Planning for your future is difficult. It’s also an easy decision to put off until later, “when you have time.” No one likes to think about their own mortality. However, life insurance is an easy way to ensure your family is protected should the worst happen, and they can no longer depend on your support and salary.
Why Life Insurance?
You work hard every day to provide for your family. What would happen to them if you were no longer around? Would they be able to pay their bills? Would they be forced to give up the home that you shared?
You don’t need to lose sleep imagining this situation. Life insurance is an excellent way to ensure your family’s financial security, even after you die. With life insurance, you’ll can rest assured, knowing that your family won’t suffer financially. Life insurance can also help pay for college, pay off a mortgage, and pay estate taxes. It’s another financial strategy to help you prepare for a stable future.
What Kind of Life Insurance Do I Need?
When you start to research life insurance, you may be overwhelmed by the many different kinds available. What are the differences? Why are there so many? Which one is right for you?
Life insurance can be confusing, which is why our Sunnyvale insurance agents have broken down what each type of life insurance product is and who it’s for.
Term Life Insurance
Sometimes term life insurance is known as “pure” life insurance or basic life insurance. It lasts for a set number of years, known as the term. If you die sometime before the end of the term, your heirs get the death benefit.
You pay a premium every month for ten years, 20 years, or even 30 years. If you outlive your term life insurance, it just expires—your heirs don’t receive anything.
Most term life insurance policies require underwriting, which means you’ll have to have a medical exam to qualify. A third-party company usually handles these exams. They’ll send a nurse or other medical professional to your house in Sunnyvale, CA. They’ll take urine and blood samples, your blood pressure, and your height and weight.
Then, the life insurance company uses this information to set your rates. Young people and people in good health pay lower premiums. Smokers pay more than non-smokers. If you just recently quit, you have to wait between one and three years to be classified as a non-smoker.
What happens if you’re denied? Shop around. Some companies are more forgiving of specific health problems than others. Request a copy of the findings and move on from there. There could be an error, but if there isn’t, you can still find life insurance.
The advantage of term insurance is that it’s usually very affordable. It’s the least expensive type of insurance. Ideally, once the term insurance expires, your children are on their own and financially independent, your house is paid off and you’ve put aside some money for retirement. In other words, you no longer need life insurance.
You can renew once the term has expired, but since you’re a lot older, the premiums will be quite a bit higher. Many term life insurance policies are convertible, which means that if you choose, you can convert them to a whole life insurance policy during a certain time, usually the first five years or so.
Whole Life Insurance
Whole life insurance can be thought of as life insurance with a savings component attached. It’s called whole life insurance because it lasts your whole life; as long as you pay the premiums every month, you will have life insurance forever.
Whole life insurance builds cash value, which is a tax-deferred savings account. This cash value account earns interest and grows at a predetermined rate. Once you have enough cash value in the account, you can withdraw from it or take a loan against it.
However, keep in mind if you never pay back the loan, the death benefit will be reduced. On the other hand, you’ll want to use your cash value account while you’re still alive because it goes back to the insurance company if you die without using it.
Whole life insurance is quite expensive, often as much as ten times as expensive as term insurance. When you enter into a whole life insurance policy, make sure you’re able to pay the high premiums for a long time.
Universal Life Insurance
Universal life Insurance is like whole life insurance, except that it offers more flexibility. You can adjust the amount of the premiums, how often you pay the premiums, and the amount of the death benefit.
You still get the cash value component, and it still accrues according to a set interest rate. You can make a single premium payment, pay semi-annually, or every month.
Universal life insurance divides the premiums into three components; some builds cash value, a portion pays the costs associated with insurance, and a portion pays the death benefit. This allows you to adjust each component individually.
You do have to pay often enough to keep the policy in force. Eventually, when you’ve built enough cash value, you can use that money to pay the premiums.
Universal life insurance is a permanent policy, just like whole life insurance, meaning it lasts your entire life and never expires.
Variable Universal Life Insurance
Variable universal life insurance is also a permanent life insurance policy and includes a cash value account. However, in variable universal life, the cash value account is an investment account.
You can choose from a list of investments that act like mutual funds. The cash value of the account grows according to the performance of your investments.
Since the cash value is invested, the cash value can grow faster than that of any other life insurance policy. However, just like in the stock market, if your investments don’t perform well, your cash value may stagnate or even lose value.
