Congratulations! The fact you are here reading this means you are looking for ways to provide financial security for your family. The U.S. Census Bureau reports one person dies every 12 seconds. And it looks like that number is on the increase for 2020.
What is surprising is how many of those Americans leave their families in a financial bind when they pass. Only around 59% of Americans even carry any life insurance at all. And about half who do have life insurance, have too little, according to LIMRA.
A big part of the problem is that 9 million American households only carry group life insurance. That’s the kind of coverage you get at work. Your employer provides it as a low or no cost benefit. The face amounts are usually not enough. People who only have group life insurance from work have an average coverage gap (too little insurance) of $225,000.
A recent LIMRA study estimates 52 million Americans earning between $50,000 to $250,000 a year don’t carry life insurance. That same study says another 28 million in the same income bracket admit they have inadequate coverage. So, it is surprising to see how many Americans making that kind of money die without enough insurance to take care of their families. Those earning less than $50,000 a year may be even more likely to have inadequate coverage.
What Is Life Insurance?
A life insurance contract between the insurer and policyholder means the insurer guarantees a death benefit payment. This payment remits to the named beneficiaries when the insured person dies. The insurance company pays that death benefit in exchange for the paid premiums from the policyholder.
Simply put, you make payments to the insurance company when you are alive. And they promise to pay your family when you die.
Without life insurance, loved ones are frequently left with a financial burden. Especially if the family member passes away unexpectedly. But despite how important life insurance is, many Americans go without any.
The Common Misperceptions of Life Insurance
Here are some top reasons Americans say they don’t have life insurance.
People Automatically Think Life Insurance is Expensive
For many, not purchasing life insurance is about the money. Many families find it hard to make ends meet, so they spend their money on other things. The New York Post reported that 58% of those surveyed believe they can’t afford essential things. Important things like saving for retirement (38%) and buying life insurance (35%).
But the same survey found that typical Americans spend almost $1,500 per month on less critical (but more fun) things. This $1500 goes to restaurants and leisure. Admittedly, these families may not know how inexpensive life insurance can be. So, it is hard to make an informed choice.
Some People Feel it is Not Important to Have Life Insurance
Some Americans think they don’t even need life insurance. They think only the wealthy need a policy. But the truth is, if anyone financially depends on you, or would hurt financially if you passed away, then you absolutely need insurance coverage.
For example, say you stay at home to parent children, and you don’t earn any income. You figure you don’t need to carry life insurance because you aren’t earning any money. But nothing could be further from the truth! You provide childcare and several other household services that your spouse would need to pay for. Paying for daycare or a nanny would make a massive difference in the family’s budget.
So, if you take out a modest insurance policy, your family has added protection in that unthinkable situation.
They Wonder How Much Insurance Coverage They Need
Many Americans hesitate to get life insurance because they wonder how much coverage they really need. They may fear spending too much money on premiums buying too much insurance. So, here is a simple formula to help you decide.
The most common approach is to add up your outstanding debts, plus your family’s major goals. Then get a policy with a death benefit that covers that amount.
- Mortgage $200,000
- Two kids to put through college for $100,000 each = $200,000
- Funeral expenses and miscellaneous costs $50,000
You could decide on a $450,000 policy. Consider adding money to pay for weddings and increase your policy to $500,000. If your spouse needs living expenses, add some more. Finally, think about other financial gaps left, and aim to close up those gaps.
What you want your insurance to cover is different before you have children, and then it changes as each child comes along. As time goes on, a regular reassessment is a good idea. Most agents suggest an annual reassessment. Pick a time of year you remember easily, like an anniversary, your birthday, or a holiday. (It’s often very easy to get appointments with insurance agents near the holidays!)
When you assess your insurance coverage, ask yourself these questions:
- What major costs for your family need to be protected?
- Weddings? College? Vacations? Childcare costs? Housekeeper? Nanny? Healthcare? Funeral?
- What would the ongoing payments be for a home, car, utilities, living expenses, healthcare?
- Can other assets combine with the death benefit?
- Does the family have other money?
- Will the surviving spouse work and earn an income?
Carefully answer these questions, and revisit them regularly to re-calibrate your insurance needs based on your evolving financial circumstances.
When to Increase Your Life Insurance
So, now you chose an annual reassessment date. Celebrate your birthday with an appointment with your broker and see if it is time to increase your life insurance. Sometimes your meeting will be very short, if nothing changed in the previous year.
Life insurance changes along with your life. Assume you need to look closely when you:
- Get married or decide on a permanent partnership
- Have each child
- Have changes in your income – up or down
- Purchase a primary residence or secondary properties
- Take on new debt
Not reassessing your life insurance policy at these times can end up being a huge mistake, especially for single-earner households. These personal lifestyle choices figure into the insurance coverage you need. Check carefully and adjust your life insurance accordingly.
They’re Too Busy to Sit Down and Figure it All Out
Life moves quickly. There is a lot to do, especially when you provide and care for a family. Consider your life insurance coverage as part of being a good provider and securing the family’s future. Carve out the time to meet a professional broker to make sure you understand your options.
Life Insurance is Too Confusing
Many Americans find navigating the details of a life insurance policy confusing. Then they avoid the whole process. You can keep things simple, just by going with a term policy (see description below). That way, you lock in premiums early based on your current age, health, and coverage. As long as you make your premium payments, you have that policy in place for the timeframe you choose, 10, 20, or even for 30 years.
