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What is life
insurance?

Some people view health and auto insurance as a necessity and life insurance as a luxury. Why is that? Insurance is designed to step in when you or your loved ones experience an unexpected loss or expense of some kind and prevent you from financial devastation.

The loss of a loved one is the greatest loss, not only emotionally, but the financial impact can also be significant. In exchange for regular premiums you pay throughout a set period, life insurance pays out after your death to your beneficiaries. It's an important safety net, especially for those who depended on you financially. A life insurance payout can be used for debts such as a mortgage, substitute your income, or contribute funds to tuition.

Types of life insurance

Life Insurance is packaged in several different forms. Each has its purpose and specific audience. The two major forms are Term Life Insurance and Whole Life Insurance (or Permanent Life Insurance). Both have varying levels of coverage; your wants and needs determine which level is best for you.

Term Life Insurance

Term Life is meant to provide a death benefit to a person's family should the person die within a set term. For instance, if a person has a 30-year mortgage on a home, he or she may choose to purchase a 30-year term policy with a set benefit equivalent to the payoff amount of the mortgage. People tend to buy these policies to cover items such as mortgages or even college expenses for children.

Just a few of the options for Term Insurance include:

Guaranteed Level Term.

The most common form. Pays a death benefit within the term period.

Return of Premium Term.

If certain conditions are met, you get your premium back at the end of the Term.

Decreasing Term.

This form of Term Insurance is popular for those with mortgages. As the mortgage amount owed decreases, so does the policy's value over the Term of the policy.

Due to the limited likelihood that the policy benefit will be paid out, the premium for such policies is often much lower than other forms of Life Insurance.

Whole Life Insurance

Whole Life policies are very similar to a Term Policy. The primary difference is that instead of coverage over a specific period, the policy lasts for the insured's lifetime.

Also, like Term Insurance, Whole Life has many different forms:

Whole Life

A standard policy is fixed rate and death benefit. They can be used as part of an estate plan to ensure wealth is properly distributed to beneficiaries.

Universal Life

This policy allows a person to raise or lower the premium and benefit as time progresses. In addition, there are tax-deferred savings options. This insurance will enable it to be used much like an IRA or 401K.

Variable Life

This policy allows a person to invest part of the cash value of their policy. Much more complex and usually requires the services of a financial advisor.

Life insurance Candidates

A 2020 report by the U.S. Federal Reserve Board revealed that almost 40% of adults would have trouble paying a $400 emergency expense, and 12% "would be unable to pay the expense by any means."

Having dependents means that you have a responsibility to provide for them. You should explore life insurance options so they will be able to be financially stable if something unfortunate were to happen and your income was suddenly cut off.

Buying life insurance in your…

30s

With financial responsibilities, and good health likely still on your side, life insurance becomes more important than ever in your 30s. At this age, you're more likely to be married, have a child, and a mortgage by this point in your life. It's important to buy enough life insurance so your loved ones can pay off debts, support themselves financially and build up savings if something happens.

Experts recommend purchasing a life insurance policy covering at least five to ten times your average annual income. If you have a larger family or little to no liquid assets, that amount jumps to 15 times your average yearly income.

It's also suggested that you do not rely solely on any employer-provided policy, as it typically covers just one to two times your annual salary.

40s

Even if you've never purchased life insurance or a past policy has expired, your 40s are the perfect time to adjust your plan before rates increase. Plus, an individual policy can help supplement what you're already getting through your employer. At this age, if you're still in good health, coverage can still be affordable! Like all other insurances, age plays a factor in how much your premiums will cost each month.

50s

Purchasing life insurance during your 50s will be more expensive. If you have little to no assets and are financially responsible for others, you need to get insured. Be selective on the term length and how much coverage you want at this age, as you are likely more financially stable than when you were younger. This will help ensure that you are not over-insured and overpaying premiums.

How much does life insurance costs per person?

According to Limra's Life Insurance Barometer Study, more than half of Americans overestimate the cost of life insurance by as much as threefold. While the cost of term life insurance for a healthy 30-year-old is roughly $160 per year, 44% of Millenials estimate it to be six times higher, at a costly $1,000. This common misperception and prioritizing other financial needs put families at risk should those they are financially dependent on pass unexpectedly.

