Most people know that when they buy a car they also have to purchase car insurance. If you purchase a house, that’s when you buy homeowner’s insurance. The same is true for motorcycles, boats, and renter’s insurance. However, many people wonder when they should purchase life insurance.
Life insurance provides financial peace of mind in the face of an uncertain future. While it may not seem obvious to people outside of the insurance industry, there are several milestones in your life at which you should purchase life insurance.
- In Your Mid-20s – By the time most people reach this age they have a career, have moved into their own place, and many of them have found the person they want to spend the rest of their life with. Life insurance at this time in your life should cover anyone relying on you financially whether that is a spouse, children, a roommate with whom you have signed a lease, or simply to cover your final expenses.
- As Soon As You’re Married – Seriously, go from your wedding reception to your life insurance broker. Don’t wait until you are 30 to buy life insurance if you get married before then. Once you are married you have a financial dependent that is relying on you to supply at least half of the income for your life together. If you die unexpectedly you leave them at risk for financial hardship, making it next to impossible for them to pay a mortgage or any other debts that you have incurred together on their own.
- While You Are In Your Best Health – Your life insurance premiums are based on a lot of different factors. Age, weight, height, and your overall physical health are all assessed by a medical exam prior to a life insurance company issuing you a policy. Many of these factors will change as you age which can adversely affect the premiums of any life insurance policy. You will never be younger than you are right now. If you currently have a health concern, talk to your doctor about it to get it under control, and then apply for health insurance. If you wait too long, you may run the risk of not being eligible for coverage at all.
In short, the best time to buy life insurance is right now. Unless you are living a life of financial freedom with no dependents, debts, and enough money in the bank to cover your final expenses, life insurance is something that you should purchase. How much life insurance you should carry and which type will be right for your circumstances are also things that should be considered prior to making a purchase.
A Living Benefits Rider, also commonly referred to as Accelerated Death Benefits, provides the policy holder with an early payout of their life insurance policy death benefit if they are diagnosed with a terminal illness. Most life insurance companies consider someone terminally ill when they are expected to live 12 months or less from the date of request for the benefit advance. With a living benefits rider the policy holder can access anywhere from 25% – 100% of the eligible proceeds, usually capping out between $250,000 – $500,000 depending on the insurance company. The payout is made to the owner of the life insurance policy instead of the beneficiary. If 100% of the policy face value is not accessed then the remainder remains in force as a death benefit on the policy.
It is important to keep in mind that many life insurance companies treat benefit advancements like a living benefits rider as a loan or lien against the life insurance policy. This means that interest will accrue on the amount paid out and be charged against the remainder of the face value of the policy. This, along with any fees the life insurance company charges, will reduce the remaining death benefit on the policy. If your life insurance company does not allow 100% of the face value of the life insurance policy to be paid out, this is probably why.
For most insurance companies the living benefits rider is available at no additional cost. It is merely an option that you need to be aware that your life insurance company offers, and alert them that you would like to add it to your existing policy. Depending on the insurance company, you might be able to elect the option at the same time that you furnish them with proof of a terminal illness. Insurers cannot dictate how the funds distributed from a living benefits rider are used. Once the money has been paid out it belongs to the owner of the policy to use as they see fit.
Since the living benefits rider is fairly new, it is unclear how the IRS will treat the payout. Currently life insurance death benefit payouts are non-taxable. However, the proceeds from a living benefits rider might be taxable.
There are other options besides the living benefits rider for terminally ill patients. Policy loan or policy surrender can be viable options for people with a permanent life insurance policy. These options are usually based on the cash value of the life insurance policy instead of the face value of the policy. This means that people with term life insurance policies will not find a benefit from these options. It also means that a living benefits rider will most likely pay more than either of these options.
