Life Insurance Basics: Additional Coverage Explained

Life insurance is a type of financial product that you can buy to ensure your family receives a lump sum of money (known as a death benefit) in the event of your death. This is a contract between you and the insurance company, with the latter agreeing to give your beneficiaries a fixed sum of money upon your death, in exchange for a fixed amount paid by you every month or annually (called a premium).

There are two basic types of life insurance: term life insurance and permanent life insurance. Term life insurance is a policy that is only in effect for a certain period, with most policies lasting 10, 15, 20, or 30 years. Permanent life insurance, on the other hand, stays in effect until you die and usually includes a cash value component that accumulates over time.

Supplemental life insurance is an additional layer of coverage on an existing policy, which can be purchased through your employer. It can include coverage for a spouse or child, and coverage that pays out if you are seriously injured or killed in an accident.

What is life insurance?

Life insurance is a type of financial product that you can buy to ensure your family receives a lump sum of money, known as a death benefit, in the event of your death. It is a contract between an insurance company and a policy owner, 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 life insurance you purchase is called a life insurance policy. This functions as a type of contract between you and the insurance company. When you apply and get qualified for a policy, the contract you signed becomes legally effective and enforceable between you as the policyholder and the insurance carrier as the insurer.

A life insurance policy is both financial and legal in nature. It is a legally binding contract that promises a death benefit to the policy owner when the insured person dies. The policyholder must pay a single premium upfront or pay regular premiums over time for the life insurance policy to remain in force.

There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance is designed to last a certain number of years, then end. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. Permanent life insurance is more expensive than term life insurance, but it stays in force throughout the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy.

The best life insurance companies have good financial strength, a low number of customer complaints, high customer satisfaction, several policy types available, optional riders, and easy application processes. When choosing a life insurance company, it is important to look for financial stability, a good track record, a good reputation, a range of life insurance products, and competitive rates.

The cost of life insurance depends on several factors, including age, gender, smoking status, health, lifestyle, family medical history, and driving record. The younger and healthier you are, the lower your insurance premiums will be.

Who needs life insurance?

Life insurance is a financial product that you can buy to ensure your family receives a lump sum of money (known as a death benefit) in the event of your death. It is a contract between you and the insurance company, where you pay a fixed amount (premium) monthly or annually, and the company pays out a sum of money (death benefit) to your beneficiaries when you die.

• The family breadwinner: If you have people who rely on you financially, such as your spouse, children, siblings, or parents, then getting life insurance is essential. The death benefit will help your loved ones cover immediate expenses and other needs.
• Single people (with no kids): While single people may think they don't need insurance because no one depends on them financially, if someone would be affected financially by their death, they should consider getting insured. Additionally, getting insured early will secure a lower rate, which will benefit the family in the future.
• Single parents: Life insurance is one of the best ways for single parents to protect their children. The death benefit can help sustain their children's needs, ensuring they don't struggle financially after the parent's death.
• Older and retired individuals: Even if your family is financially stable, your death can be a big financial blow. Life insurance can help cover burial costs and pay off any remaining debts.
• People with an illness: If you have an illness and expect long-term medical care, a life insurance policy with living benefits might be a good option. This type of insurance allows you to use your death benefits or a portion of them while you're still alive to cover medical costs.
• Small business owners: Life insurance benefits can be used to protect your company financially and keep it stable. It can help pay off existing business debts, fund a buy-sell agreement, or provide venture capital financing.

Types of Life Insurance

There are two basic types of life insurance: term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period, usually 10 to 30 years, and is the simplest and most affordable type. Permanent life insurance, on the other hand, has no expiration and remains in effect until you die, as long as you pay the premiums. It is more expensive but includes a cash value component that accumulates over time.

The amount of coverage you need depends on your situation and financial capability. You should assess your monthly expenses, including family expenses, mortgage payments, debts, and any other costs specific to your family members. Multiply this monthly amount by 12 to get an annual figure, and then multiply that by the number of years you want to provide for your family.

Choosing the Right Insurance Company

When choosing an insurance company, look for financial stability, a good track record, a reputable portfolio of life insurance products, and competitive rates. Working with an independent insurance broker can help you find the best policies and rates that match your needs.

How much life insurance do you need?

The amount of life insurance coverage you need depends on your unique circumstances and financial capabilities. Here are some steps and factors to consider when deciding how much life insurance is right for you:

Assess Your Monthly Expenses:

Calculate your total monthly expenses, including family expenses, mortgage payments, car payments, and other debts that your loved ones might shoulder if you pass away. Also, consider adding estimated monthly expenses for your children's education and any other costs specific to each family member. It's a good idea to include an extra amount to cover unforeseen expenses.

Determine Annual and Long-Term Expenses:

Multiply your overall monthly expenses by 12 to get an estimate of your annual family expenses. If you want to provide a sustainable fund for your family for a more extended period, you can multiply the annual amount by the desired number of years. The rule of thumb is to aim for at least ten years of sustainable living expenses for your family if possible.

