Life Insurance 101

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I touched on retirement savings in my last article, but a sweet friend of mine was inquiring about life insurance. Life insurance is also important to have because, well, you just never know when it’s your time to go and if you have a mortgage and a family you do not want to leave financial burdens on them when you pass. So, today I will share with you some different types of life insurance to consider; in hopes that you will pick the best option for your family.

Term Life Insurance:

Term life insurance is the most common type of life insurance sold in today’s market because it is cheaper than most other options. It will last for a set number of years, usually 10-40 years, and has a set death benefit (the amount that is paid after your death) to your beneficiary (person who you choose to receive the payment).

You should choose a policy death benefit based on any outstanding debt, such as a mortgage, plus anticipated end of life costs. Ideally the death benefit should be 10-30x times your salary.

You should choose a policy term to last as long as your longest debt, usually a mortgage term is about 30 years. There are sub-types of term life insurance as follows:

  1. No Medical Exam- More expensive
  2. Annual Renewable- with this type you renew coverage each year, rates usually go up each year, this is common with employer provided life insurance.
  3. Group Term- also a common type of employer coverage, this renews yearly, and will go up each year usually. Most of the time if you leave your job or are terminated you cannot take it with you. The upside is that sometimes these employer coverages are included free.
  4. Mortgage Protection- This type is tied directly to your mortgage lender, and they are the beneficiary in this case. The premium (monthly payments) will stay the same as the payout decreases overtime, because you are paying in on your mortage, so the amount required to pay off the mortgage goes down. Usually, you can have this added in with your mortage payment through the lender itself.
  5. Return of Premium- Allows you to get most of your premium payments back at the end of the term but these payments are more expensive.
  6. Increasing Term- This type can have fixed or variable premiums, but the death benefit will grow overtime. – Think Gerber insurance for babies whereby the time the kid is 18 it has tripled in value.
  7. Accidental Death and Dismemberment- this should supplement a life insurance policy as a rider (add on). It will pay if someone dies by accident or if you’re alive and lose a body part due to an accident.
  8. Key Person- Okay business owners this is for you- this is term life insurance on a critical member of the business. The business itself is responsible for the premiums and is the beneficiary.

Whole Life Insurance:

Whole Life Insurance will last your entire lifespan as long as you keep making the premiums. These tend to be more expensive but can come with perks that term life insurance does not. For example, some offer a cash value component and will let you borrow from it while you are still alive. The death benefit usually grows overtime at a low interest rate. There are multiple types of whole life also:

  1. Guaranteed Issue- No medical exam and up to $25,000 coverage for ages 50+
  2. Simplified Issue- No medical exam and up to $50,000 coverage for ages 45+ these are good for people who have pre-existing conditions. Will be more expensive though.
  3. Indexed- This type has NO set death benefit; it instead follows the index stocks like S&P 500. Your benefit will be variable depending on the stock market.
  4. Variable-With this type you can choose where to invest your payments- from the carriers’ options- and the death benefit will earn based on the performance.
  5. Joint- Covers two people under one policy and you can pick when the death benefit will payout, after one person passes or both people pass.

There are many other types of insurance, but that is a good breakdown of the most commonly used. If you want to be able to support those you love after you’re gone life insurance is a great way to do that. The younger you start the lower the premiums are, and of course try to keep yourself healthy. Non-smokers also have lower premiums so keep that in mind as well. I hope this helps you choose what type of insurance is best for your family.

Until next time; Best of luck and love.

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