Get to Grips with Life Insurance

September 20, 2017

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 pass on.

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 to support.
  • 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 collateral.

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 ages.

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:

  1. Level term life insurance, in which the payout stays the same throughout the period covered by the policy. Nearly all policies are level term.

  2. 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 these.

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:

  1. 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.

  2. 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.

  3. 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 circumstances.

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 leave behind.

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?!!