Before You Commit: Life Insurance 101
Brush up on these life insurance basics. It's a small price to pay to make sure your family is protected.
Some people cringe at the very thought of life insurance. Preparing for their own demise seems a bit strange, maybe even morbid.
In fact, far from being a gloomy affair, it's a very sensible and caring act. It's very practical to plan for the future of those you will leave behind while you still can. No one knows when their life will end and no one wants to leave their loved ones without any support, so it's bet to prepare for the inevitable (learn The Perfect Age to Get Life Insurance).
But don't just buy a life insurance policy from the first agent you see. No two policies are the same, and you need to choose carefully so you can get the protection you need without overspending (to help you find the right insurance professional, consult these 5 Questions to Ask Before Choosing an Insurance Agent).
So, to help you get started on your search for the right policy, here are some life insurance basics.
You Have Two Choices: Term and Whole Life
Life insurance policies come in two categories: term and whole life.
Term life insurance, as the name implies, only provide benefits during a certain period. Term policies afford your family protection while they still depend on you for a lot of direct support. You might, for instance, choose a policy that expires once you finish paying your mortgage, or maybe one that will last you until all your children have graduated college.
If you pass away during the term of your policy, your beneficiaries will receive the death benefit as a lump sum (find out How to Collect a Life Insurance Payout). Once the agreed-upon term expires, however, you will no longer be insured.
As you might have guessed, whole life insurance is much more expensive than term life insurance. It's also riskier. So, if an agent offers you a permanent life insurance policy, make sure you understand all of the risks involved before signing the contract.
Get It as Soon as Possible
One fundamental truth for all insurers is that they will charge a higher premium when they take on greater risk. That's why auto insurance companies will charge a lower premium to insure brand new car—because they're less prone to breaking down, the company won't have to pay out claims as often (learn more about How Auto Insurance Companies Value Your Car).
The same principle applies to life insurance. If you want lower premium payments, apply while your risk of dying is at its lowest. In other words, apply while you're still young.
You May Need More Benefits
If you're offered a life insurance policy that provides a million dollars in death benefits, you might be impressed by that figure. But think about it more carefully: that might not amount to a whole lot over time. Your kids' tuition for private or out-of-state universities alone could eat up a significant portion of that money. Not to mention the portion of the payout that will go to paying off your debts and the cost of your funeral.
How much would be left over to provide for your loved ones? And how long will they need to stretch it out if you're no longer around to support them? Depending on your situation, one million dollars in benefits might be enough, but consider increasing your coverage if it isn't.
Employer Benefits Are Never Enough
If you think that you don’t need life insurance because your place of employment provides death benefits, I hate to break it to you but you're wrong.
Employers usually provide three years’ worth of salaries as death benefits for their employees. Like the million dollar coverage, that looks good on paper but your beneficiaries will likely burn through that sum just paying for funeral and other expenses.
You'll also want more security. If your employer goes out of business or terminates your position right before you die, your employer benefits won't be there to help your family. Give yourself protection you can rely on; buy a standalone policy that you can take with you wherever you go.
Even the Unemployed Need Life Insurance
What about stay-at-home moms and dads? They don't add to the family income, but that doesn't mean they shouldn't get life insurance.
For one thing, a lot of the unpaid work stay-at-home parents do have real financial benefits. Statistics show that it costs about $40,000 a year to pay someone to do the work a stay-at-home parent does. That's not an easy amount to scrape together, especially after dealing with funeral costs.
Even if you're unemployed, you need a good life insurance to make sure that your family's way of life doesn't have to change too drastically if anything were to happen to you (also see A Look at Burial Insurance to find out whether it makes sense as an alternative).
You Must Not Lie
If you think that you can get away with lying to an insurance agent about your current health status to get lower premium payments, you're in for a rude awakening.
It can be tempting to leave out or alter a few material facts when purchasing a policy. But when your insurer finds out, they will cancel your policy without returning any of the premiums you paid into it. And, of course, you can forget about them paying out a claim.
Don’t Hide Your Policy from Your Beneficiaries
As I mentioned at the opening of this article, life insurance can be an awkward topic for some people. Some policyholders might be uncomfortable discussing their life insurance policy with their loved ones, or they might want to avoid worrying them.
But how can your family cash in on your life insurance policy if you're the only person who knows where it is? How would they even know what insurance company to contact? Yes, you should keep your life insurance policy in a safe place, but that doesn't mean you should keep complete secrecy about it.
And you can't just rely on your insurance company to deliver the payout to your beneficiaries. They're simply not in the habit of checking up on their clients to find out whether they're still alive.
If, after all of these considerations, you still find it difficult to discuss this matter with those around you, or you have reason not to fully trust them with the information, at least tell your lawyer about your life insurance policy. Whatever you do, make arrangements so that your policy doesn't linger unclaimed while your loved ones struggle financially.
Your Health Affects Your Premium
The terms of your life insurance policy are bound to change depending on your health. For instance, if you suddenly contracted a chronic, incurable disease, you can expect your life insurance premium to skyrocket.
As soon as you notice that your health taking a turn for the worse, ask your insurance provider if you can switch from a term to a whole life insurance. Even if there is a chance your health will recover, it's better to play it safe and switch to a policy that provides better coverage (see What Influences Life Insurance Premiums? to learn more).
The information in this article will arm you with the basics and empower you to make better insurance decisions, but finding the right provider and the right policy will still take a bit of research and time. Don't be too hasty and be sure to read the terms of the policy very carefully before signing anything. Purchasing life insurance is an important step and it pays to do it right.