The headlines frequently read, “Husband dies in a car crash leaving behind a wife and three young children.” Or, “Student killed in a head-on collision last night.”
Headlines like these are becoming common you barely take notice unless the event directly impacts your life. No one wants to bury a spouse or a child. When tragedies hit close to home, you try to make sense of the event. You wonder, “How will they survive”? During times of mourning, paying all the bills can get lost, yet they continue to pour into your mail box as if nothing has changed.
Life insurance is designed to cover such events. Unfortunately, statistics show that those who suffer such tragedies might end up dealing with a financial crisis, in addition to the loss of a loved one.
According to a 2015 Bank Rate survey¹ 42% of adults do not have any life insurance, including 37% of families with children under the age of 18. Of the 57% who do carry a life policy, 47% of policies have values under $100,000 with only 21% valued at $250,000 or more.
Delays in obtaining coverage occur because you are busy, and you convince yourself that you have time. That terrible accident that claimed a life last night will always be someone else’s family, not yours.
Here’s what you need to know so that if a tragic event happens to you, it does not create a financial crisis on top of the emotional crisis.
Top 5 Myths About Life Insurance
- It’s Too Expensive. Life insurance may not cost as much as you think. Insurance comes in two forms: temporary and permanent. Temporary policies also referred to as term policies, last for a designated number of years. These can be very affordable if you are young and in good health. For example, according to Nerd Wallet, a 30-year-old non-smoking male could get a $500,000 policy for only $243 per year or $20.25 per month. The annual rate would drop to $157 if you reduced coverage to $250,000.
- I Already Have Coverage Through Work. Work policies usually only cover 1 or 2 year’s worth of salary not including bonuses, commissions, or overtime, which significantly increase annual income. Your employer may offer expanded coverage that you can pay for with pre-tax dollars. The other challenge with employer plans is you cannot take the plan with you if you change jobs. A change in employment could result in higher premiums because you would begin a new policy at an older age. Supplementing a work policy with a personal one will help provide your family with needed coverage.
- It’s Too Complicated. Term policies are very straightforward. If you die within the time you have coverage, the policy pays. If not, the policy does not pay. Permanent coverage can be in the form of Whole, Variable or Universal life, and adds an investment element to the coverage. While these are more detailed than term policies, they build cash value over time and include more benefits. Some consumers feel money is wasted on premiums if the policy goes used, making permanent policies more attractive.
- I Won’t Be Able To Qualify. Life insurance takes your health and lifestyle into consideration and can result in higher premiums due to unhealthy habits such as smoking. Employment classification or a higher risk job, like a mechanic or a race car driver, are also risk factors considered. Final expense policies often do not include questions regarding health or occupation and are available even at higher ages. Even with risk factors included, most consumers can find affordable options provided you don’t have a terminal illness. For example, a 50-year-old with a history of heart disease and high cholesterol can qualify for $250,000 worth of term life insurance for around $45 a month.
- I Don’t Need IT. The majority of people need life insurance. With the cost of a funeral averaging over $10,000, a basic policy covering a minimum of funeral expenses should be considered by nearly everyone. Young single adults can lock in low rates by getting insurance at an earlier age. Non-working spouses should consider coverage to pay for the cost of replacing their care with third party care and bringing in other required help. Small business owners, self-employed workers, partnerships, and those who care for others, including parents, should carry adequate coverage.
How Much Coverage Do You Need?
Life insurance is designed to either replace income or cover expenses. Replacing income begins with the number of years you want to replace and then considers increases in income to establish an appropriate dollar amount. How many years before all your children are grown, for example, will no longer be dependent on you providing for them? Replacing expenses typically result in lower coverage recommendations and evaluates things like overall household expenses, the outstanding mortgage balance, and the cost of educating children.
Policies can be as simple or complex as you want. Riders are available to cover contingencies, and allow you to personalize the policy. For example, some riders allow you to take advances against the policy to cover medical expenses if you become critically ill. These additional features cost a little more but offer greater peace of mind.
Guarantees for insurance policies are made by the company, not a government agency, making the financial strength of the insurer paramount. Third party agencies like Moody’s rate insurance company financial strength and their ability to pay claims, helping you choose the best company for your needs.
Underwriting can be as simple as a few health questions to a lengthy health exam. Lifestyle habits and occupation play a role in rates and available policies. Typically, higher insured amounts require stricter underwriting.
Best Value, Ask an Expert
Regardless of whether you buy a policy online or through an agent, costs are the same. While it is uncomfortable to talk about your own demise, working with an agent will help you select the best policy for your family’s needs, at no additional cost.
Life insurance is a basic necessity for most and the sooner you get insurance the less expensive it will be, regardless of whether you choose a term or permanent policy. Term policies are inexpensive and easy to understand. Permanent policies cost more per month, but build cash value increasing balances over the years. Funds may then be used to pay policy premiums, increase account value, or offer a way to borrow funds if needed.
Regardless of which type of policy you choose, review the consequences of what would happen if you were no longer around to provide for your loved ones and look into a policy that will provide for their needs.
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