Life Insurance: What You Need To Know
Purchasing life insurance may seem like a menial task in the face of monumental expenses such as college tuition, raising children, buying a house, and saving for retirement. However, this is one expense that you cannot ignore. Life insurance is there to help your loved ones when you’re gone. It also helps mitigate financial stress if you are the primary provider for your family. If you’re single or married with no kids, getting life insurance might not be the first thing on your mind right now. But it’s something you’ll want to keep in the back of your mind so that when the time comes, you’ll be prepared. This comprehensive guide will explain everything you need to know about life insurance and why it’s essential to have it in place sooner rather than later.
What is Life Insurance?
Life insurance is a contract between you and an insurance company where you pay a premium in exchange for the company paying out a death benefit if something happens to you. The death benefit is typically paid to your beneficiaries (the people you designate to receive the money) in a lump-sum amount. The death benefit is tax-free, which can make it a valuable tool for managing your money and the estate, depending on your tax and financial situation. The death benefit is often used to cover expenses such as funeral costs, outstanding debt, child support or alimony, or college tuition. The life insurance contract contains two distinct elements: The death benefit is paid to the beneficiary upon the insured person’s death. The premiums (payments) are paid by the insured person during the term of the contract.
In the simplest terms, life insurance is:
- A contract between you and an insurance company;
- You pay a premium in exchange for the company paying out a death benefit;
- The death benefit is tax-free, which makes it a valuable tool for managing your money during life.
When Should You Get Life Insurance?
The best time to get life insurance is when you’re young and healthy. This is when you’re able to get the best rates and coverage. A common myth is that you need to be at a certain age or stage in your life before purchasing life insurance. This couldn’t be further from the truth. There are a few factors you should consider when you’re ready to purchase life insurance. One of the main factors is determining your debt and your assets. For example, do you own a home or business? Do you have a 401K or IRA? What about your personal savings? Total up these assets. Next, what about debt. Do you have a mortgage, vehicle loan, or other outstanding debts? Total up these debts. From there you should be able to determine if you need insurance, and if so what a sufficient amount would be. Another important factor to consider before purchasing life insurance is your health. You’re not eligible to get life insurance if you have a terminal illness. However, if you have an illness that can be treated, you might still be eligible for life insurance. This all depends on the severity of your illness and what your doctor says. If you are healthy, in your early to mid-20s, and have no dependents, you can get a lower-cost life insurance policy than someone older with a family to provide for.
How Much Life Insurance Do You Need?
There’s no set amount of life insurance you need. Your situation and current financial obligations determine how much life insurance you need. For example, if you’re the primary source of income for your family, you’ll need a higher amount than someone who has a secondary source of income or no dependents. This amount is also known as the “death benefit” and is typically stated in the contract as “face amount”. The recommended amount for someone who doesn’t have dependents and doesn’t have to worry about supporting anyone else is usually enough to cover their final expenses and debts. The amount you need to cover your final expenses and debts is different for everyone. This amount depends on your specific financial situation and debts.
How to Buy Life Insurance?
The best way to buy life insurance is through a licensed insurance broker. A broker has access to multiple insurance companies that can help you find the best coverage for your specific needs.
Start by determining how much coverage you need. As we discussed earlier, this will vary greatly depending on your personal and financial circumstances. Once you’ve done your calculations and consulted with financial advisors if needed, you’re ready to engage with a broker.
Brokers, being professionals in the field, can guide you through the complexities of the process. They are well-versed in the terms, conditions, and details of different life insurance policies offered by various companies. They can compare rates, coverages, and benefits to help you choose the most suitable insurance for you.
However, don’t just settle for the first broker you find. It’s essential to shop around, as brokers may have partnerships with specific insurance companies and may not offer the widest range of options. You might also consider seeking advice from multiple brokers to gain a more comprehensive perspective.
Once you’ve chosen a broker, they will assist you in filling out an insurance application. This form will require information about your health history, lifestyle, and financial status. Be prepared to answer questions about your age, occupation, medical history, and potentially, to undergo a medical exam.
Remember, it is crucial to be completely honest when providing these details. Any false information could lead to the denial of a claim or the cancellation of the policy altogether.
After your application has been submitted, the insurance company will evaluate the risk you pose based on the information provided. This process, known as underwriting, could take several weeks.
Once the underwriting process is complete, the insurer will provide a policy proposal detailing the coverage, premiums, and terms. Review this proposal carefully. If you’re comfortable with the terms, you can proceed to purchase the policy. However, if there are elements that you’re uncomfortable with, don’t hesitate to discuss them with your broker or even negotiate with the insurer directly. As certified financial planner™ professionals, New Century Investments helps have this discussions for our clients with insurance brokers. We make sure you have the correct amount of coverage and the best insurer based on a number of factors.
Types of Life Insurance
There are many different types of life insurance policies. The type of life insurance you should get and when you should get it depends on your specific situation. Some of the most common types of life insurance policies include: Term Life Insurance – Term life insurance is the most basic type of life insurance. It’s intended as a temporary solution and will end once the term is up. Term life insurance is typically the lowest cost option on the market. Whole Life Insurance – Whole life insurance is a type of permanent coverage that stays in effect until the insured dies. It’s more expensive over the long term than term life insurance, but it also provides other benefits such as cash value. Universal Life Insurance – Universal life insurance is a type of permanent coverage that’s similar to whole life insurance in that it provides cash value. Universal life insurance has flexible premiums, which makes it a good option for people who expect their income to change over the years. Variable Universal Life Insurance – Variable universal life insurance is a type of permanent coverage that has flexible premiums, like universal life insurance, but also provides a sub-accounts.
Choose the Best Option for Your Family
When purchasing life insurance, there are two main factors to consider: coverage and cost. You want to make sure you have enough coverage in place to provide for your family without overspending and paying more than necessary. When comparing different policies, you want to make sure you’re comparing apples to apples. It’s important to make sure you understand the coverage and costs associated with each policy. Life insurance policies are often broken down into three main types: Term – Provides only death benefits and does not build cash value. Whole – Provides both death benefits and a cash value that can be used for anything. Universal – Provides both death benefits and a cash value that can be used for anything.
Life insurance is an important expense that you can’t ignore. This is something that you need to get while you’re young and healthy. It provides coverage for your family’s final expenses and debts in the event that something happens to you. It also helps to mitigate financial stress if you are the primary provider for your family. If you’re single or married with no kids, getting life insurance might not be the first thing on your mind right now. But it’s something that you’ll want to keep in the back of your mind so that when the time comes, you’ll be prepared. This comprehensive guide will explain everything you need to know about life insurance and why it’s important to have it in place sooner rather than later.
Matt Ward, CFP®
*New Century Investments is a Registered Investment Advisor. It does not, nor it’s advisors, sell Life Insurance products. We look for an independent insurance broker, that is knowledgeable, trustworthy, and understands financial planning. We will partner with your insurance broker. Our mission is to make sure that clients protect their assets. Sometimes, Life Insurance is the best way to solve an immediate short-term gap in an exposure. The worst thing that could happen is having something catastrophic and losing your savings. But it is not the best long-term solution. Always look under the hood of all insurance products before making any decisions, and be sure you understand the benefits, costs, and everything in between.