Life Insurance 101
Of the over 60% of Americans that have life insurance, almost half of them don’t have sufficient coverage. Where you would fall? Do you know?
Life insurance is sometimes a hard topic to discuss, and can come with many complicated options. It’s hard to choose what kind of policy is best for you, because there is only one way to make the perfect insurance choice – by knowing the day of your death (which of course is impossible)!
People buy insurance trying to make their best guess about what resources will be needed should a tragedy occur. Since we don’t know when or how this might happen, choices must be made based on resources, health, and family circumstances.
Looking at life insurance policies, there are two main types of insurance – Term Life or Whole Life/Permanent.
A term policy is set for a certain time frame (a term) and then it ends. Term policies usually go for 1, 5, 10, 20 or 30 years, and make a larger coverage amount available at a lower cost than Whole Life/Permanent. These policies are usually better on your budget and can be designed to be in effect when your needs are greatest, such as to payout to your surviving spouse when your children are young.
But it’s widely known that about 95 to 99 percent of the time, people who buy Term insurance never see a payout because either they let the policy lapse or they live longer than the term set. One reason that people take a risk on term insurance is that they might assume that other income, like retirement, will be in place.
A Whole Life/Permanent policy will pay whenever you die. Whole Life costs more because you are purchasing a policy designed to provide a death benefit for your entire life. These insurance policies are more expensive because you are paying the average premium required to cover the cost of insurance over much longer periods of time. In short, a policy that covers you for up to 120 years will cost more than a policy designed to cover you for 10 years.
Term vs. Whole Life/Permanent
Things to keep in mind with Term versus Whole Life/Permanent insurance are cost and need.
You may not be able to afford higher premiums for Whole Life/Permanent life insurance so you choose a Term policy to provide resources when the need is greatest. But let’s say that your parents had a special circumstance like a handicapped child who would need lifelong care. In that case, something permanent might be required to provide resources for that child after their death. It is wise to get some advice from a financial expert when making such a purchase, and if you’re concerned you’re being pushed in any one direction, get a second opinion. This kind of purchase requires you to think through your family’s needs and your budget.
While all kinds of financial gurus and media commentators will take strong positions regarding certain financial products, remember that financial products are just tools, designed for specific purposes. Sometimes you need a hammer, sometimes a drill, sometimes a bulldozer. You should evaluate financial tools based on need, so start this process by having a serious look at your needs and keep an open mind about the tools available until you evaluate all the costs and benefits. Begin by having a strong budget in place, because to buy any kind of insurance is to take on a financial commitment.
An important question to ask is, “what will my family need if I die at 40 or 50 or 60 or beyond?” That answer probably changes as your children become self-supporting and your spouse perhaps has retirement income coming. (So don’t forget to save for retirement too!)
When calculating your life insurance needs, remember to include at least these 4 things:
- Income Replacements
- Funeral/Death Costs
- Education Costs for Children
- Mortgages and Other Debts
The sum total of these 4 things will get you at least in a ballpark range of what you need to plan for. One BIG mistake people make when it comes to insurance is buying it too late: “…the average life-insurance customer is a 48-year-old man with teenaged children – and he’s about 15 years too late. As people get older, the more assets they typically have, which can offset the financial impact of death; a 30-year-old with a baby, on the other hand, has relatively little, and years of income ahead of him ”
And for those who love Term insurance, remember that it can become more expensive and harder to get as your health changes, so what was available when you bought a Term policy at age 30, young and healthy, may not be available at 60 if you’ve had any health challenges. Some Term policies can be converted to permanent if you act by a certain point, but that will increase your costs, so pay attention to the fine print.
A health screening is common for almost all life insurance, and things like smoking or pre-existing conditions will be considered. Today’s companies might look at your driving record, credit score and even online habits to decide if you are worth the risk. Remember, the insurance company’s goal is to bring in more premium dollars than the amount they ultimately pay in death benefit payments.
If you do buy insurance, it is VERY important that you keep that policy paid up and the contact for the policy with your other financial records so that your heirs know how to file a claim and receive the money. Consumer Reports found that about $1 billion in unclaimed life insurance benefits are waiting for the right people to claim them. You begin that process by getting a copy of your loved one’s death certificate, an arrangement you make with the funeral home.
I urge you to become informed on what can be a rather complicated process. The Bible gives us clear instruction to make a financial plan for our families. 1 Timothy 5:8 notes, “Anyone who does not provide for their relatives, and especially for their own household, has denied the faith and is worse than an unbeliever.”
But you don’t have to do it alone. Get some help. Proverbs 15:22 says, “Plans fail for lack of counsel, but with many advisers they succeed.” Start this process by completing your own Life Insurance Needs Worksheet, and then work through the Planning Your Legacy Guide.