A viatical settlement is another option. A viatical settlement is the sale of an existing life insurance policy to a third party for more than the cash surrender value of the policy but less than the net death benefit. This amount, agreed to by both parties, is paid out in a lump sum. The third party (the viatical company) then becomes the owner of the policy and continues to pay the premiums. Upon the eventual death of the insured the viatical company then receives the full death benefit. Viatical settlements are usually only an option for chronically ill or terminally ill patients with a permanent life insurance policy. A viatical settlement is typically not an option for term life insurance policies. A viatical settlement is more likely to take a higher percentage of the policy in fees than the interest and fees generated from a living benefits rider. For most people needing one of these options, a living benefits rider will be the best value.
Mental health issues don’t have to keep you from obtaining affordable life insurance. Some life events such as the death of a family member, divorce, and even giving birth can cause short term depression. Most life insurance companies understand a brief use of anti-anxiety or anti-depressant medications as they relate to these types of events. Assuming that you are physically healthy, these types of mental health issues should not result in a lower rate class and higher premiums for life insurance. However, a life insurance company may be concerned if an applicant has been on multiple medications for mental illness at one time, or has been hospitalized to stabilize a mental health issue. Issues such as these might knock you out of the Preferred Plus rate category down to Standard.
Life insurance companies won’t comb your mental health records looking for a reason to deny life insurance. However, if they notice hints of a mental health condition that has not been treated, you may become a bigger risk to them than if you had been officially diagnosed and treated. They will also be wary of combinations of certain mental illnesses and other health factors. For instance, having anxiety along with heart disease and elevated cholesterol would make you a much higher risk to a life insurance company. This might result in extremely high premiums or no offer of coverage at all. Any use of drugs or alcohol as self-medication for a mental illness will also be a cause for concern by life insurance companies.
If you are currently undergoing treatment for a mental health issue and are applying for life insurance, there are a few things that the insurance company will probably want to know. This includes when you were diagnosed, by whom, and the name of the doctor currently treating you. They will also want to know what type of treatment you are receiving, for how long, and how you are responding to it. Overall, they will look at the severity of the condition as well as the ability for the condition to be treated when making a determination of eligibility and rate class.
Life insurance doesn’t have to be unattainable even if you have had a more serious mental illness, such as an attempted suicide. Many life insurance companies might wait one to two years after an attempted suicide before issuing a policy, or issue a policy with an increased premium. All life insurance companies have a contestability period running for two years from the “in force” date of the policy. In part, this clause states that no death benefit will be paid to a beneficiary for a death determined to be a suicide within the first two years of issuance of the policy.
If you have a history of using tobacco products your life insurance rates will most likely be higher than if you didn’t. Everything you’ve ever been taught about smoking being bad for you is true. Statistics from the CDC (Center for Disease Control) blame 443,000 U.S. deaths a year on smoking and tobacco related illnesses. Since 1980, there have been an estimated 14 million premature deaths from smoking related causes. Life insurance companies are well aware of these statistics and others like them. Tobacco use adversely affects your life insurance rates quite simply because smokers have a shorter life-expectancy than non-smokers. Since a life insurance company is taking an increased risk by insuring a smoker, that will be reflected in that person being given a lower rate class, with a higher premium.
A smoker’s rate classification is based on how long it has been since they last smoked. You will get a better rate class by quitting smoking and the use of any other forms of tobacco. Mortality risks decline if you quit and continue to do so the longer you stay from tobacco. If it has been five years or more since you have used tobacco, you could qualify for Preferred Plus, the best rate class available. If it has been between 3-5 years since you have used tobacco, you could qualify for the Preferred rate class. If you are tobacco free for at least one year, you could qualify for the Standard rate class. The amount of tobacco that you typically consume may also affect your rate class. In general, people who are moderate users of tobacco will be charged less than those that are considered heavy users.
Some life insurance companies might differentiate between different types of tobacco as they consider the tobacco use of the person applying for the policy. For instance, one life insurance company may give better rates to someone that smokes cigars once a week than they would to someone who smokes a pack of cigarettes a day. If you quit smoking after having been issued a life insurance policy, ask your provider to re-evaluate the status of your policy each year. You might be able to get your rates lowered as your time away from tobacco use increases. A good life insurance agent should be able to steer you toward a life insurance company that will offer the best rates for your situation.
