The thought of one’s own mortality can be enough to send anyone into a spiral of existential dread. However, it’s important to think about it all the same. The last thing you want to do is leave your family behind without getting your financial affairs in order.
The average funeral costs for a person can range anywhere from $7000 to $10000. That’s not usually money that a grieving family has on hand, especially when medical expenses prior to death drained their resources.
Purchasing a life insurance policy can save your family time, money, and countless hours of frustration on top of their grief. Figuring out how to choose the right insurance policy can prove tricky.
Our guide will show you how to navigate this ever-changing industry.
Understanding the Types of Life Insurance
In order to choose the right life insurance policy, you must first understand the different types of life insurance. Some of the different types of policies that you can purchase include:
- Term life insurance
- Level-term life insurance
- Permanent life insurance
- Whole-life insurance
- Convertible or combination life insurance
Let’s dig into the differences between these types.
Term Life Insurance
First on our list is term life insurance. Of all the different life insurance policies that you can get, this one is by far the most common. Why is it so common? Some of the reasons include:
Of the options, term life insurance is the cheapest. All you have to worry about are your monthly premiums. And, should you pass before you’re out of your term, your family or beneficiaries will receive the death benefit without too much trouble.
Most Require Medical Exams
However, most term life policies will require a medical examination to determine your eligibility for coverage. Some companies will refuse to cover you if you have a pre-existing condition, or else engage in behavior that’s dangerous to yourself and others.
You Could Lose Your Benefits
The last major drawback with term life insurance is that, should you happen to outlive your term, you may need to purchase a new policy. Your benefits expire once your term has ended, making it only a good choice for those who expect their life to end in less than thirty or so years.
Level-Term Life Insurance
Level-term life insurance is a subset of term life insurance that offers certain advantages over a standard policy. Those advantages include:
Doesn’t Require a Medical Exam
A level-term life insurance policy is what’s called a simplified issue policy. That means that you don’t require a medical exam to receive coverage. This makes it the best, or often, the only option with someone that has a swath of pre-existing health conditions. If you live in British Columbia and would like to learn more about this type of policy, you can speak with the experts at https://shelterbay.ca/non-medical-life-insurance/ for further information.
Policy Amounts Can’t Exceed Certain Thresholds
The biggest downside to this, however, is that the policy amounts cannot exceed certain thresholds. Once the death benefit climbs over a million or two, you may need to get a medical examination and a standard term life insurance policy.
Permanent Life Insurance
What is permanent life insurance? As the name would imply, it’s a policy without an expiration date. It’s permanent, and only expires when you do. Smart parents often purchase this kind of life insurance for their children when they’re babies, if they can afford to do so.
The pros and cons of a permanent life insurance policy include:
Permanent life insurance policies can be exponentially more expensive than a term life policy. The exact amount varies, but premiums can be anywhere from 5 to 15 times more expensive than their term life counterparts.
This can put a permanent life insurance policy out of the reach of poorer families, limiting their access.
Requires Medical Exam
Like standard term life policies, permanent life insurance policies will require a medical exam prior to approval. As above, this can mean that if you have a pre-existing health condition or certain lifestyle contraindications, you may not be able to receive coverage.
Fees and Taxes Can Complicate Its Value
In term life insurance, the death benefit tends to stay level, issued upon death. However, for permanent life insurance, additional taxes and fees can reduce or complicate the value of the policy. Worse, if you have a life insurance policy tied to certain stocks or bonds, the value of the death benefit can fluctuate wildly.
Can Access Funds As-Needed
One major benefit to permanent life insurance is that, as you pay in the premiums, you have access to the funds. You can borrow against your death benefit to handle emergency expenses. This makes it an excellent financial security blanket.
Whole-life insurance is a subtype of permanent life insurance. Some of the factors that differentiate it from a standard permanent life policy include:
No Medical Exam Needed
The whole-life insurance policy is similar to a level-term policy in that there’s no medical exam required to receive coverage. This makes it a great choice for parents insuring their children, as well as older people who have the resources to afford permanent life insurance but may not have the health state necessary for it.
Can End Up Paying a Fee If Policy Surrendered
A major disadvantage of this type of policy includes paying a fee if you should ever surrender the policy. This fee can vary, depending on the policy, but often ends up being a tenth of what would have been the death benefit.
Convertible/Combination Life Insurance
If you like the lower prices of term life insurance and the borrowing power of permanent life insurance, a convertible or combination policy might be your best bet. Some ways these differ from permanent or term policies include:
Payout Options Aside from Death
A convertible or conversation life insurance policy can offer payouts in other events aside from death. In many cases, this policy combines with long-term care insurance to offer coverage even when someone enters hospice or a nursing home.
Can Convert from Term to Whole-Life
A convertible policy offers the lower premiums of a term-life policy, while also converting to a whole-life policy upon the term’s expiration. This can ensure that your coverage continues until the end of your life while offering level, affordable premiums.
How Much Coverage Do You Need?
Once you’ve determined the type of life insurance policy you need, you need to figure out how much coverage you should have in your death benefit. Some methods you can use to help you decide include:
Multiply Your Average Income
The “standard” advice for determining your death benefit is to take your average annual income and multiply it anywhere from six to ten times. This can give a useful figure to ensure all final expenses get paid off and the remaining family can take care of themselves.
Alternatively, Use the Standard-Of-Living Method
If your insurance policy offers income replacement or borrowing power, you should consider using the standard-of-living method. Think about your average expenses, the amount of money you’d like to have left over each month, and base your death benefit on around ten times that amount.
Make Sure Debts Are Covered
As much as we wish this wasn’t the case, co-signed debts can get inherited by survivors. Even if there are no co-signed debts, your remaining debts can wipe out your death benefit if you don’t choose an amount large enough.
Consider Potential Income Replacement
Any life insurance policy with income replacement can augment your Social Security Benefits. Augment, or even replace entirely. Make sure you leave enough in your death benefit to help you replace your income once you’ve retired or passed on.
When to Buy a Life Insurance Policy
So, when should someone buy a life insurance policy for themselves or a loved one? The answer, ultimately, falls to your discretion. However, some common times to buy life insurance include:
- Upon receiving deadly diagnoses
- Upon getting married
- At the start of life for a child
- Upon passing the age of 50
As long as you do your research to ensure that you can receive coverage from your insurance company, you should be able to purchase a policy at any one of these times.
Let’s Review the Basics of Choosing a Life Insurance Policy
Choosing a life insurance policy is a difficult process. There are so many different types of life insurance on the market today, making the choice much harder than it needs to be.
While the two main types may be term life and permanent, there are myriad subtypes. Regardless of which type you choose, you need to calculate your death benefit to cover all of your remaining final expenses, no matter when you get it.
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