Life Insurance: Pitching For Protection

Life insurance is a contract between an individual and an insurance company. The individual pays premiums to the insurance company, and in exchange, the insurance company pays a sum of money to the individual's beneficiaries upon their death. The purpose of life insurance is to provide financial security to the beneficiaries of the insured, who are usually the individual's family members or loved ones. The sum of money paid out by the insurance company can be used to cover living expenses, pay off debts, fund children's education, or keep a family business running.

There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance covers the insured for a fixed amount of time, such as 10, 20, or 30 years. If the insured dies during the covered period, the beneficiaries receive the death benefit. Permanent life insurance, on the other hand, covers the insured for their entire life, assuming premiums are paid. This type of insurance also has a cash value component that grows over time and can be borrowed against or withdrawn.

When purchasing life insurance, individuals should consider factors such as their age, health, lifestyle, and the amount of coverage needed. Life insurance premiums vary depending on these factors, with younger and healthier individuals typically paying lower premiums. Additionally, it is important to compare quotes from multiple insurance companies to find the best coverage at a reasonable price.

How to choose the right life insurance policy type

There are two primary types of life insurance: term and permanent. Term life insurance covers you for a fixed amount of time while permanent life insurance can cover you until the end of your life. When choosing the right life insurance policy type, consider the following:

Term Life Insurance

Term life insurance is a good choice if you only need life insurance for a specific amount of time, for example, to cover your working years as possible income replacement for your family if you pass away. Term life insurance is also a good option if you're on a tight budget as it's significantly cheaper than permanent life insurance. It's also generally the most popular type of life insurance sold.

With term life insurance, you can choose the term length, typically 10, 15, 20, 25, or 30 years. If you pass away within the term, your beneficiaries will receive the death benefit. However, if you don't die during the term, no payout is made.

Term life insurance is often chosen to cover large debts like a mortgage, to provide income replacement, or to fund a child's education. It's also a good option if you want to protect your interest in a business, as it can fund buy/sell agreements or provide coverage for key people.

Permanent Life Insurance

Permanent life insurance provides lifelong coverage and is more expensive than term life insurance. It can last for the duration of your life, usually builds cash value, and has internal policy costs. The cash value component accumulates on a tax-deferred basis and can be borrowed against, withdrawn, or used to pay premiums.

There are several types of permanent life insurance policies:

• Whole life insurance offers a fixed death benefit and cash value component that grows at a guaranteed rate of return. Whole life insurance policies often pay out dividends, which can be used to reduce premium payments or increase the cash value.
• Universal life insurance offers more flexibility, allowing you to alter premium payments and the death benefit within certain limits. The cash value within universal policies can fluctuate.
• Indexed universal life insurance allows you to allocate the cash value to index funds chosen by the insurer.
• Variable universal life insurance is more flexible and complex, allowing policyholders to funnel their cash value into investment subaccounts to increase returns. However, these investments come with more risk.
• Variable life insurance is an alternative to whole life insurance with a fixed payout. Policyholders can use investment subaccounts to grow the cash value.

Factors to Consider When Choosing a Policy Type

When deciding between term and permanent life insurance, consider your budget, how long you need coverage for, and whether you want to build cash value. Term life insurance is ideal for those with limited budgets who only need coverage for a specific period. On the other hand, permanent life insurance is suitable for those seeking lifelong coverage and interested in building cash value.

How much life insurance do you need?