Most life insurance policies are designed to pay out a death benefit in the event that the person covered by the policy dies while the policy is in effect. However, there are certain things that almost all life insurance policies list as exclusions to their policies. You should read your life insurance policy carefully to determine exactly what is and is not covered, then explore your options for additional coverage.
Suicide: Most life insurance companies will not pay out a death benefit for a suicide that occurs within the first two years of the issuance of the policy. This exclusion is listed in order to deter people from purchasing a policy with the specific intent to commit suicide. If a death is determined to be a suicide after the first two years of the issuance of the policy, it becomes the life insurance company’s problem to prove that suicide was the intent all along. Life insurance companies will most likely investigate any suicide. Even if they can’t prove suicide as the intent behind the purchase of the policy, they may still be able to deny payment on the policy if they can prove material misrepresentation.
Aviation: Many life insurance companies list death as a result of aviation in a private plane as an exclusion on their policies. For this exclusion it doesn’t matter if you are the pilot or passenger. The reason behind this exclusion is the guidelines that private planes have to follow are not regulated as strictly as the ones for commercial airlines. Life insurance companies are very cautious when it comes to private plane crashes and the circumstances surrounding them.
Dangerous Activities: These are another typical exclusion for most life insurance companies. They usually include bungee jumping, rock climbing, scuba diving, racing, and hang gliding. Depending on the life insurance company, other activities may also be listed as exclusions. Certain life insurance companies will even go so far as to list sports that they consider dangerous, such as rugby, as an exclusion to their policies.
War: An act of war, on either foreign or domestic soil, is typically not covered by most life insurance companies. This may seem unfair, but to life insurance companies that’s more risk than they can safely take. The amount of money that a life insurance company would have to pay out as the result of war time deaths would bankrupt most of them. This exclusion is clearly an issue for members of the military. However, the U.S. military typically offers a special type of insurance for its members.
If you are concerned about not being covered for exclusions listed in your policy there are other options to consider. There are life insurance companies that specialize in selling high risk policies that cover exclusions such as those listed here, with the exception of suicide. These typically have much higher rates because of the increase in risk to the insurance company. Another option is to buy a rider to your existing life insurance policy. Riders give you the flexibility to cover specific activities that you engage in without an exclusion of coverage for that activity. For example, if you know that your policy excludes death as a result of engaging in rock climbing, you can purchase a rider to your policy that covers death as a result of rock climbing. Riders are typically more expensive than a traditional policy because of the increase in risk for the life insurance company. However, adding a rider to your existing policy should still cost less than buying a specialized policy that covers all types of typical exclusions.
If you don’t fall within what insurance companies deem a “normal” health range then chances are you may have a difficult time purchasing life insurance. People who have health issues that prevent them from buying a traditional life insurance policy might consider purchasing guaranteed life insurance instead. Guaranteed life insurance is designed for people who are looking for no-exam life insurance. The only factors taken into consideration when determining rate quotes for guaranteed life insurance are the age and sex of the proposed insured. Most insurance companies require that you fall between the ages of 50 and 85 though some companies will go as low as 40 years old. There are no requirements to pass a health exam or reveal your health history with guaranteed life insurance. You cannot be turned down for it unless you are living in a hospital or long-term care facility.
Since there is very little information to go on with a guaranteed life insurance application there is no underwriting involved. It is a very quick process to go from a rate quote to the issuance of a policy compared to the time involved with other forms of life insurance. However, without a medical exam the insurance company is taking a much higher risk to provide you with life insurance. For that reason guaranteed life insurance is much more expensive to purchase than other forms of life insurance. Depending on the insurance company the rates for guaranteed life insurance can be as much as eight times the rate of a similar value term policy.
