Take a look at these facts:
- 40% of adults in the U.S. have no life insurance coverage
- Nearly half of American households with life insurance policies are underinsured by $200,000 or more
- Only 30% of Americans have life insurance with sufficient coverage
These statistics force us to ask this question: “If something were to happen to me, would my family be financially secure?”
October is Life Insurance Awareness Month. So, our team at Baily Insurance wanted to answer questions that you might have about the important topic of life insurance.
My name is Jamie Braddock, and I am a personal insurance agent at Baily Insurance. I have been working in this industry for the last 13 years, and I frequently help my clients find the life insurance product that is right for them.
While most individuals inquiring about life insurance are wanting to protect their family in the case of an unexpected death, there are other reasons that you might want to purchase a life insurance policy.
To give you an overview of this topic, I’ve answered these four questions:
- What is life insurance?
- Why should I buy life insurance?
- What are the different types of life insurance?
- What keeps people from buying a life insurance policy?
As you read the answers to these questions, you should get a good start on understanding this product and thinking about what might be right for you.
#1 What is life insurance?
Essentially, life insurance is an insurance policy that you purchase guaranteeing a sum of money upon your death. Depending on the type of life insurance policy you purchase, you may also be able to withdraw money from your policy after a defined period.
The three basic types of life insurance are whole life insurance, term life insurance, and universal life insurance. The reason you are purchasing a life insurance policy will determine the type of policy that you purchase.
#2 Why should I buy life insurance?
While there are many reasons one might choose to purchase a life insurance policy, the two most common reasons to purchase one is to protect your family or as an investment for the future.
Protection for your family
The most common reason people purchase a life insurance policy is as a protection for their family. Life insurance can cover any outstanding debts that the individual owes as well as any funeral and burial expenses.
Because unexpected death often causes the loss of significant income, many households can not afford their monthly expenses like a mortgage or car payments without that income. Purchasing a life insurance policy to cover your debts will ensure that your spouse or children will not lose their home or vehicles.
Many parents also help their children with educational expenses. In the case of an unexpected death, a life insurance policy can provide the necessary funds for education expenses or college.
It is also important to note here that even if you do not have a spouse or children, your outstanding debt could become the responsibility of your loved ones or business partners in the case of an untimely death.
For example, if you are a college student and your parents have cosigned a student loan with you, if you were to pass away unexpectedly your parents would be required to pay your outstanding debt.
A life insurance policy is a way to ensure that your loved ones will not be burdened by your debts and that they will be able to maintain their current lifestyle if you unexpectedly pass away.
Investing for the future
Depending on the type of policy you purchase, you may purchase life insurance as a type of investment for your children or yourself.
Your children’s future
It might seem a little crazy, but often parents will purchase a life insurance policy for their young children. When they do this, they use the life insurance policy as an investment in their children’s future.
Some life insurance policies accrue interest annually similar to a certificate of deposit (CD) in the bank. After a period of years, the individual who owns the life insurance policy can withdraw money from the interest that has been accrued.
Often parents will purchase this type of policy for their children to help cover their children’s expenses when they become young adults. They may use the interest income to help with purchasing a vehicle or to help pay for their college education.
One of the benefits of purchasing a life insurance policy for a child is that their premium rate will be lower. Because children most often have excellent physical health, their premium rates can be locked in at a lower rate.
Your future
Because whole life policies can accrue interest, some individuals purchase these products as a way to invest in their future. As your policy matures and accrues interest, you can use the dividends on your needs. Some people use this as part of their retirement plan.
#3 What are the different types of Life Insurance?
As I mentioned earlier, individuals must determine if they should purchase a whole life insurance policy, a term life insurance policy, or a universal life insurance policy. What are the differences in these types of insurance policies and which one is right for you?
Whole life insurance
Whole life insurance is life insurance in which your premium rate is “locked-in” for your whole life. This product is geared at individuals who want to purchase life insurance as a financial investment. Also, whole life insurance costs more than term life insurance and offers a lower amount of coverage.
Premium rates
Let’s say you purchase a $100,000 whole life policy at age 30 costing $1,200 a year. When you are 60 years old, no matter what medical conditions you have, your life insurance policy will still be $1,200 a year.
