What Type of Life Insurance Should You Carry?

life insurance

Life insurance is a type of insurance that pays out a sum of money to a designated beneficiary upon the death of the insured person. The purpose of life insurance is to provide financial security and protection for the loved ones of the insured person, in the event that the insured person dies and is no longer able to provide financial support.

There are several different types of life insurance, including term life insurance, which provides coverage for a set period of time, and permanent life insurance, which provides coverage for the entirety of the policyholder’s life.

Life insurance policies typically require the policyholder to pay a premium, which is a set amount of money paid at regular intervals (such as monthly or annually) in exchange for the coverage provided by the policy.

What is Term Life Insurance?

Term life insurance is a type of life insurance that provides coverage for a set period of time, known as the term of the policy. If the insured person dies during the term of the policy, the designated beneficiary will receive a payout from the insurance company. If the insured person does not die during the term of the policy, the policy will expire without any payout.

Term life insurance is typically less expensive than permanent life insurance, which provides coverage for the entirety of the policyholder’s life. However, it does not offer any savings or investment component, and the beneficiary will not receive any payout if the insured person does not die during the term of the policy.

Term life insurance is often chosen by individuals who want to provide financial protection for their loved ones during a specific period of time, such as while they are raising children or paying off a mortgage. It is also sometimes used as temporary coverage for individuals who have a need for life insurance but may not want or be able to afford permanent coverage.

How Long Does Term Life Insurance Last?

Term life insurance policies can have terms of varying lengths, depending on the needs and preferences of the policyholder. Common term lengths for term life insurance policies include 10, 20, and 30 years.

Some insurance companies also offer term life insurance policies with shorter terms, such as 5 or 7 years, as well as policies with longer terms, such as 25 or 35 years. The length of the term is typically chosen based on the policyholder’s specific needs and financial goals. For example, a policyholder who is raising young children and wants to provide financial protection for their family in the event of their death might choose a 20-year term.

It’s important to note that term life insurance policies do not have a cash value component, so the policy will expire at the end of the term without any payout if the insured person does not die during the term. 

Policyholders can often renew their term life insurance policies at the end of the term, but the premiums may be higher due to the policyholder’s increased age. Some term life insurance policies also have the option to convert to a permanent life insurance policy at the end of the term.

What is Permanent Life Insurance?

Permanent life insurance is a type of life insurance that provides coverage for the entirety of the policyholder’s life, as long as the premiums are paid. This means that the policy will remain in effect until the policyholder dies, regardless of how long that may be.

Permanent life insurance policies typically have a savings or investment component, known as the cash value, which accumulates over time and can be accessed by the policyholder while they are alive. The cash value can be used for a variety of purposes, such as paying premiums, borrowing against the policy, or providing a source of income during retirement.

There are several different types of permanent life insurance, each of which offers different features and benefits. Some of the most common types of permanent life insurance include:

  1. Whole life insurance: This type of permanent life insurance provides coverage for the entirety of the policyholder’s life and includes a savings or investment component known as the cash value. The premiums for whole life insurance are typically fixed, and the policy’s cash value grows at a guaranteed rate.
  2. Universal life insurance: This type of permanent life insurance combines the features of term and whole life insurance, allowing the policyholder to choose the length of the term and the amount of the premiums. The policy’s cash value grows at a flexible rate and can be accessed by the policyholder while they are alive.
  3. Variable life insurance: This type of permanent life insurance allows the policyholder to allocate a portion of their premiums into investment options, such as mutual funds, stocks, or bonds. The policy’s cash value and death benefit can fluctuate based on the performance of the investments.
  4. Guaranteed universal life insurance (GUL): This type of permanent life insurance offers a guaranteed death benefit and flexible premiums, but does not have a cash value component. GUL policies are often chosen by individuals who want the security of permanent coverage but do not want to pay for the added cost of a cash value component.

Permanent life insurance is typically more expensive than term life insurance, which only provides coverage for a set period of time. However, it offers the added benefit of a cash value component and the security of knowing that the policy will remain in effect for the entirety of the policyholder’s life.

How Much Life Insurance Do I Need?