Consider Your Income and Dependents:

Think about how much of your income others depend on. If you are the primary breadwinner, you will want enough coverage to replace your income, at least temporarily, until your family can adjust. Also, consider any specific costs you want to cover, such as burial fees or future college tuition for your children.

Use Online Calculators:

There are helpful online tools and calculators that can assist you in determining the lump sum needed to cover potential expenses. These calculators take into account various factors and provide a more precise estimate of the coverage amount.

Compare Policy Quotes:

Once you have an idea of the desired coverage amount, it's essential to compare quotes from different insurance providers. Prices can vary significantly, so finding the best combination of policy features and cost is crucial.

Seek Professional Advice:

Consider consulting a financial advisor or insurance broker to help you navigate the complex world of life insurance. They can provide personalized recommendations based on your unique situation and ensure you make an informed decision.

Remember, the goal is to ensure that your loved ones will have the financial resources they need to maintain their standard of living and cover any necessary expenses if something happens to you.

How to buy life insurance?

How to Buy Life Insurance

Step 1: Do Your Research

Before you buy life insurance, it's important to understand what you're getting into. Research the different types of life insurance policies available, such as term life insurance and permanent life insurance, and consider which type would best meet your needs. Term life insurance is generally cheaper and provides coverage for a specific period, while permanent life insurance is more expensive and offers coverage for your entire life.

Step 2: Calculate Your Coverage Needs

Determine how much coverage you need by considering your financial goals and obligations. Think about why you're purchasing life insurance—is it to support dependents, cover end-of-life expenses, or make charitable contributions? Calculate your income, anticipated funeral expenses, mortgage, and other debts to get an idea of the coverage amount you'll need.

Step 3: Choose a Policy Type

Based on your research and coverage needs, decide on the type of life insurance policy that best suits you. Consider factors such as the length of coverage, premium payments, and the flexibility to adjust the policy over time.

Step 4: Research Carriers

Start looking for life insurance companies that appeal to you and offer the coverage options you need. Review their customer service, financial strength, and the different riders (add-on coverage options) they provide. Working with an independent agent or broker can help you compare quotes and understand the key differences between policy types.

Step 5: Request and Compare Quotes

Get quotes from multiple potential providers by providing basic personal information and answering health history questions. Keep in mind that these quotes are estimates, and the final premium amount may change after the insurer's full underwriting process.

Step 6: Fill Out the Application

Provide basic personal information, such as your name, address, Social Security number, and driver's license number. Be prepared to submit an Attending Physician Statement (APS) to verify your medical history. The application process may be completed online and is usually quick.

Step 7: Prepare for the Phone Interview

After submitting your application, the insurance company may require a phone interview to confirm the information and ask additional questions about your lifestyle, financial health, and other life insurance policies.

Step 8: Schedule a Medical Exam

Many life insurance companies require a physical exam before approving coverage. The exam is typically quick and can be conducted at your home or office. However, if you meet certain requirements, you may be eligible for life insurance without a medical exam.

Step 9: Wait for Approval

Once you've completed the application process, the insurance company's underwriter will review your information and determine your eligibility for coverage and the premium amount. This process may take several weeks. If you're approved and satisfied with the offer, you'll receive the policy documents to sign. Remember that you usually have a free-look period of 10 to 30 days to confirm your satisfaction with the policy.

Benefits of life insurance

Life insurance is an important part of any adult's financial plan. It's a way to pay for your funeral expenses, replace lost income, and help your family achieve financial stability. Here are some key benefits of life insurance:

• Financial Protection: Life insurance provides financial security for your loved ones in the event of your death. It ensures that your family will receive a lump sum of money, known as a death benefit, which can help cover immediate expenses, pay off debts, and maintain their standard of living.
• Peace of Mind: Knowing that your family will be financially protected gives you peace of mind. You can rest assured that your loved ones won't be burdened by funeral costs, medical bills, or other financial challenges during their time of grief.
• Income Replacement: Life insurance can replace lost income for your family, especially if you are the primary breadwinner. This can help them maintain their current lifestyle, pay for childcare or healthcare, and cover college expenses.
• Tax-Free Benefit: In most cases, the death benefit from a life insurance policy is not subject to federal income taxes. This means your beneficiaries will receive the full amount, without having to pay additional taxes on it.
• Flexibility: Life insurance policies offer flexibility in terms of coverage amounts and types of plans. You can choose a term life insurance plan for temporary coverage or a whole life insurance plan for lifelong protection. Additionally, you can add riders to your policy for additional benefits, such as coverage for chronic illnesses or the ability to use a portion of the death benefit if you become terminally ill.
• No Medical Questions: Many life insurance companies allow you to apply online and may not require you to answer medical underwriting questions. This makes the application process convenient and less intrusive.
• Long-Term Planning: Life insurance encourages long-term financial planning. By purchasing a policy, you are making a commitment to pay premiums over an extended period, ensuring that your loved ones are protected in the future.
• Business Protection: If you own a business, life insurance can provide financial stability for your company in the event of your death. It can help pay off business debts, protect your company's financial stability, and even fund a buy-sell agreement with business partners.

Frequently asked questions