Life insurance is an important part of the financial planning process. It can be used to help protect your family, as well as your assets. It protects your loved ones from the financial burden of death, and it can protect your assets from being liquidated if you suffer an accident or disability.Do You Prefer To Listen To This Article?
Life insurance can never replace you. It cannot cuddle your young children or kiss your wife. It’s important that as you continue loving your family, you also take a moment to look at what you can do today to provide peace of mind for them. You can assure them that they will be taken care of financially if the worst should happen by getting a proper protection.
What is Life Insurance and How It Works?
Life insurance is a financial product with the primary purpose to pay a benefit after the death of the person insured. The insurer or company assesses the probability of death and calculates how much to pay out to the beneficiary so that those funds will be sufficient to replace the income that was lost by the deceased.
Even though making money for an investor is not the main purpose of life insurance, there are advance policies that can provide benefits for the investor during its life. Those sophisticated products may not be suitable for everyone, and you must understand them before you incorporate them in your life. If you are single, or do not have dependents, it might be one of the reason why you may want to get a policy.
Who needs life insurance?
Buying life insurance is not a luxury, is more of an act of love and responsibility. It’s not for everyone, it’s more of a necessity for the responsible individual with a family. If you have dependents and children, it is necessary that you get coverage, so that your dependents are taken care of after your passing. You never want to have to use the policies’ death benefit, but you will love to leave it to your family if you die prematurely.
How much does life insurance cost?
The cost of a policy will vary depending on the type and amount of coverage desired by the individual. Companies also take into consideration the age, health, and risk of the person being insured. More expensive policies will provide greater benefits to your loved ones in case you die prematurely, and permanent policies that build up cash values will allow you to access the money while you are alive. Some policies have extra riders, options, and benefits that will allow you to access to all or a part of your coverage while you are alive, typically due to an illness, disability or if you suffer from a terminal illness. The options and riders may or may not come at a cost in fees or policy expenses, but the only real way to know is to ask a life insurance agent or independent consultant for a quote or illustration.
The Main Types of Life Insurance
If you google “types of life insurance”, you will find out articles with hundreds of different policy types. The shortest list will have about 4 types; Term Life Insurance, Whole Life Insurance, Variable Life, and Indexed Universal. The truth is that even that list is missing many others. However, you can actually categorize all of the types of life insurance policies in just two categories: Term Insurance and Permanent Insurance.
How term life insurance policies work?
Term insurance is a type of policy that provides protection against the financial consequences of death or terminal illness. This type of policy is designed to provide coverage for a set period, known as the term. The term can range from one to thirty-five years; however, most term policies premiums are only guaranteed level for twenty-years. You will not get your money back at the end of term; except if you paid an extra rider called ROP or Return of Premium. The extra rider, options, and benefits can sweeten a Term policy, but they usually come at a cost.
How permanent life Insurance
Permanent insurance works (differently) than term because it does not have a predetermined expiration date (the policy does not expire). It remains in place as long as the policyholder continues to pay the premium (the payment) as agreed. Permanent coverage is meant to provide lifelong protection and can be used for estate planning purposes, as well as providing income replacement if the person were to become unable to work due to an accident or illness. Permanent policies can have the most options; riders, and flexibility than term. In fact one great flexibility of permanent policies is the ability to structure the policies to be paid up in shorter terms; 20 Year, 10 Years, and even one lump sum payment. When properly structured and funded the permanent policy will be paid up permanently. The help of an independent agent or advisor is typically required to properly structure your policy so that it fits your needs and aligns with your objectives.
How to Choose a Life Insurance Policy Type?
Since there are many types of life insurance policies, it’s important to figure out what kind of coverage you need before you buy a policy. Do you want protection from a short-term ailment? What about long-term disabilities? If so, how much coverage would you like? How much do you want it to cost?
What is the Best Type of Life Insurance
With all of these questions the only way to find the best life insurance is to work along an independent professional. The reality is that there is no “the best type of protection”, there may only be the right type for you, and that’s the one that meets your needs, budget, and objectives. So don’t look for what is the best, but look to find out which is the right for you.
What type of life insurance is right for me?
When you meet with a financial professional make sure you ask the necessary questions, and that your advisor or agent clearly understand your overall financial situation; your budget, your goals, and objectives. If you don’t know that yourself, a professional advisor or agent will make sure to help you get those areas in order before recommending the right life insurance policy.
How to Choose a Life Insurance Coverage Amount:
What you need depends on the place and lifestyle you live. For example, someone who has a wife, four children, and three grandchildren would likely need more coverage than someone who is single with no children.
The amount of coverage also depends on how much one can afford to pay for life insurance premiums each month. The higher the premium, the higher the death benefit will be overall. If you are interested in purchasing a policy but do not know how much coverage you need or how much you can afford, it is best to consult with professional advisor. An advisor will help you determined the right coverage amount. Next we’ll share 2 ways our Prosperity Coaches help individuals determined the amount of life insurance coverage needed.
How Do You Find Out How Much Protection You Need?
