There are many things to consider when getting a life insurance policy which will help cover the future financial needs of your family. This life insurance guide 101 will help you understand the fundamentals of how life insurance works. Moreover, we’ll show you the types of coverage available, why you need it, and how to pick a plan that’s right for you. We can provide you with more detail about how various life insurance policies will help provide financial coverage for your loved ones.
What is Life Insurance and How Does it Work?
Life insurance is a deal between you and an insurance provider that offers protection based on your timely premium payment. Life insurance provides the designated beneficiary (generally a spouse) with a death benefit upon death. When you die, your heir must file a claim with the insurance provider. This is to provide evidence (a death certificate) of your passage. If an agent normally deals with your family, your beneficiary may contact the agent. This is to help him or her complete the paperwork required. Or, the beneficiary can contact the insurance provider directly and he or she will be advised by a claims representative on what to do. After all the papers have been obtained by the insurance provider, the survivor will then collect the death benefit payout.
If you appoint a child as your beneficiary then the claim will have to be made by a policy custodian. In case you died when your child is still a minor, this might be someone you named to handle the money from policy. If you didn’t name someone, then someone would be named by a judge.
Main Types of Life Insurance
Life insurance can be permanent or temporary. Temporary insurance is more generally referred to as life insurance. And plans are issued for a period of years, often between 5 and 30. You are covered by lifetime insurance for the entirety of your life or up to a certain age, usually age 100.
Some of the things you need to learn about life insurance 101 are the key distinctions between term and permanent life insurance.
Types of Term and Permanent Insurance
Practically all life insurance plans that are sold to individual customers are policy for a specific premium amount. This form of policy means that your premium will remain the same for a given period of time. And this may be the entire term or just a part. Many less common forms of term insurance include annual renewable terms and diminishing coverage for the duration. These policies are not sold to individual insurance customers by most insurance providers. This is because they are usually not the best choice for families looking for the most protection.
Whole life and universal life are two of the most common forms of permanent insurance. Most life-long plans offer a fixed bonus, so the rate you pay for the entire policy remains the same. You will get a bigger death payout by taking a medical test for most life insurance plans. Other available permanent insurance plans include life variable and universal life variable.
How Life Insurance Policies Are Issued
Policies are either a condensed problem or underwritten in full. Simplified problem plans only allow you to answer health-related questions when you complete a policy application. Such plans could cost more because the insurance provider has less evidence of your health. Completely underwritten policies allow you to undergo a medical test and complete the laboratory work. With these plans you usually get a lower premium if the results indicate good health.
Factors That Determine Your Premium Rate
For life insurance 101, a general rule of thumb is that the younger and healthier you are, the less you can pay. Usually age is the most significant factor when determining your premium rate. Many considerations cover:
- Gender—females typically get lower rates because of longer life expectancy
- Answers to health questions on the policy application
- Results from medical exam and lab work
- Family medical history
- Marital status
- Lifestyle—smoker/nonsmoker, alcohol consumption, risky hobbies like skydiving
Why Do I Need Life Insurance?
There are three main reasons why many Americans get life insurance:
- To account for burial and other expenses: This can cost thousands of dollars for a simple funeral. The National Association of Funeral Directors estimates that as of 2014, the median price Americans pay for a funeral is $7,181. When you add a vault price, as most cemeteries need, this comes at a median price of $8,508. Of this reason, about 51 percent of Americans receive life insurance,according to LIMRA.
- To substitute income: if you died leaving a spouse and young children behind, they could find it hard to make ends without your income. A life insurance policy’s funds will help sustain the quality of living in your family. This will aslo compensate for expenses that go along with raising children. For this reason, LIMRA estimates that 34 percent of American households receive life insurance.
- To pay off a mortgage: a substantial portion of your working adult life is committed to paying off your home mortgage, which can take 30 years or more. Life insurance will help to relieve your family’s financial burden of having a roof over their heads after you’re gone. Plan money will help them keep making monthly payments, or pay off the whole balance.
How to Buy Life Insurance
- Determine your needs: Calculate how much debt, the monthly living expenses and the final expenses you have. Include any future costs including university fees. Consider how long you need replacement money. Also think of how much money the heirs will need to pay for immediate and future expenses.
