Life insurance provides your loved ones financial security if you pass away unexpectedly. However, that’s only one of the many benefits of having life insurance. Depending on the policy type, you may be able to use your life insurance to supplement your retirement income, cover medical costs if you’re diagnosed with a terminal illness, and avoid hefty taxes if you want to pass on inheritance to your beneficiaries.
Table of Contents
Protect Your Future, Even When You’re Gone
Despite the many benefits that life insurance offers, only 52% of consumers reported owning life insurance in January 2021, down from 63% in 2011. Many of these consumers held off on purchasing life insurance because they thought it was too expensive. However, according to the same study, more than half of Americans overestimate the cost of life insurance by three-fold.
Do not let the misconception of high costs deter you from purchasing life insurance. It’s generally more affordable than you think. By comparing prices and understanding the different types of life insurance policies available, you can find one that best fits your budget and protect your loved ones’ financial futures even after you’re gone.
How Does Life Insurance Work?
Life insurance is a contract between you and an insurance company, where you pay them regular premiums in exchange for a death benefit, which is the sum of money paid to your beneficiaries when you pass away. They can then use the funds to cover end-of-life expenses, debts, and other financial needs that may arise when you pass away.
The cost of life insurance can vary widely. Factors like age, health status, gender, and the type of policy you choose all play a role in determining your premium, which is the amount you pay to keep the policy in effect. Here’s a close look at the different types of life insurance to help you decide which best suits your needs.
The Different Types of Life Insurance
Term Life Insurance
Term life insurance is a type of life insurance that has a specific end date, typically 10 to 30 years from the start date. If you pass away between that timeframe, your beneficiaries will receive a death benefit payout. However, if you die after the term expires, there may be no payouts. A key benefit of term life insurance is its affordability. Generally, term life insurance premiums are much lower than permanent ones, especially if you’re young and healthy.
Whole Life Insurance
Whole life insurance is a type of permanent life insurance that provides coverage throughout your life as long as you pay the premiums. Besides death benefits, whole-life insurance policies offer a savings component called “cash value,” which you can draw or borrow from. This cash value component accrues fixed interest on a tax-deferred basis.
Universal Life Insurance
Like whole life insurance, universal life insurance is a type of permanent life insurance that offers a savings component in addition to death benefits. The critical difference between the two is that universal life insurance provides more flexibility. With universal life insurance, you can adjust your premiums and death benefits (within limits) as your needs change.
Variable Life Insurance
Variable life insurance is a type of permanent life insurance with an investment component that allows you to invest your cash value in assets like mutual funds. However, variable life insurance policies could be volatile because the payout amount is determined by the performance of the underlying securities you invest in.
Final Expense Life Insurance
Also known as burial or funeral insurance, final expense life insurance covers your medical bills and funeral expenses when you die. Because of its limited coverage, it typically costs much less than other life insurance types like whole life insurance.
Key Benefits of Life Insurance
A life insurance policy could provide for you and your loved ones in several key ways; knowing the key benefits of a life insurance policy will help you understand how the policy works.
Paying final costs
End-of-life expenses can be costly. The median cost of a funeral with a viewing and burial in 2021 was $7,848, while the median cost of a funeral with cremation was around $6,971. With life insurance, your beneficiary can use the payout to cover these expenses instead of paying out of pocket or incurring debt.
Paying off debt or replacing income
Suppose you’re the primary income earner in your household or have accumulated significant debt. In that case, life insurance can ease the financial burden your loved ones may face upon your passing. Your loved ones could use the life insurance payout to pay off mortgages, car loans, and credit cards or cover expenses such as childcare, tuition, and groceries.
A life insurance policy can be an effective way to leave money for your heirs since death benefits are typically not subject to ordinary income or estate taxes. In other words, if you purchase a policy with a $300,000 death benefit, your heirs will receive the full $300,000 without worrying about tax implications when they receive the payout in one lump sum.
Paying federal or state estate taxes
When you pass away, your assets could be subject to federal or state estate taxes, depending on where you live and how much your assets are worth. However, a life insurance policy is typically considered separate from your estate, so it’s not subject to this tax. The payout of the policy can be used to pay any outstanding federal or state taxes.
By taking out life insurance and naming a charity or non-profit organization as the beneficiary of your death benefit, you can support your favorite causes and leave a positive impact on the world. Keep in mind that a term life policy may not be the best policy type for charitable giving since it could expire before you die.
Life Insurance Payouts Are Tax-Free
One key benefit of life insurance is that the payouts are typically not subject to estate or income tax. However, it’s important to note that if your beneficiaries choose to receive payments in installments instead of in one lump sum, they will be subject to taxes on the interest that accrues.
