Life Insurance 101: What You Need to Know
Buying life insurance can be intimidating. There are many different types of insurance, and every variation has its own benefits and drawbacks. The challenge is finding the policy that best suits your needs and then adjusting it where needed. At MetzWood, we want to help guide you through this process.
Why buy life insurance?
Life insurance helps cover the financial needs of your loved ones and dependents following your death. Marital status, the number of dependents, income, and wealth will help determine the optimal amount and type of life insurance. It is important to consider your future when purchasing because advanced age and failing health can make it impossible to find the life insurance coverage needed.
We recommend reviewing your life insurance policy every few years to adjust coverages for changing financial and family circumstances and responsibilities like:
- Replacing income for dependents
- Paying final expenses
- Creating an inheritance for heirs
- Paying federal “death” taxes and state “death” taxes
- Making significant charitable contributions
- Creating a source of savings
Types of Life Insurance
There are two major types of life insurance—term and permanent life.
Related Article: 5 Common Life Insurance Myths Debunked
Term Life
Term life insurance is the simplest form of life insurance. It only pays if death occurs during the policy term, and no “cash value” accrues in the policy.
In a standard term policy, the death benefit stays the same throughout the life of the policy. Additionally, the premiums on the policy are also fixed for the duration of the term.
Most term policies have the option to be extended, either through converting the policy to a permanent policy, or extending the policy on a one-year renewable term basis.
Permanent Life
There are two primary types of permanent life insurance coverages we recommend: guaranteed universal life, and traditional whole life.
A guaranteed universal life policy is sometimes referred to as “forever term” coverage. The reason for this moniker is that the policy functions very similar to the term policies mentioned above, but coverage will last until a specified age (typically 100 or 120). As with term policies, the premiums are fixed and there is no cash value accrual on the policy.
A traditional whole life policy is a permanent life insurance policy that guarantees coverage for an individual for the duration of their life as long as the premiums are paid on time. Additionally, whole life policies provide a savings component known as cash value. Cash value is similar to the equity in your home – as you pay your whole life insurance premiums the cash value portion of the policy goes up. You can access these funds during the life of the policy should you need to in the event of an emergency. The premiums on these policies are also fixed.
Factors Influencing Cost
There are several factors that influence the cost of life insurance including the type of policy, the age of the applicant, the sex of the applicant, and the health and lifestyle of the applicant.
Term is the least expensive type of life insurance, followed by guaranteed universal life, and then whole life as the most expensive. Within term insurance, the longer the duration of the term, the more expensive the policy. For example, a 10-year term policy is going to be less expensive than a 30-year term policy.
Life insurance always gets more expensive as you age. It is an important reason why locking in a fixed premium when you are younger is a wise choice. We tell our clients “life insurance is on sale today” because it is true. Without locking in a fixed premium the costs of a policy will go up over time.
Statistically, women live longer than men. Accordingly, women pay less than men for insurance, all other things being equal.
Life insurance is medically underwritten. That means that during the application process, you will be required to provide details of your medical history. Additionally, you will be asked personal lifestyle questions like whether you use tobacco products or drugs, if you have a poor driving record, etc. These items allow the life insurance company to assess the potential “risk” and charge the appropriate premium. The better your health and lifestyle characteristics, the better your premium will be.
At MetzWood, we can help you find many types of life insurance coverages including term, whole life, and guaranteed universal life insurance options. Our advisors make the process easy, so you can focus less on insurance policy nuances and more on living your life. Get peace of mind and request a proposal below or contact an advisor today at 518-392-5161.
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