- Get a quote from different insurance companies: Compare the rates, program features and benefits to ensure you get the best deal
- Choose a company with a strong financial rating: Companies with the highest ratings give further assurance of providing the funds to pay for the demand.
- Make an appointment with an agent: After you have narrowed your quest to a particular client, speak to a licensed agent to address your needs in more detail.
- Make sure you can afford the premium: Double check how much money you make and how much expenses you spend to ensure the rate you get is fair.
- Read your policy: Make sure you read all of the fine print after you’ve released a guideline. If you don’t like your contract, it is usually required by state law that you have a number of days to cancel your contract and request a refund on any premiums you paid. This can, depending on the jurisdiction, be within 10 to 30 days of the date of issue of the regulation.
Understanding the Life Chart
A part of life insurance 101 is knowing when you should choose term or permanent life insurance. The Life Chart can help show you where you fit as it relates to needing a larger or smaller amount of coverage and what type of life insurance would best fit your needs. This is also a good way to answer the question “do I need life insurance?”
Young and married with small children:
Young families need a life policy to benefit the most from death. This is because the need for income replacement capable of paying expenses for raising children is greater. Additionally, if a partner who is remaining at home to take care of the children were to die, paying for child care services would be an extra cost for the living partner.
Young and married with no children:
If both you and your partner share similar job and household expenses, you do not need life insurance. But depending on your lifestyle, if one of you is no longer alive, it may be hard to maintain the same quality of living. A modest amount of coverage can suffice to satisfy your needs. Since term plans require you to get only the minimum amount of coverage you need, you can select a plan that has a lower death benefit. This is for you to get a more reasonable rate.
Unlike young adults with teenagers, single parents with younger children do need a program that offers a significant benefit to their deaths. Studies indicate that most single parents are women, and according to Forbes Magazine, the average income of single mothers received as of 2014 was $36,780. This is well below the average income for married couples under 18, which is around $107,054 (as of 2013). With lower incomes for the majority of single parents, it is more likely that if the parent dies, there will not be enough savings that could be used as a replacement for revenue. The basic phase in this case is life insurance 101 to get a low-cost life insurance policy which will provide the most cover. The lower term insurance premiums make this a safe choice for single parents.
So the children are off to college, but that doesn’t mean that the life insurance needs are over. During the college years you may need to sponsor your children to help pay for tuition, room and board, books, or even clothes. When your household is running on two incomes and you still have big debts to pay off like a mortgage, you need revenue replacement insurance. You can still have a while to go, depending on your age, until you have enough retirement savings.
Throughout this point of life your partner may use a policy that has a death benefit to cover costs if one of you dies. The strategy could also be better suited to creating cash equity to complement your retirement savings. You can opt to go with a term plan that converts to permanent insurance. You may also go straight to a permanent policy depending on your needs. For example, if you’re 55 years old and you’re trying to have cash value in a policy by the time you’re 65, then a permanent plan would be better. This is for the reason that it might take so long to create cash value for the policy. This typically takes between 8 and 10 years for life insurance policies.
You could get a 10-year adjustable term plan if you don’t need supplementary income as fast. And you will have a life-long policy by the time you’re 65. And when you hit 75, you will get cash interest in the policy. When converting a term plan, one thing to bear in mind is that insurance providers usually only allow you to do so before you turn 65
Retired senior citizen:
You don’t need life insurance if you have the resources to get you through retirement and to care for your spouse should you die. If this does not apply then it might be important to get a life policy. When you are under 80, you can still get a life insurance package for the term. This is usually the average age at which insurance providers offer term coverage. However, as you are older, the coverage will be more costly. Premiums are generally cheaper than a permanent insurance policy, such as lifetime.
If you need a policy that can help fund your retirement savings, then a permanent plan’s cash value will match your requirements. Bear in mind that building cash value takes time. So you might want to weigh the odds. This is whether or not you’ll be around long enough to take advantage of this feature, depending on your age. Another type of permanent insurance that you can also prefer is total loss insurance. This is usually provided as a whole life policy. That kind of cover is intended only to cover your death and funeral costs, not your long-term financial needs.
Making a Decision
Now that you’ve learned the basics, it should be easier for you to determine what sort of policy you can get. Health Plans in Oregon will help you get more advice on making the decision. And we will answer any questions you might have.
Learn More: Types of Oregon Life Insurance Plans