You Can Get Coverage for Chronic and Terminal Illnesses
Most life insurance companies offer add-ons that allow you to access your policy’s death benefit early if you’re diagnosed with a chronic or terminal illness. This accelerated access to your death benefit can help cover medical expenses and relieve financial burdens while you’re still alive.
Policies Can Supplement Your Retirement Savings
By paying into a policy with a cash value component, such as whole life or universal life insurance, you can build wealth and supplement your retirement income. Not to mention that the cash value component grows tax-deferred, which means the IRS would not take a cut as your cash value grows.
Cash Value Component and Withdrawals
As mentioned above, some life insurance policy types allow you to build tax-deferred cash value, which you could access later to cover emergency expenses, supplement retirement income, or pay premiums. There’s no limit to how you can use the cash value. You can access your cash value by borrowing against it, directly withdrawing funds from it, or surrendering the policy for cash.
How Much Does Life Insurance Cost?
Life insurance premiums refer to the regular payments the policyholder must make in exchange for coverage. Premiums are typically paid monthly, but some insurance companies may offer different payment schedules, such as annually, semi-annually, or quarterly.
Your premiums could vary significantly depending on your age and health, the insurance provider, and the type of policy you choose. Generally speaking, the older and more unhealthy you are, the higher your premium. For example, a healthy 25-year-old non-smoker may only pay around $20 a month for a 20-year term life insurance policy with a $500,000 death benefit. On the other hand, a 60-year-old frequent smoker with a history of chronic health problems may pay over $100 for the same coverage.
Also, term life insurance policies are typically more affordable than permanent life insurance, such as whole life or universal life insurance, since they only provide coverage for a limited amount of time.
How To Get Life Insurance
Here’s a step-by-step guide on how to get a life insurance policy that’s right for you
- Determine how much coverage you need. How much coverage you need could depend on factors such as your financial situation, current lifestyle, amount of debt, and the number of dependents. Speak with a life insurance agent who can help you determine the appropriate coverage amount.
- Pick a life insurance policy type. There are many life insurance policy types, including term life, whole life, universal life, variable life, and final expense life insurance. Research each option carefully before choosing one.
- Shop around and compare quotes. Once you’ve determined the coverage amount and life insurance policy type you need, shop around and compare quotes from different providers. You may also want to check the company’s customer satisfaction level by reviewing J.D. Power’s studies for life insurance.
- Fill out the application. After deciding on a provider, fill out an application. Most life insurance applications are available online and would not take long to finish. Just be sure to have your medical information ready, such as details regarding chronic or pre-existing conditions.
- Prepare for a phone interview. Some life insurance companies may schedule a phone interview shortly after you submit the application to confirm your information.
- Undergo a medical exam. Before providing coverage, most life insurance policy types will require applicants to undergo a medical exam. The exam generally includes basic tests like bloodwork, urine samples, and blood pressure.
- Wait for approval. Once you’ve completed the steps above, the life insurance provider’s underwriter will review your application to determine your eligibility. Underwriting can take as little as 24 hours or up to several weeks, depending on the life insurance company and your situation.
Should You Get Life Insurance?
If you’re on the fence about getting life insurance because of the cost or other reasons, consider the benefits of life insurance to determine if it’s worth it.
Consider Getting Life Insurance If…
If you have debt that will carry on after your passing or dependents that rely on you financially, consider getting life insurance. Though life insurance can be a valuable purchase for anyone, purchasing a policy is especially important if your passing could leave your loved ones with a heavy financial burden. Besides providing you and your loved ones peace of mind, life insurance can also be a tool to supplement your retirement income or leave a tax-free inheritance.
Enhancing Your Life Insurance Benefits
Consider adding riders if you want to tailor your life insurance policy to fit your needs and circumstances. Life insurance riders are optional add-ons that provide extra benefits your current policy does not have. Here are some of the most common types of riders to choose from.
- Accidental Death Benefit Rider: This rider pays an additional death benefit amount if the insured person dies due to an accident.
- Waiver of Premium Rider: The waiver of premium rider waives future premiums if the insured person becomes permanently disabled or cannot work due to an injury or illness.
- Child Term Rider: The child term rider pays out a death benefit if your child passes away before a certain age.
- Long-Term Care Rider: This rider offers monthly payments to cover your long-term care costs if you require home care or stay at a nursing home.
- Accelerated Death Benefit Rider: If you’re diagnosed with a terminal illness, the accelerated death benefit rider allows you to access your death benefit while you’re still alive.
How Life Insurance Can Benefit You
Life insurance not only provides a financial safety net for your loved ones, but it could offer various other benefits, such as supplementing your retirement income and alleviating your financial burden if you’re diagnosed with a terminal illness. So, do not hold off purchasing life insurance if needed, especially since your premium could increase as you get older. If you’re unsure about which life insurance policy to get, speak with an insurance agent who can answer your questions and guide you in the right direction.