If you live paycheck to paycheck, the concept of life insurance may seem like either a waste of money or something reserved for a higher tax bracket. However, life insurance could be the safety net your family needs should the worst-case scenario happen.
In many cases, it’s much more affordable than you may think. Depending on your age, health history, length and type of coverage, you may be able to get life insurance for less than a dollar a day. Just make sure you know what you’re signing up for.
Life Insurance Basics
The following are terms to help you better understand life insurance policies:
- A death benefit is the amount of money the insurance company will pay when the insured dies. This amount is, typically, tax-free for the beneficiaries.
- The beneficiaries are the people who receive the death benefit. The policy may pay out to a single person or be divided amongst several, such as a spouse and children. Beneficiaries do not have to be related or even a person, as you can leave the death benefit to a trust or charity.
- The premium is the monthly (or annual) payment required to keep the policy in effect.
- The cash value is a component of permanent life policies that builds over time and can be cashed out or borrowed against.
The Difference Between Types of Life Insurance Policies
Term and permanent are the two types of life insurance. Term, as the name describes, is for a set term, or period, such as 10, 20, or 30 years. Since term life insurance expires after a predetermined time, it is the more affordable option.
Permanent life insurance lasts for your entire life (as long as you continue to pay the premium), and, therefore, is more expensive than term policies. Permanent life insurance also has benefits while you are living, including a tax-free savings account and the ability to borrow money from the policy.
The two kinds of permanent life insurance:
- Whole life insurance has fixed premiums (never increases or decreases). The death benefit (the payout) also stays the same.
- Universal life insurance allows you to adjust premiums (provided there is enough within it to cover costs). Should your policy earn more than the promised death benefit, the payout will be higher. You also have the option to increase or decrease the death benefit over time.
If you choose to go with universal life insurance, you can select between an indexed or variable policy.
- An indexed policy credits your account if the market goes up, but you do not lose money if the market crashes. However, there is a limit on how much your account can gain.
- A variable policy is like a brokerage account in that your account is directly invested in the market, so the value can fluctuate up and down with the market. While there is no cap to how much you can earn, you may need to pay more if the market crashes just to keep the policy from disappearing.
Whole life is the easiest option with little risk. Universal life gives you some flexibility but you need to manage it. Indexed universal life is less risky than variable, but variable gives you maximum potential for growth.
What is Final Expense Insurance?
Alternatively, you can select a mini whole life insurance to cover just the costs of end-of-life medical expenses and the funeral. While term and permanent life policies start at $100k and can go into the millions, a final expense insurance policy is usually only $5,000 to $25,000.
However, even though this policy is for the duration of your life, it does not have living benefits (it does not build cash value, and you cannot borrow against it).
This type is very affordable and usually doesn’t require the insured to be healthy. So, if you are denied a term or permanent policy for health reasons, you may still be able to get one of these.
How Much Does Life Insurance Cost?
No matter which type of policy you select, as mentioned, different factors affect how much your premiums will be.
- Age – The older you are, the higher your costs will be since the company assumes you’re more likely to die sooner. For every year you wait to buy a policy, the price goes up by 8% to 10% on average.
- Health History – Insurance companies calculate risk, so your body mass index (BMI), blood pressure, smoking history, family history, and chronic illnesses influence costs. Any variable that shortens your life expectancy increases your premium rate.
- Lifestyle Factors – Similarly, if you engage in dangerous activities (like scuba diving or have a reckless driving record), companies will see you as riskier to insure.
- Death Benefit – The higher the payout, the higher the premium.
- Policy Type – As mentioned, term life insurance is cheaper than permanent because you are, basically, betting on the chance that you die in the term. Permanent is often 5 to 10 times more expensive because the company knows it will eventually pay out.
- Term Length – Likewise, the longer the term, the higher the cost since the chance of you dying in 30 years is higher than in 10.
Prices vary significantly between insurance companies since they have different operating costs and underwriting guidelines. Newer companies may have lower rates to attract customers, while older companies may have higher costs since consumers trust they will be around to pay out upon their death.
How to Choose the Best Life Insurance Policy for You
Choosing the best life insurance policy is about finding one that matches your needs. First, determine why you want coverage. If it is to make sure:
- If your family doesn’t have a huge bill when you die, then you may only need final expense insurance.
- Your spouse has enough to cover basics while the kids are minors, then a term life insurance policy can protect them until they’re adults.
- You have a lifelong safety net that doubles as a financial asset; look into permanent life insurance options.
To calculate the coverage amount, companies typically suggest 10 to 15 times your annual salary, which would, in theory, cover 10 to 15 years of expenses after you pass.
By Admin –