Guaranteed life insurance policies typically have coverage amounts ranging from $5,000-$50,000. These types of policies tend to be permanent insurance so there is a cash value that grows with the policy. They are typically set up to mature when the insured reaches the age of 100. This means that if you are still living at that age the life insurance company will cash out your policy, giving you the accumulated cash value and ending the risk of having to pay out a death benefit. Guaranteed life insurance was not designed to provide a legacy for your children; it is generally intended to be used to cover funeral and final expenses but not much else. If you can purchase any other type of insurance policy it is recommended that you do so. Guaranteed life insurance should be considered only as a last resort.
Most life insurance companies will require that you have a medical exam prior issuing a life insurance policy. A medical exam is used to determine your health classification which will affect the rates for your life insurance policy. Ideally you want the information that you disclose on your life insurance application to match up with the results of your medical exam. If they don’t, you could be facing higher premiums than what you were originally quoted. It is recommended that you get a physical from your regular doctor prior to applying for life insurance. This will alert you to any potential problems with your current health and give you the opportunity to fix them prior to applying for life insurance. Taking this extra step will ensure that you get the best rate possible for your life insurance policy. A physical from your doctor that gives you a clean bill of health will not replace the insurance company’s medical exam. This is because insurance companies want to have an independent assessment of your health that is as current as possible.
Medical exams that insurance company requires for evaluation purposes are completely free to you. These exams reassure the insurance company as to the status of your health prior to issuing a life insurance policy for you. After submitting your application you will be contacted by a company that administers these types of medical exams. You can decide if you would like to go to their office or have a travelling nurse come to your home or office. Since the insurance company wants to get through the application process as quickly as possible these nurses are available almost any time, including nights and weekends. During the exam the nurse will take your height and weight measurements, your blood pressure, as well as a blood and urine sample. There will be minimal paperwork to complete at the time of the exam.
Once your medical exam is over all of the information and samples collected from you are forwarded to a lab contracted with the company that administers the exam. The lab will run tests on your samples and will send these test results to the insurance company. An underwriter for the insurance company will then look at the results of your medical exam and make a determination about which health class they recommend you be placed into when offering you rates for your life insurance policy. Rate classes generally fall into four categories: Preferred Plus/Best Class, Preferred, Standard Plus, and Standard. Many factors are considered when the underwriter makes this decision. You will be notified as to the rate class that the insurance company has placed you in prior to your life insurance policy being put into effect.
Naming a beneficiary on your life insurance policy is a very simple, yet very important process. With a named beneficiary over the age of eighteen, the death benefit for your life insurance policy is paid directly to the beneficiary, tax free. This usually occurs around ten days after the confirmation of the death of the policy holder, assuming that the terms of the policy were not violated in some way. If for some reason you fail to name a beneficiary over the age of eighteen, including the naming of your minor children, the death benefit of your life insurance policy automatically defers to your estate and becomes subject to probate and estate taxes. These taxes can be as much as 35% of the excess of the estate. This is a situation that you will want to avoid as closing an estate can be a cumbersome and timely process.
A good insurance broker will help you avoid this kind of situation by advising you prior to the implementation of your life insurance policy about choosing a beneficiary. If you wish to list your minor children as the beneficiary on your life insurance policy there are several things to keep in mind. Minor children themselves cannot inherit the money from a life insurance policy. If only the names of minor children are specified as the beneficiaries to the policy then the death benefit money will automatically fall to the estate of the deceased and be subject to probate and taxes. However, if the policy holder does a little more preparation this can be easy to avoid. By setting up a trust and trustee for your minor children you protect the policy payout from probate and taxes. This can be relatively simple to do. Your accountant, or perhaps even your personal banker, can set up a legally binding trust for your children. After the creation of your trust you can easily add your house and other assets to it, thereby protecting those assets from probate upon your eventual death.
At the time that your trust is created you will also want to name a trustee. A trustee is someone who agrees to distribute the money in the trust as specified by the direction given via a last will and testament of the deceased. Trustees are bound by the rules set forth in the trust and can be held legally accountable for any indiscretions they make with the funds in the trust. This puts pressure on the trustee to be as honest as possible in their dealings with the monies of the trust. While naming a trustee is not required, it is a good idea. Having access to large sums of money can have a strange effect on some people. It is better to be cautious and name a trustee to safeguard against the possibility of financial disaster for the children you are trying to provide for with your life insurance policy.
