Life Insurance: Diy Policy Options And Benefits

Life insurance is a contract between an insurance company and a policy owner, where the insurer agrees to pay a sum of money to one or more named beneficiaries when the insured person dies. The policyholder must pay a single premium upfront or regular premiums for the policy to remain in force. The two main types of life insurance are term life insurance and permanent life insurance. Term life insurance is temporary and only covers the insured for a set number of years, whereas permanent life insurance remains active for the entirety of the insured's life, provided that premiums are paid. Permanent life insurance is more expensive than term life insurance but offers more benefits, such as the ability to accumulate cash value. When purchasing life insurance, it is important to consider factors such as the amount of coverage needed, the type of policy, and the cost of premiums.

What is life insurance?

Life insurance is a contract between an insurance company and a policyholder, in which the insurer agrees to pay a sum of money to one or more named beneficiaries when the insured person dies. In exchange, the policyholder pays premiums to the insurer during their lifetime. The policy remains in force as long as the policyholder pays a single premium upfront or regular premiums over time.

There are two main types of life insurance: permanent and term. Permanent life insurance policies do not have an expiration date, meaning you’re covered for life as long as your premiums are paid. Many permanent life insurance policies offer an investment component that allows you to build cash value by investing a portion of the premiums you pay in the stock market or earning interest on your account. Term life insurance, on the other hand, only covers you for a set number of years and does not accumulate cash value. Some policies allow you to easily renew your coverage after a certain expiration date, while others require a medical exam to do so.

The younger and healthier you are, the less you’ll pay for life insurance premiums. However, older people can still get life insurance, although it will be more expensive.

Life insurance is meant to provide financial support for someone who may need it after your passing. Therefore, you can only take out a life insurance policy on someone else if there is some relationship between you, such as a business partner, spouse, or parent, and the person being insured consents to the policy. Additionally, the relationship must pass the "insurable interest" test, meaning you can demonstrate that the insured’s death would have an adverse financial impact on you.

Life insurance beneficiaries can use the money paid out by a policy for whatever purpose they choose. This often includes paying for living expenses, paying off debts, and funding children's education.

Who needs life insurance?

Life insurance is meant to provide financial support to those who may need it after your passing. When deciding whether to buy life insurance, you should ask yourself: "Would my death have a financial impact on the people in my life?" If the answer is yes, then you may want to consider purchasing a life insurance policy.

• Spouses or partners: If your spouse or partner relies on your income, your death could leave them without a way to support themselves. The payout for a life insurance policy can help them cover living expenses and pay off debts like a mortgage so they can maintain their lifestyle.
• Stay-at-home parents or spouses: Even if you don’t earn a traditional salary, you may still need coverage. Stay-at-home parents and spouses provide services that can be costly to replace, such as cleaning, cooking, and childcare. A life insurance payout can help your partner cover the costs of these services during a difficult time.
• Parents or grandparents with dependents: Minor children, unable to provide for themselves, could be put at a major disadvantage if your income disappeared. The same is true if you help cover college costs or provide support for someone with a disability. A life insurance policy can help with these expenses for your dependents.
• Small-business owners: Your business might struggle if you were to die, especially if you’re integral to its daily operations. A life insurance payout can help your business partners or heirs cover a variety of expenses, such as buying out your share of the company, paying office rent, and employing additional help in your absence.
• People who want to cover their final expenses: A burial life insurance policy can help you pay for your funeral and burial costs, which can be significant.
• Co-signers or co-owners of debt: If you co-own or co-sign a debt, your co-signer could be left holding the bill if you die. You can use life insurance to cover your debts if other people would be responsible for them, helping to pay them off in your absence.
• Primary earners of the family: When you’re the family breadwinner, your loved ones rely on you to survive financially. If you die, they may find they’re unable to support themselves, at least in the short term. Life insurance can ensure the bills are taken care of while your beneficiaries take time to make necessary life adjustments.
• Adults who own property together: If the death of one adult might mean that the other could no longer afford loan payments, upkeep, and taxes on the property, life insurance may be a good idea.
• Seniors who want to leave money to adult children who provide their care: Life insurance can help reimburse the adult child’s costs when the parent passes away.
• Young adults with co-signed debts: Young adults without dependents rarely need life insurance, but if a parent will be on the hook for a child’s debt after their death, the child may want to carry enough life insurance to pay off that debt.
• Children or young adults who want to lock in low rates: The younger and healthier you are, the lower your insurance premiums. A young adult might buy a policy even without having dependents if they expect to have them in the future.
• Stay-at-home spouses: Stay-at-home spouses should have life insurance as they contribute significant economic value based on the work they do in the home.
• Wealthy families who expect to owe estate taxes: Life insurance can provide funds to cover the taxes and keep the full value of the estate intact.
• Families who can’t afford burial and funeral expenses: A small life insurance policy can provide funds to honor a loved one’s passing.
• Businesses with key employees: If the death of a key employee, such as a CEO, would create severe financial hardship for a firm, that business may have an insurable interest that will allow it to purchase a key person life insurance policy on that employee.
• Married pensioners: Pensioners can choose to accept their full pension and use some of the money to buy life insurance to benefit their spouse. This strategy is called pension maximization.
• Those with pre-existing medical conditions: Note, however, that some insurers may deny coverage for such individuals or charge very high rates.