To find out how much life insurance you need you can use either of this two methods. One method is call the DIME Method, and the other one is call DETAILED Method.
METHOD 1: The DIME Method
DIME is an acronym to help you remember what might be most important to protect. It stands for Debt, Income, Mortgage, and Education.
- DEBT: All consumer debt: Auto Loans, Credit Cards, Personal Loans.
- Income: 10X your income.
- Mortgage: Total Balance to Pay off your house.
- Education: Amount of money needed to pay for college adjusted for inflation.
METHOD 2: The DETAILED Method
The detailed method is not an acronym, but just a more detailed calculation of what you might want to cover with the death benefit.
- Income: 75% of your income multiply by 10 years.
- Debt: All debt including mortgage.
- Education: Enough to pay for college adjusted for inflation.
- Final Expenses: Cost of Funeral, Taxes, and Estate.
- Emergency Fund or Goals: Money to create an Emergency or Goal Fund.
How to Get Life Insurance:
The first step to getting life insurance is getting a quote. Some agents offer free quotes online, while others might opt out to offer you a quote over the phone or in person. Although more convenient, online quotes however are typically limited to simple term policies. More complex policies that will include extra riders and options are not found online. This include complex financial products like permanent life insurance, and annuities.
The best way to get the right life insurance is thru independent agents and/or consultants. Independent agents like the ones volunteered at Prosperity Leaders have access to multiple life insurance carriers with a broad portfolio of policies and financial products. An independent agent will be able to provide you more options, comparison side by side, and since they are not exclusive representatives of one company; they are more likely to teach you both advantage and disadvantage of the offers. Essentially, an independent agent does the shopping for life insurance work for you!
Is there anything you should be aware of when buying life insurance?
Yes a couple of things; qualification, exclusions, and suitability:
How to qualify for life insurance?
Qualifications for a life policy typically includes your medical condition and history, but may be stretched to your lifestyle and financial situation. According to monye, the things to keep in mind when buying life insurance and Understand what factors affect your premiums are – are age, gender, cigarette use, health, lifestyle, family medical history, and driving record. (money.com)
Exclusions are terms on the insurance contract that will exclude the company from paying the claim. Beware of them, but most rated companies only have 2 exclusions you should know:
- 2 Year Contestability: The contestability clause (also referred to as the contestability period) is a rule that starts at the date of issue of the life insurance policy, and it provides the insurance company the right to challenge the claim and refuse to pay the death benefit if it is found that the insured of the policy might have lied during the policy application or committed insurance fraud. “If the life insurance policy holder dies within the contestability period, the life insurance company will investigate whether the insured provided accurate information on the policy application. The insurance company has the option of denying payment of the policy death benefit if it can prove that the policy holder made a material misrepresentation or omission”. (erisaattorneys.com)
- Suicide Clause: “Life insurance policies generally have a suicide clause, which means the policy won’t pay out if suicide is the cause of death. Suicide clauses are meant to help prevent people from buying policies immediately before taking their lives so that their families can receive financial benefits.” (fidelitylife.com). The suicide clause is temporary and for most policies they are in force for the first two years since the policy was issued.
In order to find the right life insurance, you must figure out what is suitable for you. This starts by considering your financial situation, goals, and objectives before considering the Life Insurance Company, The type of policy, or the agent who will help you.
Is Term Life or Whole Life Better?
Some financial gurus would like you to think that the best type of life insurance is term, others will try to convince you that it is whole life, both ignoring the many other options, and the fact that not one person is equal and does not have the same needs as another. Providing recommendations without knowing the full scope of an individual does not only raise many ethical concerns but by nature is very dangerous. Beware of anybody that recommends you to do something without knowing the full picture. Only pay attention to financial advice, suggestions, and recommendations that considers your needs, your current financial situation, and your goals and objectives.
Term Life Can Be The Worst
Mariana (we changed the name to protect her family’s privacy) was a woman who purchased a 20 Year Paid Up Life Insurance Policy around 1995 after her boss ask their financial advisor to help her. In 2006 while taking a workshop to get out of debt with the promise of financial peace, she received advise to drop the whole life and buy a term policy. She was referred to a person who was recruited by a life insurance company and just happened to be in training to become a life insurance sales person. The agent had her drop the whole life policy, and take the cash value amount to invest it in a mutual fund. Unfortunately, Mariana lost over 40% of her money in 2008 as she did not understand the concept of holding long term. Furthermore, in 2015 she received a letter stating that her 10 Year term policy was about to lapse, would be automatically renewed at 3X the cost, and each year the premium would rise. She could not longer keep the policy. In 2020 Mariana died due to covid-19 with no life insurance coverage. Her family had to ask for contributions in the community for her funeral. Unfortunately, the Paid Up Whole Life Insurance that would have been paid up in 2015, was canceled by the recommendation of the financial guru and agent whose belief that term was the best, was more important than the right protection for Mariana.
Do not look for the best type of life insurance, look for an ethical and independent agent or consultant that will consider the full scope of your financial situation and objectives, and help you find the Right type of protection for you and your family.
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