The amount of life insurance you need will depend on your specific circumstances, including your age, health, financial situation, and the needs of your loved ones. Some factors to consider when determining how much life insurance you need include:

  1. Your income: The amount of life insurance you need may depend on your income and how much your family relies on that income to maintain their standard of living. You may want to consider replacing at least a portion of your income with life insurance coverage to help your family maintain their financial security in the event of your death.
  2. Your debts and expenses: If you have outstanding debts, such as a mortgage or car loan, you may want to consider getting enough life insurance to cover those debts and help your family pay them off in the event of your death. You should also consider any other expenses your family may have, such as childcare, education, and medical costs.
  3. Your financial goals: If you have financial goals, such as saving for retirement or paying for your children’s education, you may want to consider getting enough life insurance to help your family achieve those goals in the event of your death.

How do You Get A Life Insurance Policy?

To get a life insurance policy, you will typically need to follow these steps:

  1. Determine your coverage needs: The first step in getting a life insurance policy is to determine how much coverage you need and what type of policy is best suited to your needs and financial goals. You can use a life insurance calculator or speak with a financial advisor to help you determine the appropriate amount of coverage.
  2. Shop around for the best policy: It’s a good idea to shop around and compare different life insurance policies and companies to find the best coverage for your needs. You can use an online comparison tool or speak with a financial advisor to help you compare policies and determine which one is the best fit for you.
  3. Fill out an application: Once you have chosen a policy and insurance company, you will need to fill out an application and provide any necessary documentation. This may include information about your age, health, and financial situation, as well as details about your beneficiaries.
  4. Undergo a medical exam: Some life insurance policies may require you to undergo a medical exam as part of the application process. This exam will typically involve a physical examination, as well as blood and urine tests.
  5. Wait for approval: After you have completed the application process and any necessary medical exams, the insurance company will review your application and determine whether to approve or deny your policy. If your policy is approved, you will receive a policy contract outlining the terms and conditions of your coverage.

What Are Some Reasons a Life Insurance Application Would be Denied?

There are several reasons why a life insurance application may be denied, including:

  1. Pre-existing medical conditions: If you have a pre-existing medical condition, such as diabetes or heart disease, the insurance company may deny your application or charge you higher premiums due to the increased risk of death.
  2. High-risk occupations: If you have a high-risk occupation, such as a professional athlete or a commercial pilot, the insurance company may deny your application or charge you higher premiums due to the increased risk of death.
  3. Dangerous hobbies: If you participate in dangerous hobbies, such as skydiving or rock climbing, the insurance company may deny your application or charge you higher premiums due to the increased risk of death.
  4. Poor health: If you have poor health, as indicated by factors such as a low BMI or high blood pressure, the insurance company may deny your application or charge you higher premiums due to the increased risk of death.
  5. Age: If you are older, the insurance company may deny your application or charge you higher premiums due to the increased risk of death

It’s important to be honest and transparent when filling out a life insurance application, as providing false or incomplete information can result in your application being denied or your policy being voided. If your application is denied, you may be able to appeal the decision or apply for a policy with a different insurance company.

Are There Circumstances When Life Insurance Payout is Denied?

Yes, there are circumstances when a life insurance payout may be denied. Some common reasons why a life insurance payout may be denied include:

  1. Fraud: If the policyholder has engaged in fraud, such as providing false or misleading information on the application or hiding pre-existing medical conditions, the insurance company may deny the payout.
  2. Suicide: If the policyholder died by suicide within the first two years of the policy, the insurance company may deny the payout. Some policies have a longer waiting period for suicide, such as five years.
  3. War or terrorism: If the policyholder’s death is the result of war or terrorism, the insurance company may deny the payout.
  4. Exclusions: If the policyholder’s death is the result of an exclusion listed in the policy, such as an act of criminal violence or participation in a dangerous sport, the insurance company may deny the payout.

Choosing a Life Insurance Salesperson

It is important to choose a qualified life insurance salesperson when purchasing a life insurance policy. You should make sure that the salesperson is licensed in your state, has experience in the industry, and has a good reputation. Additionally, you should verify that the salesperson is familiar with the type of life insurance policy you are looking for and understands the coverage and options available. Before signing any paperwork or making a purchase, make sure you understand the terms and conditions of the policy, the cost of the policy, and your rights and responsibilities as policy holder.

Finally, never feel pressured to buy a policy or rush into a decision. Make sure you take the time to research and compare different policies and companies to make the best decision for your situation.