There’s also Indexed universal life insurance, which is similar to variable insurance except that your cash value is based on an index of the market’s performance. Instead of choosing your own investments, you’ll earn interest based on how the market does overall.
You don’t actually invest in the market, but the interest rate reflects how the market is doing. This means that the cash value may grow at a much faster rate than, say, whole life insurance.
On the other hand, you might not earn anything. There are usually caps on how much interest you can earn, and floors on how little interest you can earn.
Say you have an indexed universal life insurance policy with the cap set at 10% and the floor at 1%. If the market performs really well and earns 20%, you will still only earn 10%. On the other hand, if the market loses money, you will still earn at least 1% interest on the cash value.
Simplified Issue Life Insurance
Simplified issue life insurance is perfect for you if the thought of undergoing a medical exam is preventing you from applying for any life insurance at all. You’re not alone; half of all consumers say they would be more likely to purchase life insurance if it didn’t have a medical exam. With simplified issue life insurance, there is no medical exam at all. There may be some health questions, but no one will come to your house and take blood samples.
You will be asked such things as whether or not you smoke, and if you have any serious illnesses such as heart disease or diabetes. Don’t be tempted to lie about your health because if your insurance company finds out, they could cancel the policy.
One advantage of simplified issue life insurance is that you can be approved and covered quickly since there’s no medical exam.
Since almost everyone qualifies for simplified issue insurance, the rates are quite a bit higher than they are for term insurance. They will also be higher than you would pay if you had a medical exam, assuming you’re in reasonably good health. But for people with health issues, simplified issue may be just what you need.
Guaranteed Issue Life Insurance
If the part about answering health questions when applying for simplified issue health insurance makes you cringe, consider guaranteed issue life insurance. It’s very similar, except that everyone qualifies and you don’t have to answer any health questions at all. All you need to apply is your name, age, amount of insurance (there’s usually a limit), and where you live—and you can get life insurance.
If you happen to die within the first two years of the policy, your heirs won’t get the death benefit. Instead, whatever amount you paid in premiums will be paid back to them.
Since everyone who applies gets approved, guaranteed issue life insurance is quite expensive. If you are suffering from health issues, it might be worth shopping around before settling for a guaranteed issue policy. Some insurance companies are fairly forgiving about certain health issues and you may get a better rate.
Final Expense Insurance
Final expense insurance, sometimes known as burial insurance, is meant to cover final expenses and that’s it. According to the National Funeral Directors Association, the average cost of a funeral in Sunnyvale CA is $7,640. Final expense insurance usually limits coverage you can get, to up to $25,000.
If you have a terminal illness and no money saved up to cover the burial, consider final expense insurance. This way, your family doesn’t have to worry about paying for your funeral.
Coverage amounts are low, and rates are high, so consider final expense insurance if you don’t have any savings or any other life insurance.
Group Life Insurance
Some employers offer life insurance as part of their benefits package. It can be a good supplemental insurance to life insurance you already have, although it’s not usually enough to be your only life insurance.
The rates are usually lower because the risk is spread out among many employees. Sometimes there isn’t even a medical exam involved. California law says that your group life insurance must be convertible to permanent insurance when the group policy terminates.
You’ll have to pay higher rates than your group insurance rates, especially if your employer covered part of the cost. But it’s nice to know that if you’ll still have life insurance even if you leave the company.
Sometimes group insurance plans are offered through unions or other organizations, such as the American Association of Retired Persons (AARP).
Group life insurance is a great value for the money, but since the coverage amount is usually low, you’ll need to purchase additional life insurance on your own.
How We Can Help
If all of this seems complicated and you still have questions, we can help. A lot goes into choosing a life insurance policy. You’ll have to consider what kind of life insurance policy you want and how much life insurance you’ll need.
Some online calculators advocate for a life insurance policy that’s ten to fifteen times your income, but this is simplistic and may not take your individual needs into account.
Life insurance is both a defense against an uncertain future and an investment planning tool. Obviously, you want your loved ones to be taken care of in the event of your passing, but you should also consider things like retirement and paying for college. There’s also estate planning, especially if you earn a high income.
Sitting down and meeting with a Sunnyvale life insurance agent can help answer all your questions. We have the experience and the expertise you need. Our knowledgeable and friendly agents will explain everything to you and help you make the right decision for your family and your budget.