One of the biggest checkoffs on your “adulting” to-do list is life insurance. You, and the people who depend upon you, may need it at any point in time. There’s simply no telling. However, like any insurance product, life insurance can be confusing. Often policyholders or tentative life insurance prospects will be concerned about the premiums, and whether the purchase is worth it or not. Is it necessary? Why do we need it? How does it work? What’s the difference between term and permanent? There are so many questions – and Panda7 has answers.
See our list of “good to know” popular life insurance questions.
How does life insurance work?
Permanent and term life insurance both work by spreading “financial risk” among multiple people, who then pay out into a “pool.” If a policyholder was to suffer an unexpected event, such as a death, this would minimize the losses. Basically, it is depositing money in a way that buffers the potential loss that your dependents and loved ones would otherwise face, as well as repaying any debt that may still exist after your death so it is not inherited by your heirs.
When is life insurance necessary?
A general rule of thumb is this: life insurance is essential when you have dependents who would be without income or have significant financial impact in the event of your death. The fact of the matter is that life insurance is not required by law, but it is highly recommended. Life insurance is also a means of paying off large debt that you would not want to pass on to your children, spouse, or other dependents. This includes debt like mortgage, credit card debt, loans, and so on.
Who is ineligible for life insurance?
Depending on the provider, you may be able to purchase life insurance under most circumstances. However, the most insurable individuals are healthy people between the ages of 18 and 60. Those with chronic conditions or a history of heart disease, respiratory illness, cancer, etc., may have a more difficult time getting insured.
How much does life insurance cost?
It depends! Policies can start very low the younger you purchase and may increase over time. It is advised that you purchase a policy as soon as you have dependents or feel as though you may need it soon so that you do not risk becoming ineligible for coverage later in the future nor chance any increased premiums due to the development of a health condition that may come with age.
How much life insurance do I need?
Again, it depends. There is no true answer to this question, but you may ask a life insurance broker to help you go over your circumstances, your needs, and your budget to determine a solution. They should look at your existing assets, your debt, your dependents, and any future plans you have in order to determine a coverage plan. You can review your coverage if you experience any major life events, like if you get married or have a child.
What is term life insurance vs whole life insurance?
You are considering purchasing life insurance but stuck between the choice between term life insurance and permanent life insurance. There are advantages to both. Moreover, there are numerous forms of permanent insurance, but “whole life” tends to be the most popular.
Term life insurance is generally clued as the more affordable of the two options. It helps to protect your loved ones, it is relatively simple, and easy to understand. As long as you continue to pay your premiums on time and die while you still have coverage, your death benefit or tax-free payout will go out to your named beneficiaries. It should be noted that the policy itself has no cash value and you will only receive payout if you die while covered.
A whole life insurance policy is far more expensive. However, you have a guarantee that you will receive a tax-free death benefit when you die and, in addition, your life insurance policy will build some cash value over time. This tends to be the biggest incentive for this policy, so long as you are willing to pay out for the higher premiums. If the cost isn’t within your budget, you can also just put your savings into an index fund or discuss with a financial advisor for alternatives.
When do I not need life insurance?
If you are currently single and do not have dependents or any ongoing debt, and you believe that your savings and/or assets would cover your funeral expenses, you probably do not need life insurance. If you are single but have debt, you may want to look into life insurance or consider seeing if your savings and/or assets can cover your debt in the event of your death. Moreover, if you have a mortgage, you may want to consider a life insurance plan even if you are single without dependents.
Life insurance can also help out if you have considered starting a family in the future or if you want to leave something behind for your family or charities of choice.
What does life insurance not cover?
There are certain causes of death that may impact your life insurance coverage. For example, if an individual purchased a policy and within two years committed suicide, this may not be covered by insurance. Moreover, high-risk activities that result in death like parasailing, rock jumping, cliff diving, and so on will also not be covered. Finally, if you have misrepresented yourself or lied about your activities, health, conditions, etc., your life insurance will be impacted. It is a good idea to talk to a broker – such as the experts here at Panda7 – if you are considering purchasing life insurance. We can answer any questions you may have about coverage, your options, eligibility, savings, and so much more.