Life Insurance: Are You Sure You're Covered?

Life insurance is a contract between an insurance company and a policy owner in which the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies. In exchange, the policyholder pays a single premium upfront or pays 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. Whole life, the most common type of permanent coverage, can cost 20 times as much as 20-year term coverage for a 30- or 40-year-old healthy applicant buying a $500,000 policy, a comparison of average life insurance rates shows.

The pros of term life insurance are that it is generally less expensive to purchase than permanent life insurance, and it can be a good option if losing an income would leave your family financially vulnerable. The cons are that it only lasts for a set number of years, and if you outlive the policy, there is no payout.

The pros of permanent life insurance are that it generally does not expire, and it typically accumulates cash value over time, which can be withdrawn or borrowed against. The cons are that it is much more expensive than term life, and it can be an expensive way to save for retirement given the premiums.

Waiting to buy insurance

Waiting to buy life insurance can have several negative consequences, and it is generally recommended that individuals purchase life insurance as early as possible. Here are some reasons why waiting to buy life insurance may be detrimental:

Buying Standard Coverage May Become Impossible

People with certain pre-existing medical conditions may be disqualified from purchasing life insurance. Life insurance companies often require applicants to undergo a medical exam and answer health-related questions to assess their risk of paying out the death benefit. If you develop health issues while delaying the purchase of life insurance, you may fail the underwriting process, making it difficult to obtain a standard policy. In such cases, guaranteed issue policies may be an option, but they often have long waiting periods and lower coverage limits.

Buying Coverage May Become More Expensive

Life insurance premiums are typically lower for younger individuals, as insurers charge higher rates for older applicants. Additionally, any medical issues, even minor ones, that arise during the waiting period can result in higher premiums. By purchasing life insurance early, you can lock in lower rates and avoid the increasing costs associated with age and potential health issues.

An Untimely Death May Occur Before Coverage is in Place

While it is natural to assume that waiting to buy life insurance until an older age is safe, the reality is that sudden accidents or illnesses can occur at any time. Delaying the purchase of life insurance means taking the risk of passing away before obtaining coverage, leaving your loved ones without the financial support they may need.

Waiting Periods Impact Coverage Activation

Life insurance policies typically have waiting periods, which are the time between purchasing a policy and when certain benefits become active. During this period, if the insured individual passes away, the insurance company may only refund the premiums paid instead of paying out the full death benefit. The waiting period can vary depending on factors such as the age of the policyholder, the type of policy, and pre-existing medical conditions.

Impact on Permanent Life Insurance Plans

Permanent life insurance plans have a cash value component that grows over time. By purchasing permanent life insurance early, you allow more time for this cash value to accumulate, which can be beneficial for future financial needs, such as a down payment on a home or supplementing retirement income.

Buying the cheapest policy

The cheapest life insurance will vary based on health metrics, policy type, coverage level and more. Term life insurance is typically the cheapest type of life insurance available and is much more affordable than permanent life insurance. Whole life insurance guarantees a payout for the policyholder's beneficiaries, which increases the financial risk the insurance company takes on. This makes whole life coverage more expensive.

When shopping for life insurance, it's important to keep in mind that the cost of a policy depends on several factors, including age, health status, lifestyle, and the type and amount of coverage selected. Here are some tips for getting cheaper life insurance:

• Consider term coverage: Term life insurance is more affordable than whole life insurance.
• Apply when you're younger: Life insurance rates tend to increase with age, so purchasing coverage early can help lock in lower rates.
• Avoid tobacco use: Non-smokers typically get lower life insurance rates.
• Maintain your health: Pre-existing health conditions can result in higher life insurance premiums. Improving your health may help lower your rates.
• Evaluate employment benefits: Life insurance provided by employers often offers lower rates due to group pricing.
• Consider a ladder strategy: Buying several term life insurance policies with different coverage levels and expiration dates may help save money in the long run.

When choosing a life insurance company, it's important to consider not only cost but also the company's financial strength, customer satisfaction ratings, and the types of coverage and riders available. Here are some of the cheapest life insurance companies based on average rates:

• Penn Mutual: Offers term life insurance for around $22 per month, based on averages across various applicant profiles.
• Banner Life: Offers term life insurance for around $21 per month, with seven term length options ranging from 10 to 40 years.
• Pacific Life: Offers term life insurance for around $21 per month, with a diverse range of policy options and riders.
• Transamerica: Offers term life insurance for around $21 per month, with living benefits for terminal, chronic, or critical illness included at no additional cost.
• MassMutual: Offers term life insurance for around $25 per month, with six term length options and a wide range of permanent life insurance options.
• Nationwide: Offers term life insurance for around $26 per month, with the option to apply for up to $1.5 million in coverage without a medical exam.
• Mutual of Omaha: Offers term life insurance for around $27 per month, with a variety of no-exam policy options.

