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Life Insurance
According to the 2020 Insurance Barometer Report from industry organizations LIMRA and Life Happens, 41 million individuals in the United States feel they need life insurance but do not have it. This may be explained in part by people’s habit of overestimating the expense.
Affordability and value perceptions might dissuade individuals from purchasing the life insurance they need. According to the Insurance Barometer Report, more than half of respondents believed a $250,000 term life insurance policy for a healthy 30-year-old would cost $500 or more each year. However, the average annual expenditure is closer to $160. That’s a significant difference between perceived and real costs.
Here’s a rundown of everything you need to know about finding the greatest life insurance policy so you can make an informed selection.
What Exactly Is Life Insurance?
A life insurance policy is a legal agreement between you and an insurance provider. In return for your premium payments, the insurance company will pay your beneficiaries a lump amount known as a death benefit following your death.
Your recipients are free to use the money in any way they see fit. This sometimes involves paying bills, paying a mortgage, or putting a kid through college. Having life insurance as a safety net helps guarantee that your family can remain in their house and pay for the things you planned for.
There are two main types of life insurance: term and permanent. Permanent life insurance, such as whole life insurance or universal life insurance, may give lifelong protection, while term life insurance only provides coverage for a certain period of time.
The Main Types of Life Insurance
Term Life Insurance
According to the Insurance Barometer Report, term life insurance is not only the most economical kind of life insurance, but it is also the most popular type of life insurance sold (71% of customers).
Term life insurance offers coverage for a certain period of time, with premium payments remaining constant throughout the policy’s term. The most common insurance durations are 10, 15, 20, 25, and 30 years.
If you die within the policy’s term, your beneficiaries may file a claim and receive the death benefit money tax-free.
When the policy’s term ends, you may be able to renew the coverage in one-year increments, which is known as guaranteed renewability. However, the rate of renewal will increase with each passing year.
Permanent life insurance
Permanent life insurance offers coverage for the rest of one’s life. It is more costly than term life insurance because it:
- Can last for the rest of your life
- Usually increases the financial value
The cash value component grows tax-deferred during the policy’s term. It serves as the policy’s savings component. Typically, you may borrow against the cash value of the insurance or make a withdrawal. If you elect to cancel the insurance, you will get the cash value less any surrender charges.
In some policies, cash values may accumulate slowly over time, so don’t expect to have access to a large sum of cash straight away. The predicted cash value will be shown on your policy illustration.
Permanent life insurance comes in numerous forms:
Whole life insurance provides a set death benefit as well as a cash value component that increases at a predetermined rate of return. Many whole life insurance plans give out dividends that may be utilized to lower premium payments or to increase cash value.
Universal life insurance is often more flexible than whole life insurance. Within certain restrictions, you may be able to change your premium payments and death benefit. Depending on the policy type, the cash value of a universal life insurance policy will grow. For example, the cash value of an indexed universal life insurance policy will be linked to an index such as the S&P 500. A variable universal life insurance policy will usually include investing subaccounts that you may choose and control.
Burial insurance is a modest whole-life policy with a small death payout, often ranging from $5,000 to $25,000. Burial insurance is solely intended to cover funeral and final expenditures.
Survivorship life insurance, often known as “second to die life insurance,” covers two persons under a single policy, typically a married couple. The insurance pays out the death benefit to the beneficiaries once both spouses have died. Survivorship life insurance is often purchased as part of a wider financial strategy to establish a trust or pay federal estate taxes.
How to Select the Best Type of Life Insurance Policy
With so many life insurance alternatives available, it may seem difficult to choose the best one.
To begin, choose between term and permanent life insurance.
If you just need life insurance for a limited period, consider a term life insurance coverage. For example, if you want insurance to cover your working years as a prospective “income replacement” if you die.
If your budget is tight, term life insurance is a suitable option. Because term life insurance offers coverage for a set period of time and is not a cash value policy, the premiums are lower than those for permanent life insurance.
Your life insurance needs may alter as you go through life. Many term life insurance plans are convertible to permanent life insurance policies. Your alternatives will be determined by your insurance and insurer. You may convert your term life insurance policy to permanent coverage without having to reapply or take a life insurance medical exam.