The amount of life insurance you need depends on your financial goals and needs. Here are some factors to consider when determining how much life insurance coverage you should have:

• Debts and expenses: Calculate all your outstanding debts, including mortgage, credit cards, car loans, and personal loans. Your life insurance coverage should be enough to pay off these debts, preferably with some extra to settle any additional charges and interest.
• Income replacement: If you are the primary breadwinner, your life insurance coverage should be sufficient to replace your income for a certain number of years, factoring in inflation. A common guideline is to get coverage worth 10 times your annual income.
• Family situation: Consider your family's financial needs, especially if you have children or other dependents. You may want to ensure their living expenses and education costs are covered until they become financially independent.
• Spouse's coverage: Even if only one spouse is the primary breadwinner, both spouses may need life insurance coverage. In the event of the death of a non-working spouse, the working spouse may incur additional costs such as childcare or household services.
• Business partnerships: If you have shared financial responsibilities or co-own assets with a business partner, consider getting life insurance coverage for them as well. Their death could significantly impact your financial situation.
• Funeral and final expenses: The cost of funerals and end-of-life expenses can be significant. Ensure your life insurance coverage includes these expenses, especially if you don't want to leave your loved ones with this financial burden.
• Existing assets and beneficiaries: If you have significant assets and beneficiaries to receive them, you may not need as much life insurance coverage. However, make sure your coverage is sufficient to cover any remaining debts and expenses.
• Age and health: The cost of life insurance increases with age, as the risk of death is higher. Additionally, pre-existing health conditions or risky hobbies may result in higher premiums or limited coverage options.

How is life insurance priced?

Life insurance premiums are based on a variety of factors that are evaluated during underwriting—the process by which the insurance company examines the risks, decides how much life insurance to offer an individual, and sets the price. While companies weigh these factors differently, they have similar concerns. The goal is to determine how much risk the company will take on if it decides to insure an individual. Individuals who are found to be lower risk (less likely to die early on) will usually pay less or be offered more coverage than those who are considered higher risk. Here's a closer look at the factors that go into pricing a life insurance policy.

Age

The age of an applicant is one of the most important factors in policy pricing. The younger you are when you get coverage, the lower your premiums are likely to be. Life insurance rates increase as you get older, with age 65 seeing a sharp jump in average monthly premiums. This is because, as you age, your life expectancy decreases, and the likelihood of your insurer having to pay out your policy increases.

Gender

Since women typically live longer than men, their premiums are often lower than they would be for a man of similar age and health. On average, men pay 23% more for term life insurance than women.

Tobacco Use

Tobacco use has been linked to an increased risk of heart disease, lung cancer, emphysema, and other medical conditions. As a result, tobacco users will pay more in premiums than non-users. Smokers, on average, pay premiums that are 218% higher than those of non-smokers.

Health and Family History

Health factors are another major consideration for insurance companies when determining premiums. People with a history of health issues or whose families have a history of health issues are at greater risk than healthy individuals, and their premiums will reflect this.

Occupation

Since the risk of death or injury is higher in certain occupations than others (e.g., firefighters, police officers, construction workers), people in these professions may have higher premium payments than those in low-risk jobs.

Amount of Coverage

The more insurance coverage you get, the higher the premiums are likely to be. The dollar amount that would be paid to your beneficiaries when you die is called the life insurance policy's face value, and it is essential to your financial planning.

Type of Policy

Life insurance comes in two primary types: term life insurance and permanent life insurance. Permanent life insurance, which includes whole life and universal life insurance, is more expensive than term life insurance but offers lifelong coverage and the opportunity to accumulate cash value. Term life insurance is typically the cheapest option because it has fixed rates for a specific period and does not build cash value.

Lifestyle and Behaviour

Other factors that help determine your risk level and, consequently, your life insurance rates include your driving record, criminal history, hobbies, and lifestyle choices. Reckless driving, DUIs, risky hobbies like skydiving, and heavy alcohol consumption can all lead to higher insurance rates.