But remember, a professional agent will make a clear recommendation after you explain your life situation. That removes all the confusion!
They Have Life Insurance at Work
So many people think that just because they have life insurance at work, they don’t need their own personal life insurance policy. Usually, free life insurance coverage through your work equals one or two times your annual salary. Sometimes, it’s a flat amount, like $50,000. Even if it is more, the total is seldom enough. A nice perk from the job that would likely pay your funeral expenses, it is not designed to be your sole coverage.
Since the coverage ends when you change companies, you won’t be able to take it with you. Any coverage you buy personally to replace it when you leave will be more expensive. It is more expensive because you are older, but also because it is not covered under the group policy.
Group life insurance is usually just not enough. Employers offer group life insurance as an employee benefit at no cost or a low cost. Although there is no reason to refuse the coverage (it’s usually a great deal!), there are some issues.
- It’s connected to your employer or an association. So, when you leave the company, you lose the coverage.
- You could convert a group policy into an individual one, but it will be expensive.
- Very few options or riders. So, there is no provision for protection, such as long-term care.
- Low death benefit payout amounts. Usually, only one or two years’ pay.
- You employer can always remove coverage benefits at any time. Since you are not the one paying the premiums, there’s no guarantee it remains available when you need it.
As a result, you should consider your employer policy complementary to your private policy.
They Don’t Know What Kind of Policy is Right
Life insurance options are plentiful. Each one designed for specific situations. This article describes each type in the next section.
Think of the options as ice cream. When you look into the glass case to see all the flavors, it seems like a lot. But it doesn’t take long to narrow down which flavors you don’t want, and then you can narrow down which one(s) you do want.
This guide helps you take the first steps, and a trusted insurance agent helps you make the final decisions.
How Life Insurance Policies Work
Life insurance policies have three basic elements.
- Death Benefits
- Cash Values
The face value, or death benefit is the amount the insurance company guarantees to pay to beneficiaries of the policy when the insured person dies. The insured chooses the death benefit amount based on their estimate of what their beneficiaries need in the future. The insurance company then determines if the proposed insured does qualify for the insurance coverage. This decision is based on the underwriting requirements associated with age, health, and hazardous activities (like skydiving or smoking.)
The policyholder pays premiums to the insurance company for the insurance coverage. The company pays the death benefit upon the death of the insured if the premiums are paid as required. Premium payment amounts are determined by the likelihood the insurer ends up paying out the policy’s benefit based life expectancy.
Factors influencing life expectancy include age, gender, occupational hazards, medical history, and any high-risk hobbies. Premiums go up for policies with bigger death benefit payments, people who present a higher risk, and for permanent policies accumulating a cash value.
Cash values serve two purposes. As a savings account, the policyholder can use the cash value while the insured is alive, and the cash is tax-deferred. Often restrictions on withdrawals depend on the reason for taking the money out.
Usually, the policyholder and the insured are the same person. But sometimes not. For example, a company buys key person insurance on crucial employees like the CEO or Vice Presidents. Or insured people can sell their own policies to a third party to get a cash settlement while they are alive.
The Different Types of Life Insurance
When choosing the type of life insurance you need, the place the start is with the two basic types of life insurance: term and permanent. Look at what you can afford, the purposes of your life insurance, and your general life situation.
Term life limits the number of years of your coverage. Usually you choose a 10, 20- or 30-year term when you purchase the policy, then it ends. It’s good if you want a cheaper policy, only during high earning years, to cover specific temporary debts, and there is no large estate. This is usually the least expensive choice in life insurance options.
You may outlive your term life policy. If so, you need to decide what to do next.
Some choices you have:
- Renew the policy. This costs more because you’re older now than when you got the policy in the first place.
- Purchase a brand-new policy. This might be more expensive, depending on how old you are.
- Convert over to a permanent policy. Some term life policies allow you to convert directly to a permanent policy.
- Buy a different kind of insurance, like final expenses coverage.
The two basic types of Term Insurance are Level and Increasing Term:
· Level Term
Term insurance where the premiums remain the same every year throughout the term.
· Increasing Term
Term insurance where the premiums start out lower and increase as you age. Some agencies call this yearly renewable term, too.
Permanent Life Insurance
Permanent life insurance is exactly that, permanent. It remains active as long as you keep paying the premiums or you surrender the policy. This choice helps with a life benefit for your family when you die, if you want a cash value to tap when needed, and there is a larger estate. Permanent Insurance is more expensive than Term Insurance.
This Permanent Life Insurance allows you to pay the entire amount of the premium upfront. There are no ongoing payments.
· Whole Life
Whole life insurance is permanent life insurance that accumulates a cash value.
· Universal Life
Universal Life is permanent life insurance that has a cash value component and earns interest. The lower premiums compare with term life insurance. But unlike term or whole life, both the premiums and the death benefit for Universal Life are adjustable over the life of the insured.
o Guaranteed Universal
This universal life insurance does not build up a cash value, so it has lower premiums.
o Variable Universal
Variable universal life insurance allows you as the policyholder to make investments with the policy’s cash value.
o Indexed Universal
This universal life insurance lets you earn an equity-indexed or fixed rate of return on the cash value.
· Burial or Final Expenses
This permanent life insurance has just a small death benefit. Despite the name, there are no limitations for the use of the funds.
· Guaranteed Issue
This permanent life insurance is available for people with medical problems who would otherwise not be insurable. The guaranteed issue policy does not pay out death benefits the first two years, except in the case of accidents. