Most people find that as they get older their priorities change. Once you have a family, it’s not just you that you need to think about. You have a spouse and perhaps children who depend on you. Most likely, you dream of growing old with them and enjoying your sunset years free of the obligations and stresses of work.
Your pension pot is designed to give you the retirement that you dream of, but what if you don’t live as long as you hope? If you were to fall ill or be involved in an accident, would your loved ones be well taken care of? Life insurance policies exist to address exactly these issues.
How Does Life Insurance Work?
Life insurance, like most kinds of insurance, is a contract between a policyholder and an insurance company. Under this contract, the policyholder makes regular payments to the insurance company called premiums. In return, when the policyholder dies, the insurance company makes a payment to the policyholder’s named beneficiaries — usually the person’s spouse or children.
What Are Some Different Kinds of Life Insurance?
There are three main types of life insurance:
- Term life insurance
- Permanent/whole life insurance
- Final expense cover
Term life insurance covers the policyholder for a fixed period of time, often around 10 years. Some term life policies include a critical illness element, which pays out if the policyholder is diagnosed with certain conditions during the term. Term ife insurance is available for businesses, too. Employers often take out Group Term Life Insurance on their key employees or those in high-risk positions.
Permanent life insurance covers the policyholder from the date the coverage starts until death as long as the policyholder continues to pay the premium. In most cases, term life insurance has lower premiums than whole life insurance. However, if you outlive the contract on a term life insurance policy, you lose the money that you have put into the policy.
By contrast, permanent or whole-life insurance coverage continues to gain value over time and does not expire. This means if you start a whole-life policy while you’re still fairly young and then proceed to live a long time, your loved ones could receive a substantial payment upon your death.
Final expense coverage, unlike other policies, is offered only for burial or funeral expenses.
What Is Life Insurance For?
When life insurance products first became popular, they were used to cover burial and funeral costs. Over time, the purpose of life insurance policies has evolved and today the policies cover more than that.
Many people who are the main income providers for their families choose to take out a life insurance policy to give themselves peace of mind that their loved ones will still be able to remain in the family home and that their children’s education will be paid for if the worst should happen.
Money management is something that many families struggle with even during times of stability. Unforeseen events can make managing finances even harder. Life insurance ensures that when a person dies, their loved ones are at least shielded from financial challenges during what is likely an emotional and difficult time for them.
Should You Get Life Insurance?
Life insurance is a powerful financial tool, but it is not something that is suitable for everyone. According to research conducted by LIMRA, around 60% of Americans have a life insurance policy, but not everyone is getting value for money from their policy.
There are two reasons for this: Not everyone really needs life insurance, and even people who do must take care to pick the right policy for their needs.
Who Needs Life Insurance?
Life insurance is a good idea for people who need peace of mind that their loved ones will be taken care of financially after their death. In particular, it is useful for:
- People with children
- A person who contributes a significant amount to the household finances
- Older people who are worried about loved ones shouldering burial or funeral costs
- People who work high-risk jobs
Who Does Not Need an Insurance?
There are some cases where life insurance may not be a good idea. For example, children tend not to need life insurance, and young, single people with no dependents may not need a life policy.
Of course, there are exceptions to this. A child who is an actor or model with high earnings may consider a life insurance policy to be a good investment. A younger, unmarried person might opt to start contributing to a whole life/permanent life insurance policy to build up the value of the policy for the future.
The average life expectancy in the United States is 78.6 years. This means a young person is unlikely to die before the end of a term life policy. However, if they have dependents, an affordable term life policy could be a sensible choice for peace of mind.
Many mortgage lenders strongly recommend people have life insurance simply to ensure that their loved ones can afford to remain in the family home in the event of their spouse’s death.
Which it Makes Most Sense for You?
It’s important to understand that life insurance is more of a hedge than a true insurance policy. Obviously there is no insurance policy that can insure you against dying in the way that car insurance gets you a new car if your old car is damaged. Instead, life insurance is about balancing money today with protection for loved ones in the future.
Permanent life insurance tends to have higher premiums than term life insurance. This makes it a less appealing option for many people, but there are some cases where it can be useful.
Term life insurance has lower premiums but runs only for a fixed term. If you take out a 20-year term life insurance policy in 2020 and are still alive after 2040, the contributions you made to the policy will be lost. However, the contributions will have cost you less than you would have paid into a permanent policy.
Permanent policies cost more but don’t expire. As long as you’re making payments, the policy still has value. In addition, when you take out whole life insurance coverage you can often then borrow against the sum you have paid in. This gives you more flexibility than a term life policy.
The ability to withdraw from or borrow against the permanent life insurance policy’s cash value is something that some people who are on a higher income and who are generally healthy find useful.
There are some mutual life insurance companies that even pay out dividends when they’re running at a profit. These companies are owned by the policyholders, and holders have the option of taking the dividends as cash or putting them into the policy as a premium for extra coverage.
Which policy you choose will depend on several factors:
- Your age
- Your income
- How many dependents you have
- Your health
- Whether you have a high-risk job
A term life policy might be a good choice for someone who is older or someone who doesn’t want to pay high premiums but does want the peace of mind of having some life coverage.
Another option is to consider final expense insurance instead of full life insurance. Final expense policies have much lower caps on their coverage than full life insurance policies, but they offer guaranteed acceptance with no medical exam. Premiums are high considering the payout offered, but they could still be more affordable than a permanent life policy.
If you would like to know more about life insurance policies or are unsure which policy is best for your needs, contact the team of advisers at the TrueCoverage Insurance Marketplace for advice on policies to suit your circumstances.