Allowing premiums to lapse

Allowing your premiums to lapse is a costly mistake that can jeopardise your life insurance coverage. When you purchase life insurance, you enter into a contract that requires you to pay regular premiums to maintain your policy. Failing to make these payments on time can have significant consequences.

For term life insurance, allowing your policy to lapse means losing coverage, as there is no cash value to withdraw. In contrast, whole life insurance policies may use any accumulated cash value to continue paying premiums on your behalf until the cash value is depleted, resulting in an eventual lapse.

If you anticipate a late payment, contact your insurance company. Many insurers offer a grace period of 30 to 60 days without altering the policy's guarantee. However, missing a payment or being significantly late can have severe implications for universal life policies with secondary guarantees, such as low-premium guaranteed death benefits.

For instance, a policy guaranteeing coverage until the age of 100 might only provide protection until the age of 92 if a payment is missed or delayed. This reduction in coverage could be problematic if you live longer than anticipated.

To avoid this mistake, stay vigilant about premium due dates and maintain open communication with your insurance provider. If you're having difficulty making payments, discuss alternative options with your insurer before your policy lapses. Remember, allowing premiums to lapse can result in a loss of coverage and defeat the purpose of having life insurance in the first place.

Forgetting insurance is an investment

Forgetting that insurance is an investment is one of the five most common mistakes people make when it comes to life insurance. While it may seem like a financial burden due to the regular premium payments, it is important to remember that life insurance is an investment in your future and the security of your loved ones.

Life insurance is a financial contract that pays out a death benefit to your beneficiaries in the event of your death. The purpose of this benefit is to replace any lost income, cover outstanding debts, and provide additional money as an inheritance. By investing in life insurance, you are ensuring that your loved ones will have the financial support they need if something happens to you.

There are two main types of life insurance: term life insurance and cash value life insurance. Term life insurance is the most basic form of coverage, providing a level death benefit for a set period, such as 20 years. Cash value life insurance, on the other hand, can last your entire life and often includes a cash accumulation component. This type of insurance is more expensive but offers additional benefits and value.

When deciding between term and cash value life insurance, consider your financial situation and long-term goals. If you are looking for coverage over a specific period, such as the number of years until your retirement, term life insurance may be a more affordable option. However, if you want lifelong coverage or a policy that builds cash value as an investment vehicle, cash value life insurance may be a better choice.

Don't forget that life insurance is an investment in your future and the well-being of your loved ones. By investing in life insurance, you are taking the necessary steps to ensure financial security and peace of mind for yourself and your family.

Borrowing from your policy

Borrowing from your life insurance policy can be a quick and easy way to get cash in hand when you need it. However, it's important to understand the specifics before making a decision. Here are some key points to consider:

Types of Policies

Only permanent life insurance policies that have accumulated a cash value can be borrowed against. These include whole life, universal life, variable life, and variable universal life insurance. Term life insurance, which is cheaper and more suitable for many people, does not have a cash value and cannot be borrowed against. However, in some cases, a term life policy can be converted into a permanent policy, allowing you to build cash value and borrow against it.

Loan Amount and Interest

The amount you can borrow is typically limited to a certain percentage of the policy's cash value, usually up to 90%. Interest rates on life insurance loans are generally lower than those for personal loans or credit cards, ranging from 5% to 8%. The interest accrues over time, and if left unpaid, can cause the loan balance to exceed the policy's cash value, leading to potential issues.

Repayment Flexibility

Life insurance loans do not have a strict repayment schedule, and you can pay back the loan at your own pace. However, it is important to stay on top of interest payments to prevent the loan from growing larger than the policy's cash value. Failure to manage the loan effectively can result in a reduced death benefit for your beneficiaries or even cause the policy to lapse.

Tax Implications

Life insurance loans are generally not recognised as income by the IRS, making them tax-free. However, if the loan is not repaid and the policy lapses, you may owe taxes on the borrowed amount. Consult a financial advisor to understand the specific tax implications for your situation.

Pros and Cons

Borrowing against your life insurance policy offers advantages such as no credit check, flexible repayment, and no impact on your credit score. It can be a good option when you need cash quickly and don't want to risk other assets. However, there are also disadvantages. If the loan is not managed properly, it can reduce the death benefit, cause a policy lapse, and result in significant interest accumulation. It is crucial to weigh the pros and cons carefully before making a decision.

Frequently asked questions