beneficiaries get paid

When a policyholder passes away, their beneficiaries must contact the insurance company to start the claims process. The insurance company will not automatically know when a policyholder has died. The beneficiary must file a claim with the life insurance company, as benefits are not automatically paid out. While the rules can differ by state, the insurance company will typically require beneficiaries to verify the death of the policyholder and their identity and relationship to the policyholder.

The death benefit is typically paid out as a lump sum, though some policies may offer other options like instalment payments or an annuity. The beneficiary can also select how much money they wish to receive. For example, they can receive all the money as a lump sum, by way of an instalment or annuity plan, or a retained asset account.

In general, once a valid claim has been filed, payment is typically made within 30 days, although it can sometimes take up to 60 days. If there are multiple beneficiaries, each person must file their own claim.

Riders and additional features

Riders are optional add-ons to a life insurance policy that provide additional coverage and benefits. They are usually associated with permanent life insurance policies and can be added when purchasing life insurance. Riders offer added flexibility and financial protection and support, even while the policyholder is still alive.

• Guaranteed Insurability Rider: This rider allows the policyholder to purchase additional insurance coverage without the need for a medical examination. This is especially useful when there are significant changes in life circumstances, such as the birth of a child, marriage, or an increase in income.
• Accidental Death Rider: This rider provides an additional payout on top of the standard death benefit if the policyholder's death is caused by an accident. This is often called a double indemnity rider as it usually doubles the benefit amount.
• Waiver of Premium Rider: This rider waives future premiums if the policyholder becomes permanently disabled or loses their income due to injury or illness before a specified age.
• Family Income Benefit Rider: This rider provides a steady flow of income to the policyholder's family in the event of their death. The income is paid out monthly for a specified number of years.
• Accelerated Death Benefit Rider: This rider allows the policyholder to access a portion of their death benefit if they are diagnosed with a terminal illness that will significantly reduce their lifespan.
• Long-Term Care Rider: This rider provides monthly payments if the policyholder requires long-term care, such as staying in a nursing home or receiving home care.
• Return of Premium Rider: With this rider, the policyholder pays a marginal premium and gets their premiums returned in full at the end of the term. In the event of the policyholder's death, the beneficiaries will receive the paid premium amount.
• Term Conversion Rider: This rider allows the policyholder to convert a term life insurance policy into a whole life policy, providing permanent coverage at a later stage in life.

Frequently asked questions