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There are 41 million people in the U.S. who say they need life insurance but do not have it, according to the 2020 Insurance Barometer Report from industry groups LIMRA and Life Happens. This can partially be explained by the tendency of people to overestimate its cost. Perceptions about affordability and value can deter people from buying the life insurance they need. More than half of respondents in the Insurance Barometer Report said a $250,000 term life insurance policy for a healthy 30-year old would cost $500 a year or more. But the average cost is closer to $160 a year. That’s a pretty big discrepancy in perceived cost versus actual cost. Here’s a breakdown of what you need to know about getting the best life insurance so you can make an educated decision. What Is Life Insurance?Life insurance is a contract between you and an insurance company. Essentially, in exchange for your premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death. Your beneficiaries can use the money for whatever purpose they choose. Often this includes paying everyday bills, paying a mortgage or putting a child through college. Having the safety net of life insurance can ensure that your family can stay in their home and pay for the things that you planned for. There are two primary types of life insurance: term and permanent life. Permanent life insurance such as whole life insurance or universal life insurance can provide lifetime coverage, while term life insurance provides protection for a certain period. Best Life Insurance Companies Cost competitiveness Very good Other top strength Pricing stability Compare Quotes Compare quotes from participating carriers via Policygenius.com Cost competitiveness Excellent Other top strength Historical performance Compare Quotes Compare quotes from participating carriers via Policygenius.com Cost competitiveness Very good Other top strength Access to cash value Compare Quotes Compare quotes from participating carriers via Policygenius.com See the full list: Best Life Insurance Companies of 2022 Main Types of Life InsuranceTerm Life InsuranceIn addition to being the most affordable type of life insurance, term life insurance is the most popular type of life insurance sold (71% of purchasers) according to the Insurance Barometer Report. Term life insurance provides coverage for a certain amount of time and the premium payments stay the same amount for the duration of the policy. Typical choices are policy lengths are 10, 15, 20, 25 or 30 years. If you pass away within the term of your policy, your beneficiaries can make a claim and receive the death benefit money, tax-free. Once the term of the policy expires, you may be able to renew the coverage in increments of one year, known as guaranteed renewability. But each year of renewal will be at a higher rate. Permanent life insurancePermanent life insurance provides lifelong coverage. It’s more expensive than term life because it:
The cash value component accumulates on a tax-deferred basis over the life of the policy. It acts as a savings portion of the policy. Typically, you can borrow against the policy’s cash value or make a withdrawal. If you decide to end the policy, you can get the cash value minus any surrender charge. In some policies the cash value may build slowly over many years, so don’t count on having access to a lot of cash value right away. Your policy illustration will show the projected cash value. There are several varieties of permanent life insurance:
What Does Life Insurance Cover?Life insurance covers all causes of death, with one main exception: Suicide within the first two years of owning the policy. Apart from that exclusion, life insurance covers death from illness, disease, accidents and homicide. Regardless of the cause of death, a life insurance company could deny a claim if it believes there was misrepresentation on the life insurance application, especially if the death is within the first couple of years of owning the policy. For example, if someone lies about their health or other information on the application, the life insurance company could deny a claim by the beneficiaries. In other extremely narrow cases, a life insurance claim could be denied if the beneficiary killed the insured person, or if the claim is disputed by someone who says the policyholder was coerced into changing the beneficiary. How to Choose the Right Life Insurance Policy TypeWith all of the life insurance options available, it may seem complicated to choose the right one. Start by deciding between term life and permanent life insurance. Consider a term life insurance policy if you need life insurance for a specific amount of time. For instance, if you want insurance to cover your working years as possible “income replacement” if you were no longer around. Term life insurance is also a good choice if your budget is limited. Since term life insurance provides protection for a specific amount of time, and it’s not a cash value life insurance policy, the rates will be lower than permanent life insurance. As you enter different stages of life, your life insurance needs may change. Many term life insurance policies are convertible to a permanent policy. The options will depend on your policy and insurer. Term life conversion allows you to switch to a permanent policy without re-applying or taking a life insurance medical exam. On the other hand, a permanent life insurance policy will last for the duration of your life. If building cash value is important to you, look at permanent life insurance options. But if you’re purchasing a permanent policy only to capitalize on the cash value accumulation, depending on the policy, you’re better off putting your money into a savings or investment vehicle, so you’re not paying for the life insurance and charges within a permanent policy. And cash value isn’t typically intended for beneficiaries. Upon death, any cash value generally reverts back to the life insurance company. Your beneficiaries get the policy’s death benefit, not the death benefit plus cash value. That said, some policy types will offer the death benefit plus cash value, but for a higher price. How Much Does Life Insurance Cost?The cost of life insurance varies significantly depending on several different factors. One of the biggest cost factors will be the type of life insurance you buy. For example, a term life insurance policy is significantly less expensive than a whole life insurance policy for the same amount of coverage. Here are some of the most common factors affecting life insurance rates:
How to Choose a Life Insurance Coverage AmountA good rule of thumb for estimating how much coverage you need is to:
The resulting number is how much life insurance you need. It may look high, especially if you’ve factored in income replacement for many years. Still, life insurance quotes are free, so it doesn’t hurt to price out the coverage you need. If it turns out to be unaffordable, you can buy what you can afford now to lock in a good rate. You can buy more later, just be aware that several years from now your rate will be based on your older age and any health conditions you’ve developed. Here is a calculator to help you estimate how much life insurance you will need. How to Get Life Insurance QuotesAccording to the Insurance Barometer Report, 15% of people think they can’t afford life insurance. At the same time, many consumers overestimate the cost. The only way to know what you will pay is to get life insurance quotes from a few companies. Quotes are free. An experienced life insurance agent will know what companies tend to give the best prices based on your age, health and desired coverage amount. Expect to be asked about your age, health, tobacco use, your family health history, driving record, and any dangerous occupations or hobbies. When you have a quote that you like, you can start a formal application. You answer more questions in detail and apply for a specific policy type, amount of coverage and policy length (if you’re buying term life insurance). Once you’ve submitted the application, some insurers may require a life insurance medical exam. These exams can take place at your home, work or sometimes a local exam office. The time it takes to process an application varies significantly among companies and policy type.
How to Choose a BeneficiaryA life insurance beneficiary is the person who can claim the death benefit after you pass away. You can name multiple beneficiaries and decide what percentage they each will receive when you die. Additionally, you should add contingent beneficiaries who will receive the death benefit if your primary beneficiaries have died. Not everyone names people as beneficiaries. Some people name trusts. By creating a revocable living trust and naming it as the life insurance beneficiary, you can ensure that the money is used according to your wishes. For example, the trust money could be used to take care of children. If you decide to name a trust the beneficiary of your policy, make sure to work with an attorney to structure the trust correctly. It’s also wise to work with a financial planner so that a trust is part of your larger financial plan. It’s crucial to update and review your beneficiary selections regularly. For example, life events such as a marriage or a divorce can impact your selection. To update your beneficiaries, contact your life insurer and submit a change of beneficiary form. Making changes only on a will won’t affect life insurance. How Does a Beneficiary Make a Claim?Claims can be paid quickly—in about a week, assuming the insurer has all the documents it needs. Don’t assume a life insurance company will contact you. It’s unlikely they know that your relative died. While some insurers are proactive in monitoring for insured customers who have passed away, they won’t discover a death immediately.
Claims are typically paid within 30 days after the insurer receives the necessary documents. You don’t need an original copy of the life insurance policy to make a claim. You only need to know the name of the insurance company and contact them to initiate the claim. That’s why it’s important to let your beneficiaries know that you have a policy and tell them the name of the insurer. And insurers are contractually obligated to pay only the people listed on the policy. Life insurance beneficiaries don’t have any restrictions on how they can use a life insurance payout. Money from life insurance money can be used to:
Compare Life Insurance CompaniesCompare Policies With 8 Leading Insurers What is the disadvantage of whole life insurance?What is the downside of whole life insurance? Compared to a term life policy, a whole life policy is more expensive and complex, in part because it's designed to provide a death benefit that lasts a lifetime.
How does Whole life insurance build cash value?How Cash Value Builds in a Life Insurance Policy. Pay your policy premium.. Take out a loan at a lower rate than banks offer.. Create an investment portfolio that maintains and accumulates wealth.. Supplement retirement income.. What happens to a whole life insurance policy when it matures?Typically for whole life plans, the policy is designed to endow at maturity of the contract, which means the cash value equals the death benefit. If the insured lives to the “Maturity Date,” the policy will pay the cash value amount in a lump sum to the owner.
Which is a source of revenue for a life insurance company?Most insurance companies generate revenue in two ways: Charging premiums in exchange for insurance coverage, then reinvesting those premiums into other interest-generating assets. Like all private businesses, insurance companies try to market effectively and minimize administrative costs.
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