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Life insurance rates

As you age, the premium amount increases by 8% to 10%. This amount can be as low as 5% annually in your 40s and as high as 12% annually if you're over the age of 50. Another factor that plays into your insurance rate will be your risk class. This is a way for life insurance companies to estimate how likely your policy will be paid out. These risk classes are based on:

  • Age
  • Gender
  • Overall health (ex. weight and preexisting conditions)
  • Smoking status
  • Family history
  • Occupation
  • Participation in risky hobbies (ex. hang-gliding or sky-diving)

Farm Bureau Financial Services. "8 Factors That Can Affect Life Insurance Premiums."

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Choosing a Life Insurance
Beneficiary

Choosing a beneficiary is a part of the process when purchasing life insurance. This is the person you designate to receive the death benefit from your policy. You can also name one or more contingent beneficiaries who would receive the funds if your primary beneficiary passes away. A life insurance beneficiary can be:

  • A spouse
  • Parent
  • Sibling
  • Adult child (a minor cannot be a beneficiary)
  • Business partner
  • Charitable organization
  • A trust

Term life insurance vs Permanent life insurance

Term life insurance is different from whole life insurance, universal life insurance, or variable universal life insurance. For starters, it's cheaper! It also gives people the opportunity to save up for permanent life insurance or another policy that isn't immediately as affordable.

It functions similarly to auto insurance, for example, in that it satisfies a claim based on what you have insured. This means you get fixed payments for your insurance policy for the period you choose to have coverage.

Term life
Permanent life
Provides coverage for a limited time period (term), if premiums are paid.
Provides lifetime coverage, if premiums are paid.
Provides a death benefit, but typically no cash value.
Cash value accumulates over time and creates an asset which may be used during your lifetime.
Initially, less expensive form of life insurance.
Level premiums.
May be renewable or convertible.
Some types of permanent insurance offer flexible premium payments and level or increasing death benefit options.

How to buy a life
insurance policy

As with any form of insurance, you are investing in a calculated risk. Determining your level of need can be confusing, especially if you're new to life coverage. If you're struggling to decide on a policy, you may want to consider reaching out to a life insurance specialist.

According to a study conducted by LIMRA, more than a quarter of those shopping for life insurance found that working with a life insurance agent eased the life insurance buying process. 97% of the applicants surveyed experienced satisfactory service.

Once you've educated yourself on the various policies and coverage amounts available, don't be afraid to shop around. Figure out what you need and then find the best plan that fulfills your needs. Read the fine print and understand the exact details of the coverage before signing up.

What is the best
coverage for you?

The amount of life coverage you need will be determined by a variety of factors. Every individual will be different. Once you've selected the type of life insurance you need (term, universal, whole), you'll need to choose the amount of coverage.

The amount of coverage you select is the amount that will be paid to your beneficiaries if you (the insured party) pass away.

While there are many factors to consider, some of the most common and important factors to consider are:

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  • Your income
  • Your assets
  • Your liabilities & debts
  • Any existing insurance
  • Other miscellaneous costs your family could incur

Once you've selected the amount of coverage you think you need, you'll want to remember to review and possibly change your life policy after any significant life event (ex. marriage or children).

Frequently Asked Questions
Life insurance FAQ
How long do you have to have a life insurance policy before you can use it?

Like any other product, life insurance is not standardized; the waiting period varies depending on what type of policy you purchase. There are many situations where you will be eligible for a death benefit immediately, while others can take up to five years before coverage kicks in. The average time between when your life insurance becomes effective and when something happens that calls upon its use range from six months to two or three years, but this too depends on which specific plan suits your needs best.

How is life insurance paid out?

You can also help decide how your death benefit will be paid out after you die. Here are the most popular payout options:

Lump-Sum Payments: This is the traditional way for beneficiaries to receive your life insurance payout.

Installments and Annuities: Modern life insurance policies include an installment payout or an annuity option as an alternative. This allows the policy owner to select a predetermined income stream for five to forty years.

Retained Asset Account: Just like a bank, the insurance provider keeps the payout in an account, allowing your beneficiary to write checks against the balance.

At what age should I get life insurance?

When it comes to life insurance, age is a factor but not the only one. It would help if you thought about how your dependents might be affected should something happen to you and whether or not they would need financial stability to go on with their lives without significant disruptions. Life Insurance gets more expensive as we get older, so don't procrastinate if you want an affordable rate!

What is the most expensive type of life insurance?

Whole life insurance is the most expensive type of life insurance. It can range from five to ten times more than a term policy, and it pays benefits until age 100 while other types only last for 20-30 years.

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