Whole life insurance policies have a locked-in premium rate for the entire life of the policyholder.
Interest
While this is not the case for all whole life insurance policies, most whole life policies will accrue interest annually.
Imagine you purchase a $100,000 whole life policy. If you have that policy for 50 years, it will accrue interest annually. With that interest, the policy could accrue $25,000 and end up with a total worth of $125,000. That means that upon your death, because of the added interest, your beneficiary would receive $125,000, not just $100,000.
It also means that you can withdraw money from the interest accrued on your policy before death. Because annually your policy is gaining interest, you are often able to receive dividends on the interest it is gaining.
It is important that you ask your insurance agent the specifics of the policy you are purchasing. Your agent will know if the policy you are buying accrues interest and if you will receive any dividends.
High-cost low-coverage
It is important to note that most whole life policies offer a lower amount of coverage. This may on the surface appear like a strike against whole life insurance policies, but depending on your reason for purchasing life insurance this factor may not be what it appears.
Because whole life insurance has a guaranteed premium rate, your beneficiary will receive the entire amount at your death. And, because this product can often accrue interest, that interest will be added to the policy’s total upon your death.
In general, whole life insurance is a product that works for people of all ages. Because the premium for this type of policy gets locked in for the buyer’s lifetime, the rates will be best for those who are young and healthy.
And because this type of policy can accrue interest, whole life insurance is an investment, not merely protection.
Universal Life Insurance
Universal life insurance became a popular life insurance option in the 1980s. While it is still available today, not all insurance agencies carry this product. A universal life insurance does not have fixed rates throughout the life of the policy. It works more like a mutual fund in which the policyholder can choose where to invest their funds.
Premium rates
The premium rates for a universal life Insurance policy fall between the rates for whole life and term life insurance policies.
The premium rates for a universal life insurance policy are not fixed. You can adjust your rates throughout the life of the policy. This type of insurance requires only that your premium rates remain within a preset range.
While some individuals like this flexibility, you should note that to receive the full benefit of your policy you may need to pay higher premiums later in your life to keep your policy.
Interest
A universal life insurance policy will accrue interest from the time it is purchased until it is paid out at your death. The interest rates for a universal life Insurance policy are not fixed – that means that you can not guarantee how much money your policy will accrue throughout its duration.
You can borrow money from your policy if you need to. If you do so, your insurer will determine the interest rate that you will pay on that loan. Unlike a whole life insurance policy, you can not simply receive money from the interest that your policy has accrued.
Universal life insurance policyholders also have an option to surrender their policy before their death. If they opt for this, you would receive a sum of money from the money you already invested in your policy. Again, because the interest rates are not fixed on this product, the amount you would receive would vary.
One last note, there are universal life insurance products that give the policyholder the option of where and how to invest their funds. This type of product is called variable universal life. This type of product works much like a mutual fund.
High-Cost Low-Coverage
The cost of a universal life insurance policy falls somewhere between a whole life and term life policy. For example, a $100,000 universal life policy for a healthy 30-year-old is likely to cost $550 yearly.
In general, these policies cost a little less than a whole life policy because there is no guarantee on how much interest you will accrue on your policy. It is, however, still a high-priced life insurance option.
Term life insurance
Term life insurance guarantees the policy’s premium rates for a certain number of years – 10, 20, or 30. Most often this product is purchased to serve as financial protection for your loved ones in case of your death. This product typically costs less than whole life insurance and offers a higher amount of coverage.
Premium Rates
Term life insurance rates are lower than whole life insurance rates. If you are a healthy 30-year-old individual, a 20-year term life insurance policy may only cost you $180 annually. That is significantly less expensive than a whole life policy.
Also, at the end of your term life insurance policy, the rates will readjust to your current age and increase. Typically most agents will advise you to replace the policy with a new term unless you now have medical issues that would not allow you to get a new policy. If you can still afford the policy, it is best to continue with the policy as long as possible.
Interest
Term life insurance is not a product that accrues interest for the policyholder. When your policy ends, you will not receive anything financially. Term life insurance is not an investment; it is financial coverage for your family in case of your death.
Most individuals who purchase term life insurance buy this product so their loved ones can pay off any outstanding debts – like a mortgage or school loans. The purpose of the product is to prevent your family from being burdened financially at the loss of your income.