A permanent life insurance coverage, on the other hand, will last the rest of your life. If accumulating cash value is essential to you, consider permanent life insurance. However, if you’re simply interested in the cash value buildup and you don’t really care about the insurance cover, then you’d be better off placing your money into a savings or investment vehicle rather than paying for the life insurance and expenses that come with a permanent policy.
Furthermore, monetary value is not usually intended for recipients. Upon death, any financial value is typically returned to the life insurance provider. Your beneficiaries get the death benefit of the insurance, not the death benefit plus cash value. However, certain insurance types may provide a death benefit as well as cash value for a greater premium.
What Is the Cost of Life Insurance?
The cost of life insurance varies considerably based on several criteria. The sort of life insurance you choose will be a significant cost influence. For example, for the same amount of coverage, a term life insurance policy is much less costly than a whole life insurance policy.
The following are some of the most prevalent variables influencing life insurance rates:
Age. The younger you are when you get insurance coverage, the less you will pay. This is because your chances of dying are lower.
Sex. According to the National Center for Health Statistics, females enjoy an almost five-year greater life expectancy than men. As a result, males often pay more for life insurance than women (except in Montana where insurers must provide gender-neutral life insurance rates).
Health. Your health has a significant influence on your life insurance prices. The insurer will assess your history and present medical issues to determine your life expectancy.
Lifestyle. Your driving record (such as a DUI conviction), criminal background, and risky employment and hobbies (such as scuba diving) may all result in higher life insurance premiums.
How to Choose the Amount of Life Insurance Coverage
A decent rule of thumb for calculating the amount of coverage you need is to:
Add up all of the expenditures you wish to cover, such as income replacement for your job, a mortgage, and college fees for your children.
Subtract the funds that your family might use to meet such expenditures, such as savings and current life insurance, from that total. If your spouse will need retirement funds in the future, leave them out.
The outcome is the amount of life insurance you need. It may seem to be excessive, particularly if you have accounted for income replacement for several years. Still, because life insurance quotes are free, it doesn’t hurt to estimate the amount you need.
If it becomes expensive, you can purchase what you can now to lock in a decent rate. You can buy more later, but keep in mind that your rate will be determined by your age and any health issues you’ve developed many years from now.
How to Get Life Insurance Quotes
According to the Insurance Barometer Report, 15% of respondents believe they are unable to purchase life insurance. Simultaneously, many buyers overestimate the expense. The only way to find out how much you will spend is to seek life insurance quotes from a few different firms. Quotes are provided for free. Based on your age, health, and desired coverage level, an expert life insurance adviser will know which firms provide the best rates.
Expect questions on your age, health, cigarette usage, family health history, driving record, and any risky jobs or hobbies.
When you’ve found a quote you like, you can begin a formal application. You provide further information and apply for a specified policy type, amount of coverage, and policy duration (if purchasing term life insurance).
Some insurers may need a life insurance medical exam after you’ve filed your application. These examinations may be taken at home, at work, or a local exam center.
The time it takes to complete an application varies greatly depending on the company and insurance type.
Some insurers provide quick life insurance, including speedy acceptance, to those who qualify, are often younger (under the age of 60), and have no medical problems.
Depending on the company, some insurers employ “accelerated underwriting” to bypass the medical test and review applications in a day or a week.
Furthermore, some insurers utilize a conventional method that includes a medical exam and a month-long approval process.
How to Select a Beneficiary
A life insurance beneficiary is an individual who will get the death benefit if you die.
You may name several beneficiaries and specify how much each will get after you die. You should also include dependent beneficiaries who will get the death benefit if your main beneficiaries die.
Not everyone identifies individuals as beneficiaries. Some people refer to trusts. You can guarantee that the money is spent according to your intentions by establishing a revocable living trust and identifying it as the life insurance beneficiary. For example, trust funds might be used to care for children.
If you decide to designate a trust as the beneficiary of your insurance, engage with an attorney to properly form the trust. It’s also a good idea to consult with a financial consultant to ensure that a trust is part of your overall financial strategy.
It is critical to frequently update and analyze your beneficiary choices. Life events such as marriage or divorce, for example, might influence your choice.
Contact your life insurance and submit a change of beneficiary form to amend your beneficiaries. Making modifications to a will alone will not affect life insurance.
What Steps Does a Beneficiary Take to File a Claim?
Claims may be settled quickly—in approximately a week if the insurer has all of the necessary papers. Do not expect a life insurance firm to contact you. They are unlikely to be aware that your relative died. While some insurers are attentive in looking for deceased covered clients, they may not detect a death right away.
To begin the claim procedure, you will need to provide a certified copy of the death certificate. The insurer will not return it. As a result, if you want certified copies for numerous reasons, you should obtain a few.
Notify the insurance provider as soon as possible: While you may have a lot on your plate after the death of a loved one, the sooner you contact the insurer, the sooner you can get the money.
Check that you have satisfied all of the claim requirements: Once you have completed all of the claim papers, ensure that all supporting documents are included. A claim form and a death certificate may be included.
Claims are normally settled within 30 days after receipt of the relevant paperwork by the insurer.
To file a claim, you do not need an original copy of the life insurance policy. To begin the claim, you only need to know the name of the insurance company and contact them.
That is why it is important to notify your beneficiaries about your insurance and provide them with the name of the insurer. Furthermore, insurers are legally required to pay only the persons named on the insurance.
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Do I need to sign up for Medicare when I turn 65?
It depends on how you get your health insurance now and the number of employees that are in the company where you (or your spouse) work.
Generally, if you have job-based health insurance through your (or your spouse’s) current job, you don’t have to sign up for Medicare while you (or your spouse) are still working. You can wait to sign up until you (or your spouse) stop working or you lose your health insurance (whichever comes first).
– If you’re self-employed or have health insurance that’s not available to everyone at the company: Ask your insurance provider if your coverage is employer group health plan coverage (as defined by the IRS.) If it’s not, sign up for Medicare when you turn 65 to avoid a monthly Part B late enrollment penalty.
– If the employer has less than 20 employees: You might need to sign up for Medicare when you turn 65 so you don’t have gaps in your job-based health insurance. Check with the employer.
– If you have COBRA coverage: Sign up for Medicare when you turn 65 to avoid gaps in coverage and a monthly Part B late enrollment penalty. If you have COBRA before signing up for Medicare, your COBRA will probably end once you sign up.
Answer a few questions to find out when you need to sign up.
How do I sign up for Medicare?
If you’re already getting benefits from Social Security (or Railroad Retirement Board), you’ll automatically get Medicare. If not, you’ll need to sign up.
How does Medicare work with my job-based health insurance?
Keep in mind that:
– Most people qualify to get Part A without paying a monthly premium. If you qualify, you can sign up for Part A coverage starting 3 months before you turn 65 and any time after you turn 65 — Part A coverage starts up to 6 months back from when you sign up or apply to get benefits from Social Security (or the Railroad Retirement Board).
– If you have a Health Savings Account, you and your employer should stop contributing to it 6 months before you sign up for Part A (or apply to start getting Social Security benefits) to avoid a tax penalty.
| I’m still working and… | How my coverage works with Medicare (Part A & Part B): |
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| My (or my spouse’s) job has less than 20 employees. |
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| My (or my spouse’s) job has more than 20 employees. |
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I (or my spouse) get a stipend from my employer to buy my own health insurance. OR I (or my spouse) am still working, but I don’t have health insurance through that job. |
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Do I need to get Medicare drug coverage (Part D)?
You can get Medicare drug coverage once you sign up for either Part A or Part B. You can join a Medicare drug plan or Medicare Advantage Plan with drug coverage anytime while you have job-based health insurance, and up to 2 months after you lose that insurance.
Even if you have a Special Enrollment Period to join a plan after you first get Medicare, you might have to pay the Part D late enrollment penalty. To avoid the Part D late enrollment penalty, don’t go 63 days or more in a row without Medicare drug coverage or other creditable drug coverage.
If you have other drug coverage: Ask your drug plan if it’s “creditable drug coverage.”
Each year, your plan must tell you if your non-Medicare drug coverage is creditable coverage. Keep this information — you may need it when you’re ready to join a Medicare drug plan.
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If you: |
Do this: |
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Don’t have any drug coverage |
Part D late enrollment penalty
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Have drug coverage that’s creditable |
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Have drug coverage that’s not creditable |
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