For an average layperson, life insurance may be confusing, and many are not able to grasp its many intricacies. They may find its themes too perplexing to understand completely, and you might be one of them. However, you may be a little hesitant because you just don’t know what it is and to a greater extent, how it works.
Based on the 2020 Insurance Barometer Report, there are over 41 million people in the U.S. who say they need life insurance but don’t have it. It’s because they lack the necessary know-how about it and tend to overestimate its cost.
Misinformation and ignorance can discourage people from purchasing the life insurance they need. In the same report, more than half of the respondents think that a term life insurance policy of two hundred fifty thousand dollars would cost five hundred dollars a year or more for a normal thirty-year-old person. But in truth, the average cost is about one hundred sixty dollars a year. There is a big difference between the actual cost and the perceived cost.
With everything considered, many people either don’t know about it or were misled by wrong information. If you fall into one of them, then you might find these answers enlightening.
1. What is life insurance?
It is a contract between you and the insurance provider. Basically, your insurance provider will pay a lump sum in exchange for your premium payments, which is called a death benefit to your beneficiaries after your demise. Therefore, your beneficiaries can use the money for any reason they want. Mostly, they use it to pay bills, mortgages, or tuition. It serves as a safety net for your family, which affords them to stay in their home and be able to pay for things you had planned for them.
2. What are the two types of life insurance?
- Term Life Insurance – According to the Insurance Barometer Report, it is the most popular type of life insurance due to its affordability. It provides coverage for a certain timeframe, and the premium payments remain the same for the duration. The choices typically are 10, 15, 20, 25, or 30 years.
- Permanent Life Insurance – it allows lifelong coverage and is costlier than term life because it builds cash value and can last a lifetime.
There are several types of permanent life insurance:
- Whole life insurance – It provides a fixed death benefit and cash value that increases at a guaranteed rate of return.
- Universal life insurance – It is more flexible than whole life, and you are able to change your death benefit and premium payments among certain limits.
- Burial insurance – it is usually made to cover funerals and other related expenses. It is a low whole-life insurance policy with a similarly low death benefit, frequently from $5,000 to $25,000.
- Survivorship life insurance – It is made usually for married couples that insure them under one policy. When they pass away, the beneficiaries will get the death benefit.
3. What does life insurance cover?
The coverage for a life insurance plan includes all causes of death (i.e., from illnesses, accidents, diseases, and homicide) except for suicide within the first two years of owning a policy.
The insurance provider can deny a claim if they believe there was a falsehood in the application for life insurance, particularly if the death is within the first two years of owning the policy.
4. How much does life insurance cost?
The price of an individual life insurance policy will vary depending on a few factors, like:
5. How can you select a favorable life insurance policy amount?
A good principle to follow for estimating how much coverage you require is to:
- Add all the expenses you want to be covered, like mortgage, college expenses for your children, and income replacement for your job.
- Once you have added everything necessary, deduct the amounts your family could use to cover those expenses, like the existing life insurance and savings.
- The result is the amount of how much life insurance you need. If it is too high and you can’t afford it, you can purchase what you can afford and lock in a beneficial rate. Yet you can still buy more later, and you only have to be aware that many years from now, the rate will be based on your health conditions and older age.
6. What is a life insurance beneficiary?
It refers to a person who can claim the death benefit after the life insurance policyholder passes away. Multiple beneficiaries can be included in the policy, and different percentages can be made for each. Some insurance holders name trusts instead of beneficiaries, like trust money to take care of the children.
7. How can a beneficiary make a claim?
A beneficiary can get a claim quickly in about a week if the typical insurance provider has all the necessary documents. Most are proactive enough to monitor their insurance holders who have passed away, and some would not be able to immediately discover a death. Do not assume your life insurance provider will contact you whenever this happens.
- Death certificate – At the beginning to process a claim, you have to submit a certified copy of a death certificate.
- Contact the insurance company immediately – Even though you may have a difficult time due to a deceased loved one, the sooner you are able to contact your insurance provider, the sooner you can receive the money.
- Make sure you have attached all supporting documents – After finishing all the paperwork for filing the claim, reaffirm you have finished all the claim requirements, especially the death certificate and claim form.
8. How long can a claim be paid from the insurance provider?
As a rule, claims are paid within 30 days after the insurance provider receives the required paperwork. Once the beneficiaries receive it, it can be used to pay for:
- Mortgages and loans
- Household expenses
- Education for the children
- The family business to keep going
- Funeral and other expenses
9. What are the benefits of life insurance?
- Protecting the family – It can be used as a form of income replacement and used to pay for the abovementioned expenses like mortgages, loans, etc. This way, the remaining family members can maintain the current lifestyle they were accustomed to.
- Providing financial assistance – Once a loved one has passed, there is comfort in the knowledge that the finances of remaining family members like the spouse or partner, children, and aging parents are handled.
- Debt payment – Debts come in all forms (mortgages, credit card debt, student loans, car loans, etc.), and they can be used to pay for them.
- Protecting your business – Business owners will often think of life insurance as a way to fund the continuity of their business.
- Children’s education – College tuition keeps rising. The average cost varies from $9,500 per year for a public four-year state college to $32,000 per year for a private four-year college. In permanent life insurance policies, the cash value can be used to fund educational expenses, and death benefits can also be used.
- Help to save for retirement – Since there is a cash value component in permanent life insurance, you can use it as a supplemental retirement income.
- Assisting with the end-of-life expenses – If you take out a final expense insurance policy, it can be used to pay for funeral and final expenses like medical bills, funeral costs, etc.
- Aid in estate planning – It involves securing a lawyer for closing the remaining accounts of the deceased person and reporting the death to the IRS. A life insurance policy is used to cover any debts owed to the IRS and cover legal fees and taxes.
- Donating to charities – A charitable foundation can be made as a beneficiary of a life insurance policy.