Everything You Need to Know About Life Insurance
How Does Life Insurance Work?
This type of policy is essentially a contract between you and the insurance company. If you die within the policy’s duration, the insurer has to pay the agreed amount to your selected beneficiary. In return, you have to pay your premium on time. Life insurance settlements are tax-free.
Additionally, some policies, such as whole life, have a cash value component. It’s a separate account within your insurance policy. It functions primarily as a savings account. You can use the cash value to pay premiums or even take a loan. Still, its chief purpose is to serve as compensation if you surrender your policy to the insured.
What Is the Best Life Insurance?
There are over twelve different types of possible life insurance. All of them fit different customers in different situations. Here, we covered the most common policies and how they work.
A basic term life policy is the bread and butter of the life insurance industry. It’s the most affordable type of life insurance, so it’s the best policy if you’re looking for cheap coverage for a given period.
So exactly what is term life insurance? It provides coverage for a specific period, usually ranging from 5 to 30 years, with a set limit frequently between $200,000 and $500,000. Your premium can’t change during the term, meaning if you’re paying $32.40 now, you’ll be paying $32.40 in ten years. Once the policy expires, you can choose to renew it, but at a much higher price. There’s no cash value, and the premium won’t be returned if you outlive your coverage.
This is a type of permanent life insurance. It covers you from the first effective day until the day you die. You can only lose coverage by not paying the premium, which causes the policy to lapse, or by canceling it. Much like term life, the premiums are fixed for your lifetime.
A whole life policy has a cash value component, which functions as a separate savings account. The death benefit payments are tax-free, although the income from the cash value is taxable.
A whole life policy is considerably more expensive than term. The premiums are usually 8–12 times higher than an equivalent term policy. That’s why it’s a better investment for customers with a higher annual income or those looking to profit from the cash value component.
Return of Premium Term Life Insurance
If you’re looking for a protection plan that perfectly balances the benefits of term and whole coverages, a return of premium term policy demands your attention. Essentially, it’s a regular term policy that also pays your premiums back if you outlive your policy. Additionally, you’ll likely get some money back even if you cancel the policy before it expires.
In many instances, you’ll earn even more if you invest the premium’s money with interest. Some ROP term policies even have cash value components, like whole coverages. These are just some of the reasons ROP term can be the best life insurance policy for many.
Nonetheless, they’re 3–4 times more expensive than most standard term policies. For instance, a $500,000 20-year term policy from State Farm costs $44.39 monthly, while its ROP variant costs $161.84 monthly. Still, it’s considerably cheaper than permanent insurance—our same State Farm quote was $688.19 monthly.
Those who fancy whole life coverage but prefer more flexibility and lower prices should consider universal life insurance. Just like a whole life policy, it’s a permanent protection plan, and it offers cash value. However, the premium and the death benefit can be easily adjusted. Since the premium increases as you age, you can lower it to the minimum COI (cost of insurance) amount. Alternatively, you can use the cash value to pay your premiums.
How Much Life Insurance Do I Need?
The simplest method to calculate this is to take your annual income and multiply it by ten. According to this, if your annual salary is $50,000, the death benefit on your policy should be $500,000.
However, there are usually more things to consider. Start with your mortgage and student loan debts. If it takes 20–30 years to repay them, consider a higher death benefit. Furthermore, if you’re planning to send your children to college, calculate how much that would cost. Finally, review your current bank account balance. Once you take all this into account, the right limit may be as high as 40 times your annual income.
The Best Ways to Get a Life Insurance Quote
More often than not, you’ll have to deal with an agent to complete your insurance policy. There are essentially two types of insurance agents. First, there are captive agents, who only sell the products of the insurer they work for. Then, there are independent agents, who work by commission for multiple insurers. If you manage to find a skilled independent agent, you should count on them to find the best insurance quote possible. However, agents often don’t cooperate with mutual insurance companies (those owned by their policyholders).
Another route to the best coverages is to use quote comparison websites. Nonetheless, we still prefer getting online quotes the most. Often they’ll need to be finalized through an agent, but it’s still the most convenient way to compare prices.
Tips for Finding Cheap Life Insurance
You should do everything in your power to ensure the best possible insurance quite, especially in times of skyrocketing healthcare costs. There are several different factors and lifestyle choices that can impact your life insurance premium. Many of them relate to your physical health and safety, but some may have nothing to do with that. For example, even a bad credit record can lead to higher premiums. Here are some tricks to keep your quote as low as possible.
Take Advantage of Bundle Discounts
Almost every insurance company my team and I have reviewed offers a 5%–10% discount to customers who buy different kinds of policies from them. Some of the big players that offer both auto and life insurance quotes are State Farm, Geico, MetLife, USAA, and Nationwide.
The Sooner the Better
It sounds trivial to say that health and fitness deteriorate as you age. If you’re considering a term policy, you could end up paying 10% more for every year you wait. That’s why it’s best to get coverage while you’re still fit and in good health. This is especially true for male customers.
Maintain Healthy Habits
Smoking is among the biggest red flags to a life insurance provider. The link between using tobacco and various forms of life-threatening cancers is well established. That’s why insurance companies have to charge them three to four times more than they would a regular customer.
To keep your life insurance rates low, try to avoid other unhealthy habits too. These include consuming substantial amounts of alcohol, eating a lot of greasy or sugary food, or skipping physical exercise. So make sure to stay active and eat your vitamins.
To test how these vices influence prices, we got two quotes for a 40-year-old male from Haven insurance with the same limits and terms. One of them was in good health, while the other was an overweight smoker and a moderate drinker. The monthly premium for the healthier individual was $38.65, while it was $169.25 for the unhealthy customer.
Don’t Drive Fast
Almost every life insurance provider reviews your driving record before issuing a policy. That’s because a streak of speeding citations or DUI violations on your record are a major warning sign. It indicates that you’re more likely to end up six feet under than a driver with a safe record. They’ll have to adjust their rates accordingly to protect their profits.
Don’t Do Anything Dangerous on a Regular Basis
Activities such as skydiving, full-contact martial arts, rock climbing, and scuba diving all make a life insurance underwriter’s stomach turn. This is no surprise, given how much they increase your chances of a disabling injury or death.
Check Your Family Records
Genes play a big part in your overall life expectancy. Even if you’re healthy and athletic, if your parents or relatives passed on prematurely due to disease, insurers may charge you more. Changing your genetic make-up is beyond your power, but providing a family history isn’t. Your life insurance company may void your policy or even deny paying a claim if you intentionally hide this information.
Don’t Skip Medical Exams
You can buy certain types of life insurance, such as Haven’s term coverage, without completing a medical exam. While this option is available only for younger customers, it’s still smarter to have a physical exam before applying. Without it, an insurer is essentially taking a risk by assuming you’re as healthy as you said in the application. If you can provide them with some hard evidence signed by a doctor, they’ll offer you more competitive rates.
Compare Multiple Quotes
Insurance companies often have different marketing strategies. For instance, an established insurer will invest a lot in marketing and therefore offer relatively high rates. An emerging company, on the other hand, will try to woo customers by providing the best life insurance rates on the market.
Additionally, all insurance policies, including life, are highly individualized. While one company may offer you unreasonably high rates, another may provide a quote that’s well within your budget. For this reason, it’s essential to compare quotes from multiple insurers. We recommend you do this either online or through independent agents.