Did you know that more than 50% of Americans already have life insurance? And the number of people who intend to buy it over the next year (largely due to COVID-19) is at an all-time high.
There are a number of reasons people purchase life insurance. Whether it’s to cover your final expenses, provide for your child’s education, replace income lost by your untimely death, or another reason, it’s important to understand how life insurance works and why you may need it.
If anyone depends on your income right now, you should consider taking out a life insurance policy.
None of us want to think about “what will happen after we die,” but it’s a smart idea to be prepared just in case, so our loved ones aren’t left with huge debts if anything out of the ordinary happens.
Note: We’re living through challenging times right now. Due to COVID-19, some insurance carriers have changed their offers and policy applications. If you already have life insurance, ask your provider how the pandemic may have influenced your policy.
What is life insurance?
Like every type of insurance, life insurance is a contract between you and your insurance provider. Life insurance will provide a financial safety net for your dependents if you die. If you have business partners, it can also help them pay off the business expenses you leave behind.
Life insurance can help cover daily living costs, bills, college tuition, mortgages, childcare, keeping your business going if you’re an entrepreneur, or any other purpose. It can replace your income so your dependents can live similarly to how they live now (like staying in the same house, for example).
How do life insurance policies work?
In exchange for the premiums you paid throughout the life of your policy, your insurance company will pay a “death benefit” to any beneficiaries you have listed on your contract when you die.
Beneficiary: Anyone who receives the money from your life insurance policy when you die. It often includes children, parents, or a spouse.
Death Benefit: This is the amount of money your beneficiaries will receive.
The two most common types of life insurance are term life and permanent life insurance. There are some significant differences between the two.
How does term life insurance work?
Term life insurance covers you for a fixed amount of time—often 10 to 30 years—and can be much more affordable than other types of life insurance.
We usually recommend term life insurance to our customers because it provides coverage throughout the time of life when many people need it most. It’s also the most straightforward, least expensive, and most popular form of insurance.
With term life insurance, you simply agree to pay a yearly premium, and if you die before the term is up, the value of your policy will go to your beneficiaries once they make a claim.
If you live longer than the life of your policy, your dependents won’t receive anything. However, you may have the option of switching to whole life insurance if necessary (depending on your provider). Some carriers also give you the option of extending your term life policy in one-year increments for a higher rate.
How does permanent life insurance work?
Permanent life insurance (including whole life and universal life) is more expensive and complicated than term life. As its name suggests, it covers you until the end of your life. Unlike term life, permanent life enables you to accumulate cash value over time. And it never expires, as long as you continue paying your premiums.
If necessary, you can borrow or withdraw cash. If you end your policy early, you’ll receive its cash value amount (minus a surrender charge).
Who needs life insurance?
Life insurance is a wise investment for anyone with dependents. If something happens to you and you don’t have enough insurance, your loved ones may be forced to pay severe consequences.
If you fall into any of the following categories, you should consider buying life insurance to protect your loved ones or business partners:
- You own a business.
- You’re married, the breadwinner, or a parent.
- You own a home that you’re still making payments on.
If you fall into these scenarios, you may not need life insurance at this time:
- You’re single and have little to no debt.
- Your children are grown and self-supporting adults.
- You’re retired and have no dependents.
- Your funeral expenses won’t be a heavy financial burden for anyone.
How do I choose a life insurance coverage amount?
The amount of coverage you choose will depend on your personal needs and goals. For example, if you’re a mother of two middle schoolers and work full-time, your policy should cover your income and regular living expenses for your two children.
If you’re considering term life insurance, you can take out a policy that ranges from around $20,000 to $10 million. There are multiple ways to determine the amount of life insurance you will need. One of the most common is to take a multiplication of your annual salary. Experts recommend taking out a policy for 10 to 15 times your regular yearly income.
If you’re elderly, you may only need life insurance to cover burial and other end-of-life expenses.
You can also use an online life insurance calculator for an estimate or speak with an insurance expert directly for more information and to get a quote.
How is the cost of life insurance determined?
The perceived cost of life insurance scares many people away. Most Americans estimate that taking out a life insurance policy will cost anywhere from three to five times more than it actually does. It can be quite affordable, especially for younger consumers.
To determine your life insurance premium, providers will look at several factors:
- Lifestyle (occupations, hobbies)
- Medical history
- Family health history
- Coverage amount
- Tobacco use
- Driving record
- Policy type and length
Typically, the younger and healthier you are when you take out your policy, the less it will cost. Buying life insurance early can be a smart move, especially if you can lock in your rates. Be sure to shop around for quotes, and choose the coverage you can afford long term.
How do I apply?
To apply for life insurance, follow these five steps:
- Fill out an application.
- Answer the phone (when a life insurance rep calls).
- Take the medical exam (if required).
- Wait for the underwriting process to take place (to assess risk and calculate your premium).
- Start paying!
Your policy will start the day you pay your first premium.
Get a Term Life Insurance Quote
Coverage Direct is an independent insurance agency. We partner with numerous carriers—including some of the best term life insurance companies in the United States—to offer our customers the best coverage options and pricing.
Contact us any time for a quote from one or multiple providers.