Question I have a fairly stable job and earn the bulk of my family’s income. We have a toddler and just had a second child, so I’ve decided it’s time to get serious about life insurance. But I’d really like to understand some of the basics before I make a purchase – mostly so I know what to ask an agent or look for in a policy. What are some things to consider before buying life insurance?
We posed this question to Andrew “Jack” Fitzpatrick, a Farmers Insurance® agent based in Irving, Texas. Here’s what he had to say about life insurance questions.
Answer Life insurance can be a tricky topic. It’s designed to provide financial support for those who depend on you, but permanent life insurance can also be used to access money for big purchases during your lifetime through policy loans.2 Here are answers to some common questions I hear about life insurance.
Group policies provided by employers typically offer an affordable and easy way to enroll in life insurance without a medical exam. However, group policies may only pay an amount equal to one or two years of salary or a similarly limited amount, which may or may not be enough to cover your family’s needs.
Additionally, when you change jobs, you may not be able to take your life insurance coverage with you. When you consider that, the older we get, the more difficult and costly it may be to obtain life insurance, having a personal policy to supplement your employer-provided policy can make sense.
The cost of life insurance will vary. From a broad perspective, it’s all about risk. The greater your risk of dying, the more you are likely to pay for life insurance. That’s why life insurance is relatively inexpensive to purchase when you are young and healthy. To determine your risk, underwriters look at such things as age, medical history, use of nicotine and alcohol, and any hazardous pastimes, such as skydiving. There are medical conditions that can cause the denial of an application, such as cancer, heart disease or dementia. For most types of coverage, your insurer will likely ask you to take a medical exam.
What you pay for life insurance premiums can also depend on other things such as the type of policy you choose, the coverage amount and the number of years you need to have it in place. If you have riders, or customized provisions, added into your policy, those typically come at an extra cost.
First, you should be aware that there are two basic types of life insurance coverage: term and permanent.
Term life insurance has guaranteed level premiums for a fixed period and generally is more affordable than permanent life during that level-premium period. You can generally choose level premiums for 10, 20 or 30 years. If you have young children and your primary concern is making sure there’ll be money to pay for their college educations, depending on their age today you might consider a 10- or 20-year term life insurance policy. If you should die while the policy is in force, the death benefit payout could help your beneficiaries with future expenses such as education costs.
Permanent life insurance plans are designed to provide coverage for your entire life, as long as premiums are paid. In fact, if you buy a child a permanent life policy, you or the child will have the ability to maintain coverage throughout their life, even if they develop health problems, as long as the premium is paid and the policy is kept in force.
There are two main types of permanent life insurance: whole life and universal. Whole life policies offer premiums that don’t rise. Part of their appeal is that they build cash value that you can borrow against.
Universal life offers more flexibility. It allows you to adjust the size of premium payments, death benefits, and the accumulation portion of your policy, within limits set by the policy contract. Some changes may require underwriting approval and additional premiums.
How much life insurance should I consider?
People usually want to make sure the size of the death benefit is large enough to meet the needs of loved ones who depend on them. Some people estimate that number by adding up their long-term financial obligations and subtracting their assets. The amount leftover can offer a rough indication of how much you might want for the death benefit.
You may start with a number in mind -- for example, death benefit equal to 10 times current annual income -- but not all individuals may want that amount of coverage. It all depends on your situation and the needs of your dependents. Your agent can help guide you through the consideration process, asking questions such as how much is left on the mortgage, what are your monthly bills and how much you may want for your surviving spouse to live on.
The way you structure your death benefit will depend on your family and your goals. One option is a lump-sum payout, but you also can generally have the benefit issued in monthly payments. That way your beneficiary will not receive all the benefit at once. You can even structure your life insurance to pay the death benefit into an individual retirement account (IRA), to provide savings for your spouse’s retirement.
It depends on whether you have term or permanent insurance. With term life coverage, your premiums typically start out lower than comparable permanent coverage and stay fixed for the initial 10, 20 or 30 years. If you choose to keep your policy in force past that initial period, the premiums will likely go up. With whole life insurance coverage, though, so long as you don’t let your policy lapse, your premiums are guaranteed not to increase for the rest of the insured’s life. Universal life insurance allows you flexibility in what premiums you pay – if you choose to pay more when you’re younger, you can build up cash value to cover the cost of insurance when you’re older. If you choose not to build up that cash value, then the amount you’ll have to pay to keep the policy in force will increase with age.
Consider buying now. No matter how old you are, you will never be younger than you are today. Age can be a significant factor in determining premiums. Many multi-line insurers offer discounts on either the life policy or the home or auto policy when you “bundle” all your policies with their companies, so ask if the company offers any such cost savings.
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1Lifetime coverage (or life of the policy) is guaranteed as long as all premiums are paid to keep the policy in force.
2 Policy loans and partial surrenders will reduce cash surrender value and death benefit. Policy loans are subject to interest charges. If your policy is a modified endowment contract, loans and surrenders may be subject to taxes and penalties.