How to get life insurance quotes

Getting life insurance quotes is a straightforward process. You can either contact a local insurance agent or broker, look for online marketplaces that offer products from several insurers, or contact the insurance company directly. Here are the steps to get life insurance quotes:

• Determine your needs: Consider your financial situation, including any outstanding debt, income level, occupation, and medical conditions. Calculate how much coverage you need and what type of policy would be suitable (term, whole, or universal life insurance).
• Research and compare: Once you know your requirements, start researching different insurance companies and their offerings. Compare policy features, coverage amounts, premium costs, and customer reviews to find the best value for your needs.
• Gather quotes: Contact multiple insurance providers and request quotes based on your desired coverage and policy type. You can usually do this through their websites or by contacting their sales agents.
• Analyze the quotes: Carefully review the quotes you receive, paying attention to the coverage, premiums, and any additional benefits or restrictions. Consider using an online calculator to help compare the costs and benefits of each quote.
• Choose the best option: Select the quote that best meets your needs and fits within your budget. Ensure you understand the terms and conditions of the policy before making a decision.

By following these steps, you can obtain life insurance quotes and make an informed decision about the type of coverage that is right for you and your family.

How to choose a beneficiary

Choosing a life insurance beneficiary is an important step in owning a life insurance policy. A beneficiary is the person or entity who receives the death benefit if you die while the policy is still in force. This is probably the reason you have life insurance in the first place, so it's important to choose the right beneficiary.

Who can be a life insurance beneficiary?

Almost anyone can be a life insurance beneficiary, including people, organisations and trusts. Here are some common examples:

• A person, like your spouse.
• Multiple people, like your children.
• A charitable organisation.
• A legal entity, like your company.

Some insurers place limits on how many beneficiaries you can name. If your policy has a limit, be selective when compiling your list.

The beneficiaries you choose must have an "insurable interest" in your life. This means they have more to lose than gain by your death, whether that's financial or otherwise.

Primary vs. contingent beneficiary

Primary life insurance beneficiaries are the first in line to receive the death benefit if you die. Contingent life insurance beneficiaries, or secondary beneficiaries, receive the death benefit if the primary beneficiary dies before you do.

Multiple beneficiaries

If you name multiple beneficiaries, you can choose how much of the payout each party receives. For example, you might allocate 50% to your spouse, 30% to your child and 20% to a charity. No matter how you divide the benefit, the percentages must add up to 100%. If you don't specify the percentages, the insurer may grant equal shares to each beneficiary.

Irrevocable vs. revocable beneficiaries

You cannot change an irrevocable life insurance beneficiary designation without the beneficiary's approval. For this reason, irrevocable designations aren't common. However, they can be useful if you want to make sure the death benefit reaches a specific person, such as your child.

In contrast, a revocable life insurance beneficiary designation is flexible. You can change, update, add or remove a revocable beneficiary at any time.

Choosing a life insurance beneficiary

This decision isn't always a simple one. The right choice may not be the most obvious. Start by asking yourself why you have life insurance in the first place:

• Who relies on you financially and would need help paying 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?

You can avoid simple mistakes when designating a beneficiary by being as specific as possible. Make sure to include any identifying factors, such as each beneficiary's full name, Social Security number, relationship to you, date of birth and address, so the insurer can locate your beneficiaries quickly. Consult a legal professional to ensure you use the correct language.

Once you narrow down your options, ask yourself how much money each beneficiary would need, and divide the death benefit accordingly.

Naming children as your beneficiaries

Naming your children as life insurance beneficiaries might seem like a sensible decision, but if they're minors, the payout can be complicated. Here are your options:

• Many states allow legal guardians to receive payouts on behalf of minors. You can appoint a legal guardian prior to your death, or the guardian can petition for rights after you die. In either case, the state must grant the guardian legal rights to manage the child's finances.
• Trusts can be effective solutions for leaving money to children. You can set up a life insurance trust for your children and have the trustee oversee the funds and distribute the money according to your wishes.
• Naming your estate as your beneficiary: Although life insurance proceeds typically aren't taxable, the payout may be subject to estate tax if left as part of a large inheritance.

Changing, adding and removing beneficiaries

You can typically change, add or remove revocable life insurance beneficiaries at any time. The methods to do so vary among insurers. Some companies may require a change of beneficiary form signed by a witness, while others allow you to update your beneficiary online.

Frequently asked questions