Q&A on Life Insurance
Many recognize the importance of life insurance but may have questions surrounding the more intricate details.
Imagine that you decide to buy a brand-new laptop, which you’ll need to use every day. Yet, you’ve never used a laptop before, have no clue on the differences between brands, know nothing on battery life or different software to install, and so on. You know this is a decision you’ll have to live with for years, yet you feel out of your league in making it.
While this particular scenario may not play out very often in today’s world, that feeling of not knowing which questions to ask or what you need to know is fairly common among consumers thinking of purchasing life insurance. In fact, almost 6 in 10 millennials don’t know how much insurance they need or what type of life insurance to buy.1 However, 90% of consumers agree that at least a family’s primary wage earner needs to own life insurance.1
Given the importance of life insurance but the intricate details surrounding a product you may be unfamiliar with, read below for a Q&A that addresses some of the most common questions received on the subject:
Q: What is life insurance?
Life insurance’s primary purpose is to provide your beneficiaries (i.e. your loved ones) with money in the event of your untimely death. With a life insurance policy, you are protecting the financial future of your loved ones by guarding against the unknown. Should you pass away while you are covered under your policy, the death benefits, or the money, that your loved ones would receive could be used to pay for funeral costs, outstanding debts, everyday living expenses (both now and in the future), savings for future milestones and much more.
Q: How much insurance should I consider purchasing?
The amount of life insurance you’ll potentially need will depend completely on your individual situation. According to North Star COO Diane Yohn, “there are a number of ways to answer this question. Fancy calculations such as human life value, a needs-based analysis done via software, general rules such as 5-7 times their income, $1 million in coverage for every $40,000 of annual income they want to provide for their family, etc.”
Because a life insurance policy should be a part of your overall financial strategy, it’s wise to complete an in-depth review of your financial picture as a whole to help in determining how much insurance you’ll need. Your personal situation will also factor in. If you’re young, single and with no dependents, you may only need the equivalent to covering your funeral costs and any outstanding debts you may have (student loans, credit cards, etc.) On the other hand, if you have a spouse and kids to consider, you’ll want to ensure they would be financially taken care of, if you are not around.
Q: Do both myself and my spouse need to consider purchasing life insurance?
There are a few different ways to look at this question. If both you and your spouse are working, the untimely death of one could be financially devastating for the family. Hence, the need for a policy for each of you. If you have a single-income family and the spouse who has passed was a stay-at-home parent, the surviving spouse would need to potentially factor future costly childcare costs into their everyday budget. If the spouse who has passed was the primary wage earner, the surviving spouse may need to either start working or seek additional financial assistance to pay bills. However, in all of these situations, the money received from a life insurance policy could help keep the surviving spouse afloat during this time and buy them some extra time to get back on their feet.
Q: What’s the difference between term and permanent life insurance?
“Term insurance is like renting—a temporary solution for a temporary issue with an affordable premium,” says Yohn. Common term life insurance plans last 10, 20, or 30 years at which point they expire. The vast majority of people outlive the term but had the use of the policy along the way. “Permanent insurance is like owning. You build equity and the owner has more control. If structured correctly, permanent insurance will result in money being paid to the beneficiaries 100% of the time, due to the inevitable fact that everyone dies.”1
Q: Can I ever change my coverage?
Yes! “Studies have shown that the average person purchases or changes their life insurance coverage 12 times in their life,” says Yohn. “Some policies allow more flexibility than others. With the new riders that allow for payment when diagnosed with critical illness(es), this average may only increase. Purchasing a long-term policy that is flexible should result in a lower overall cost and less policy fees.”
Q: Is it expensive?
63% of consumers don’t buy or delay buying life insurance because they believe it’s too expensive.1 However, there are many ways to structure an affordable life insurance policy, particularly if you choose a term option. “Most people can afford some level of life insurance,” says Chris Sitek, North Star’s VP of Life Insurance Advancement. “Young parents on a budget can likely protect their families for less than $10/month. It’s heartbreaking seeing so many people scrambling for a few thousand dollars on GoFundMe following a loved one’s death when they could have gotten $100,000 or more for minimal cost.” Sitek says the last thing grieving loved ones should have to worry about is financial distress. “If your husband or wife dies, you should have time to mourn and honor them, not worry if you’ll have to sell the house.”
For help in locating the appropriate life insurance policy for you that fits within your budget, a financial advisor can be a great resource.
Q: What other issues could a life insurance policy help?
Modern life insurance policies can help with a number of important financial objectives.
- The cash value inside perm policies can be used for anything from emergency funds to college funding, a down payment on a home, and including a way to supplement retirement income.
- Many policies include Chronic Illness and Long-Term Health Care provisions which allow for money to be paid prior to death. As long-term care is an enormous risk to a successful retirement, these features can be crucial. They can also help younger people who suffer accidents, strokes, or other disabling ailments.
- It can also help in a number of business scenarios. For example, it can help business owners secure loans to start or grow their businesses. It can also help partners ensure continuity of the business should one pass away. Recruiting, retaining, and rewarding key team members can also be accomplished using life insurance.
Q: What does the life insurance application process look like?
The application process will depend upon where you’re purchasing your policy. For those offered a life insurance policy through their employer, the process could be quick and painless, with relatively little to be done on the part of the employee. However, while employer-provided life insurance policies are a great benefit, they seldom provide adequate money at death on their own to the employee.
For those applying for life insurance coverage elsewhere (either to supplement your coverage through work or just on your own), the process can require a few extra steps. First, a financial advisor can help you sort through your options and select the life insurance company and policy most appropriate for you. Then, you’ll apply for coverage, giving basic personal and health information. Next, you may be asked to answer some questions about your medical history and perhaps complete an in-person physical exam at your convenience. Lastly, the insurance company will review all of these parts and let you know if they can offer you a policy.
Q: What is underwriting?
Underwriting is the process that insurance companies use to determine whether they can ensure the applicant by researching and assessing the risk they present. The process determines how much coverage they will issue and at what cost to the applicant.
Q: Where should I get started?
Working with a financial advisor knowledgeable on life insurance is a great place to start. An advisor can walk you through your options, work with you on any concerns you may have, and help identify the appropriate coverage for you.
Life insurance doesn’t have to be an unapproachable topic. September is Life Insurance Awareness Month. This month, take some time to evaluate your needs and engage in an open discussion with your advisor to make a decision that you feel confident about.
Interested in discussing this topic further with a financial advisor? With offices in 23 states, there is likely a North Star financial advisor near you. Contact an advisor here.
Note 1: Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods. Please keep in mind that primary reason to purchase life insurance is the death benefit.
1Leyes, M. (2018, April 10). Key Findings for the 2018 Insurance Barometer Study. Retrieved June 27, 2019, from https://lifehappens.org/blog/2018-barometer-study/
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