How much life insurance do I need?

The amount of life insurance you need depends on your financial goals and needs. It's recommended that you have enough life insurance to cover your obligations after you're gone. Here are some factors to consider when determining how much life insurance coverage you need:

• Income: You'll want to ensure that your policy provides enough money to replace your income for your loved ones. A common guideline is to get coverage worth 10-12 times your annual income.
• Mortgage and debts: Calculate your mortgage balance and any other debts, such as car loans, credit card debt, or personal loans. Your life insurance should cover these expenses so that your family isn't burdened by them.
• Future needs: Consider any future expenses such as college tuition for your children or funeral costs.
• Number of dependents: The more dependents you have, especially if they are young, the more life insurance you will likely need.
• Stay-at-home spouse or parent: Even if they don't have a paycheck, their contributions to the household, such as childcare and household duties, have value. Calculate how much it would cost to pay someone else to do these tasks and include that amount in your coverage.
• Health and age: Your age and health are important factors in determining the cost of life insurance. The younger and healthier you are, the lower your premiums will be.
• Policy type: Term life insurance is generally cheaper than permanent life insurance but only covers you for a specific period. Permanent life insurance lasts your entire life and often includes an investment component, which makes it more expensive.
• Number of policies: You can purchase multiple, smaller life insurance policies to vary your coverage as your needs change over time.
• Other assets and savings: Consider any other assets or savings you have, such as investments or existing life insurance policies, when determining how much additional coverage you need.

How does life insurance work?

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 policyholder pays premiums to the insurer during their lifetime, and in exchange, the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies.

There are several kinds of life insurance, including term and permanent plans. Term life insurance provides coverage for a set number of years, while permanent life insurance remains active until the insured person dies, stops paying premiums, or surrenders the policy.

When purchasing life insurance, it's important to consider how much coverage you need, whether a term or permanent policy makes more sense, what you'll pay for premiums, and which optional coverages you'd like to include. The cost of life insurance 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 beneficiaries can use the death benefit payout for various purposes, such as paying for living expenses, covering funeral and burial costs, or funding children's education. The death benefit is typically paid out in a lump sum, but some policies offer alternative payout options, such as installments, annuities, or retained asset accounts.

To buy life insurance, you can request quotes and apply through the insurer's website or by speaking with a licensed agent. The process typically involves deciding on the coverage amount, selecting a policy type, researching different carriers, comparing quotes, filling out an application, and undergoing a medical exam.

Life insurance provides financial security and peace of mind, ensuring that your loved ones will be taken care of in the event of your death. By understanding how life insurance works, you can make informed decisions about the type of coverage, policy features, and cost that best suit your needs and goals.

How to choose the right life insurance policy type

Choosing the right life insurance policy type depends on your financial goals, family situation, and how long you need coverage for. Here are some factors to consider when selecting a life insurance policy:

• Budget and savings habits: If you have a limited budget, term life insurance is typically the most affordable option. It provides coverage for a specific period, often 10 to 30 years, and is ideal for those who want to ensure their dependents are provided for during their income-earning years. However, if you can afford higher premiums and want lifelong coverage, consider permanent life insurance.
• Length of protection: Term life insurance is suitable if you only need coverage for a finite period, such as until your children become financially independent or your debts are paid off. In contrast, permanent life insurance provides coverage for your entire life, ensuring a death benefit regardless of when you die, as long as premiums are paid.
• Desired death benefit and flexibility: Term life insurance usually offers a larger death benefit for a lower premium, making it a good choice if you need a substantial benefit to cover expenses like mortgages or college tuition. Permanent life insurance, on the other hand, often has a smaller death benefit but offers more flexibility. It typically has a cash value component that grows over time and can be borrowed against or withdrawn, providing a source of funds for various purposes.
• Health and age: The cost of life insurance increases with age, so it's generally more affordable to purchase a policy when you're younger. Additionally, your health can impact your premiums and eligibility for certain policies. If you have health issues, consider a final expense insurance policy, which is a type of whole life insurance designed for older individuals and doesn't require a medical exam.
• Riders and additional benefits: Life insurance riders are add-ons that provide extra benefits. For example, an accelerated death benefit rider lets you access a portion of the death benefit if you're diagnosed with a terminal illness. A waiver of premium rider waives premium payments if you become disabled. When choosing a policy, consider which riders are available and whether they align with your needs.
• Conversion options: Some term life insurance policies offer conversion features, allowing you to convert your term policy into a permanent one without a medical exam. This can be advantageous if your health changes and you want to switch to permanent coverage.
• Company reputation and financial strength: It's crucial to choose a reputable insurance company with strong financial stability to ensure they can pay out the death benefit in the future. Check financial strength ratings from independent agencies like AM Best and review customer satisfaction rankings, such as the J.D. Power study.

Frequently asked questions