Get to Grips with Life Insurance
Life is precious for so many reasons, among them the support we provide for
each other. That's one of the reasons we have life insurance: so we can
take care of others who are important to us.
Yet, surprisingly, although the vast majority of Americans agree life
insurance is important, most people either don’t have it or they don't have
enough, according to research group LIMRA.
One reason is that many people actually believe life insurance is much more
expensive than it really is (up to 3 times the actual price). To add to
that misunderstanding, 70 percent of Americans fail a 10-question basic
life insurance IQ test!
In fact, basic life insurance is quite easy to understand. We all know our
time here will be up one day. Life insurance can allow our beneficiaries --
whoever we nominate -- to collect a fairly significant sum of money when we
A policy either guarantees to pay out whenever the time comes, or it pays
if the policyholder dies within a specified period.
We'll take a closer look at these, and more, in a moment. But first, let's
consider another important factor why many people don’t have life
insurance: they simply don’t like to think about what it signifies -- the
end of a life.
But that's the worst possible reason for not being insured because it
ignores the needs of those who rely on us.
The Importance of Life Insurance
Life insurance is available in multiples of a thousand dollars, usually
from about $5,000 to $1 million or more.
Depending in the amount and the beneficiaries, it can:
- Replace lost income for dependents -- especially important if there are
children to be cared for or other family members with special needs.
- Pay for final expenses -- funeral and burial costs, which can be
surprisingly high in some circumstances.
- Pay death taxes, which might otherwise be a burden for surviving family.
- Leave a significant amount of money to charities we care about and wish
- Create a bequest in our memory.
- Create an inheritance for heirs that could transform their lives.
Some types of life insurance can also be used for savings or even
Different Types of Life Insurance
There are two basic types of life insurance -- term and whole life (also
sometimes called permanent life insurance).
Term Life Insurance
The one that pays out only if death occurs within a specified period,
usually between one and 30 years or until a particular age (usually 65).
Because it's not guaranteed -- we all hope to live longer! -- it's low
cost, extremely so if you're young, but also quite affordable for older
Low cost and a high payout make it particularly attractive to young
families on a budget because it can take care of so much future expenditure
during the crucial years.
It comes in two main varieties:
- Level term life insurance, in which the payout stays the same throughout
the period covered by the policy. Nearly all policies are level term.
- Decreasing term life insurance in which the payout reduces each year
over the period. This can sometimes enable people on a tight budget to
secure very high coverage for key, early years.
Term life insurance policies sometimes can be renewed for a further period
without further evidence of health, but at a higher premium that reflects
the older age of the policyholder.
Also, since there's no payout after the term expires, some policies may
offer a return of some or all of the premiums. Expect to pay more for
Whole Life Insurance
This is the guaranteed payout mentioned earlier. Whenever the insured
passes on, the policy pays.
There are three main types of whole or permanent life insurance:
- Traditional whole or ordinary life coverage, in which the premium and
the death benefit are unchanged, no matter when the policyholder dies.
Obviously, the older a person is when the policy is issued, the higher,
generally, the premium will be.
- Universal or adjustable life insurance is more flexible. It allows the
policyholder to increase the benefit (subject to a medical exam) usually at
any time. It can also be used as an interest-earning savings vehicle. In
some circumstances, the savings can be used to replace premium payments.
- Variable life insurance, does what the name suggests. It combines life
insurance with a savings and investment program but the payout on death can
vary depending on how the investment portfolio performs. (There's also a
sort of hybrid type that combines both the universal and variable approach)
Where a policy includes savings and generates further income, these can be
used to secure a loan. The policy can also be surrendered so the holder can
collect accumulated savings during their lifetime -- but this should only
be done after taking appropriate professional advice.
How Much Life Insurance Do I Need?
That depends on at least two things: The future needs of your dependents
and your budget.
Some experts suggest a guideline of around 20 times your gross salary but
it obviously differs according to the individual's age and family
In fact, there are many factors to be weighed up. You might find the
following article from the Insurance Information Institute useful:
It's also something you should discuss with a life partner, another trusted
family member, your insurance agent and/or your financial advisor.
When Should I Get Life Insurance?
Unless you have no dependents, no desire to pass on a legacy, and
sufficient money for your funeral costs, you should consider getting life
insurance right now, to avoid bequeathing a financial burden to those you
Once the premium is set, it is effectively locked in, which means it can't
be increased if health deteriorates, although, as mentioned earlier, a
variable policy generally permits the policyholder to change the premium,
or the benefits (subject to a health check).
Your family stage and your budget are the important elements. You should be
able to discuss this with your insurance agent, without any kind of
commitment, to get a broad idea of the coverage you could get and the cost.
If you don’t already have an agent, please speak to the life insurance
professionals at Aldrich Taylor Insurance 1-818-841-2940.
Now, are you ready for that life insurance IQ test?!!