5 Questions to Ask About Life Insurance
A lot goes into choosing the right life insurance coverage for you and your loved ones.
To help you make the best decisions possible, we answered 5 of the most common questions people ask when navigating the complicated world of life insurance.
Below are answers to the following questions:
- What types of life insurance coverage are available?
- How much does life insurance cost?
- How are payouts handled and when can I expect to start seeing returns?
- What if my health changes?
- What should I look for in a trust-worthy life insurance provider?
What types of life insurance coverage are available?
There are two primary types of life insurance coverage: Term and Permanent.
If you are looking for coverage for only a specific number of years (in the range of 10 – 30 years, for example), then Term coverage may be the right type of coverage for you.
Generally speaking, Term coverage is more affordable than permanent life coverage. This is because whereas with Permanent coverage you’re paying premiums for your entire life, with Term coverage you’re paying guaranteed level premiums for only a fixed number of years (however long you want the coverage for).
If you are older and purchasing life insurance for the first time, or suffer from a potentially life-threatening condition, then Term coverage may make more sense than Permanent coverage.
As already mentioned, Permanent life insurance coverage provides coverage for your entire life, or for as many years as premiums are paid.
There are two types of Permanent coverage: Whole Life and Universal.
Whole Life coverage offers premiums that don’t rise, whereas Universal life coverage allows for more flexibility. With Universal life coverage, you can adjust:
- the size of premium payments
- death benefits
- the accumulation portion of your policy
However, you’re only able to make changes within the limits set in place by your contract.
In addition to Permanent and Term, coverage is also broken down into Group and Individual options.
As the name implies, Group coverage protects you as part of a larger group.
When you receive life insurance from your work, for example, it’s typically Group coverage.
The main benefit of using Group coverage is convenience. Benefitting from Group coverage at your work usually only requires you to fill out a short questionnaire about your health history. Also, premiums are usually automatically deducted from your paycheck so you don’t have to worry about them.
Individual coverage is coverage you apply for and own yourself (any Group coverage provided through work is owned by your company).
It’s more complicated to get, typically requiring some sort of medical exam, detailed medical history, and background check, but beyond this Individual coverage provides its own unique benefits.
The main benefits of using Individual coverage include:
- Flexibility (because you’re the owner of your Individual coverage, you may have more options available than you would with Group coverage)
- Portability (Group coverage from your work ends when you leave your job, whereas Individual coverage applies no matter where you go)
- Level Premiums (most Individual policies benefit from having level premiums for the duration of the contract)
Plus, Group coverage provided by employers typically only pay an amount equal to one or two years of your salary. Depending on your needs, this may not be enough coverage.
Before you decide on what kind of coverage you need, it’s important to consider why you’re buying life insurance coverage.
If you’re buying coverage due to life-long financial obligations and/or support (family or debt, for example), then Permanent coverage may make more sense than Term coverage. However, Term coverage may make more sense if it’s required for a business partner or lender.
It’s equally important to understand how much coverage you need.
While different companies use different formulas for coming up with your specific insurance needs, two common factors are the amount of money it will take to pay off your debts, and how much your dependents (husband, wife, children, etc.) will need to continue their accustomed lifestyle after you pass.
When choosing a company from which to purchase life insurance, it’s also critical that you make sure that non-typical debts are factored into the equation (such as high medical bills, for example) so that you can choose a policy that accurately covers you and your family’s needs.
To get an idea of how much coverage you need, add up your long-term financial obligations and subtract the value of your assets. Whatever is left gives you an idea of how much you might want for coverage.
Once you know what you need, there are multiple ways to purchase your life insurance.
For Term life insurance, you can buy from a number of online companies. Based on the information you provide, these companies try to find you the policy with the lowest associated cost.
If you work for a company that offers life insurance, you can also ask them about their group coverage options.
If you’re after Permanent or more individualized life insurance, then it’s probably best to connect with an experienced insurance agent. As specialists, these agents can not only find you the best life insurance options for your specific needs, but they’re also available to answer any questions you may have for your own understanding.
How much does life insurance cost?
The easiest and most accurate way to answer this question is it depends.
As a rule of thumb, the greater your risk of dying, the more you are likely going to pay for life insurance.
This is why life insurance is cheaper when you’re younger and healthier.
At a glance, here are some of the most common factors that affect how much you page for life insurance:
- Your age
- Your medical history
- Any use of cigarettes and alcohol
- Any risky pastimes
Plus, as explained above, policy type, policy coverage, any customized features, and the number of years you need to have your policy in place can all affect your cost as well.
Regardless of all of this, generally speaking, the sooner you buy your life insurance, the cheaper it will be.
How are payouts handled and when can I expect to start seeing returns?
In the unfortunate event that you do die, there are a number of ways for your death benefits to be paid out. Here are some of the most common ways:
- Lump-sum payout
- Monthly payments
- Payments into specific accounts, such as individual retirement account (IRA)
These are just a few examples of how you can pay out your benefits.
How you customize your payout plan depends on your family and your goals.
In terms of when you can expect your policies to start generating returns, for both Term and Permanent coverage policies, it’s not uncommon to have to wait several years before your policy actually starts generating positive returns. This is mainly important to keep in mind if your purchasing Term coverage.
As a tip, to make sure your beneficiaries get as much payout as possible, look for policies that either automatically adjust for inflation or offer it as an additional feature.
What if my health changes?
In most cases, it’s best to apply for the highest health classification your policy has to offer.
However, it’s also important to ask your life insurance provider if you have the ability to improve your health rating in the case that your health increases.
Upon the improvement of your health, even after such things as a heart attack, DUI, or smoking, it can be possible to decrease your life insurance premium anywhere from 10-20%.
On the other hand, it’s equally important to ask what happens upon a decline in your health or an acquired disability over the course of your policy.
Likewise, if you are fortunate enough to outlive your temporary Term coverage and want to convert to Permanent coverage later in life, know what options you have with your policy and the costs associated.
What should I look for in a trust-worthy life insurance provider?
This is more common sense, but it’s incredibly important to know and trust your life insurance provider.
How long have they been in business? How big are they? How are they rated?
On an individual level, you also want to ask your life insurance agent what kind of experience he or she has.
In terms of priority, generally speaking, look for agents with any of the following accredited titles:
- Chartered Life Underwriter
- Certified Financial Planner
- Chartered Financial Consultant
There you have it!
Use these answers to five of the most common life insurance questions to help make educated decisions for you and your loved ones.