Low-Cost High Coverage
As I stated earlier, term life insurance products are very inexpensive in terms of the coverage that they provide. Remember for a healthy 30-year-old individual, a $100,000 policy may only cost you $180 annually. In the case of death, the policy beneficiary would receive $100,000 to help cover a mortgage, outstanding debts, needed childcare, etc.
For many individuals, it is well within their budget to pay for a term life insurance policy. This policy gives peace of mind that your loved ones will be cared for if something should happen to you.
Term life insurance policies have a low cost but can provide a significant amount of money for your family in the case of an untimely death.
In general, term life insurance is best for individuals between the ages of 18 and 40, because most individuals within those ages have unpaid debt and often a family that is reliant on the individual’s income.
| A Quick Comparison of Whole, Universal, and Term Life Insurance Products | |||
| Whole Life | Universal Life | Term Life | |
| Duration | Life | Life | 10, 20, or 30 years |
| Guaranteed death benefit | Yes | Yes | Yes |
| Premiums | Fixed | Varied | Fixed |
| Builds cash value | Yes, at a guaranteed rate | Yes, but not at a guaranteed rate | No |
| Dividends for policyholder | Yes | No | No |
| Cost | More expensive than term life | More expensive than term life, sometimes less expensive than whole life | Less expensive than whole live |
| Investment option | No | Sometimes | No |
| Primary purpose | Death benefit and investment | Death benefit and investment | Death benefit |
#4 What are the most common reasons people don’t purchase life insurance?
As an insurance agent, I hear a few common reasons from individuals regarding why they haven’t purchased a life insurance policy. Here are the 3 top reasons people give for putting off this important decision.
I haven’t thought about it.
For many people, purchasing life insurance is just not a pressing issue. Many individuals are young and healthy and don’t often ponder an untimely death. Let’s face it – the younger we are, the more invincible we feel.
But we all know that tragic things happen outside of our control. Having a life insurance policy in place will care for our loved ones if tragedy happens.
Calling your insurance agent to discuss the life insurance options available to you only takes a short amount of time but can have enormous impacts on your family in the case of such an emergency.
Taking the time to think about life insurance is a practical way to love and care for your family.
Life insurance costs too much. I can’t afford it.
When I get the opportunity to quote a life insurance policy, many of my customers are surprised at just how affordable this product is. Before applying, they imagined a life insurance policy would be a little pricey.
As I mentioned above, term life insurance policies can be very affordable. Paying under $200 a year can ensure that your loved ones won’t be burdened if something happens to you. At that kind of rate, you will be paying just over $15 a month. That’s less than the cost of a dinner out, a few fancy coffee drinks, or even a haircut!
Life insurance is very affordable!
I am investing my money elsewhere in case of an emergency.
Many people take seriously the advice to sock away some money after each paycheck. They may invest in mutual funds, CDs, IRAs, etc. And depending on how much you are saving, you might be right about your decision.
Most individuals will need to save several years of income to adequately cover their families’ needs in the case of an unexpected death. For most people, that is a greater amount of money than they can set aside. Life insurance can be an excellent solution to provide adequate funds for your loved ones if something happens to you.
Your insurance agent will be able to give you advice on what type and size of policy you would need to make sure your family is covered if you were to pass away unexpectedly.
They can also advise you on the amount of coverage you need for your family to help you determine if your other savings vehicles will adequately protect your family upon your death.
Ready to secure your family’s future with life insurance?
By now you should have answers to your life insurance questions and understand how this product can benefit your family. But I realize that this article just skims the surface of this important topic.
One of the ways that we express our love to our family is by making sure that they are provided for if something happens to us. Life insurance is just one of the ways we can say, “I love you” to those you love most.
We also say “I love you” by preparing for our children’s futures. Life is expensive, and life insurance can be an excellent way to plan for expenses that your children will face in their young adult lives or that you might face in your retirement years.
At Baily Insurance, we know that choosing a life insurance product that is right for your family is no small decision. Your family means the world to you, and we want to help you take care of them if something should happen and to help you prepare financially for the future.
If you have questions about this insurance product or want to move forward with getting a life insurance policy in place as a protection or an investment, we would love to answer your questions.