If you currently find yourself in a situation with an improperly named beneficiary to your life insurance policy, don’t worry. It is a relatively easy process to change the named beneficiary of your life insurance policy. A simple beneficiary change form is usually all that is required and can be submitted to your insurance company through your insurance broker.
It can be difficult to determine how much life insurance you should carry. According to this article you should think like an economist when considering your life insurance needs. Several factors, such as the ages of your spouse and children, should be taken into consideration before making your decision.
According to the economist standpoint, you should carry enough life insurance to get your children raised and your spouse comfortably into old age with the highest possible standard of living. That means that a young family just starting out has a greater need for life insurance than an older couple in their retirement years. The reason for this is simple: younger children and a younger spouse have a greater number of potential living years left ahead of them. Couples at retirement age theoretically have fewer years ahead of them and no children to finish raising, thus reducing their needed coverage amount.
The only way that most young families can afford the amount of coverage that the economist viewpoint says that they need is to buy term life insurance. Many insurance agents may argue that young families are most in need of permanent life insurance and the savings and additional benefits that those types of policies can provide. However, because of the increase in premiums for permanent life insurance most young families are better off purchasing a higher death benefit and paying a lower premium that only term life insurance affords. For example, you could purchase a $2 million death benefit in a term policy for the same premium you would pay for a $500,000 death benefit in a permanent policy. As you age there will be opportunities for you to add to your savings, investments, and retirement. What a young family needs most is the guaranteed death benefit that term life insurance provides.
The economist viewpoint also believes that your need for coverage decreases at a rate that coincides with the growth of your family. To do this smoothly you might think about purchasing several policies with the same death benefit that overlap with staggered end dates. This would stair step your coverage down as your need for coverage decreases. However, it is also important to take inflation into consideration. For example, if you bought a term life insurance policy worth $2 million today and figured 3% inflation, in 20 years that same policy would be worth approximately $1.1 million in today’s dollars. Inflation alone may remove the need to reduce your coverage as you age.
Anticipating how much life insurance you need can be a daunting task. However, if you think like an economist you can rest assured that you have made an informed decision before purchasing life insurance, whatever stage your family is in.
Finding the right life insurance policy for you can be a confusing, often discouraging project. However, don’t let it keep you from finding the best life insurance policy for your money. It really doesn’t have to be intimidating at all when you do a little research ahead of time.
Permanent Life vs. Term Life
While figuring out how much life insurance you need is important, determining what type of life insurance is best for your situation is equally so. There are two primary types of life insurance: term life and permanent (or whole) life. You might be able to compare the differences between them as you would between renting a house and buying one.
Permanent life insurance is like buying a home—it’s a death benefit with the added advantage of part of the premium being put into a savings program, which can be borrowed against at a later date. This makes permanent life insurance premiums considerably more expensive than those for term life.
On the other hand, term life is like renting that home. You pay the premium for the death benefit, but there is no savings benefit. Term life insurance has the benefit of cheaper premiums than permanent life insurance. This is helpful for young families starting out or for people close to retirement age.
Tips for Finding the Best Life Insurance
Your age and sex will play a big part in determining your insurance premiums. If possible, get insurance while you’re young. Women get lower rates because they typically have a longer life expectancy than men do. Get a physical before you go shopping for a policy, so you know what to expect. High cholesterol, hypertension and other issues can raise premiums. Team up with a doctor to get those types of issues under control before you apply. Smokers pay up to three times the premium as non-smokers. If you smoke, quit for at least a year before applying for a policy. Most companies will cut your rate significantly if you’ve been smoke-free for three to five years.
Finally, don’t wait to get a policy when you’re seriously ill. If you do have an ailment, work with a specialized broker who can help you find the best life insurance for your situation.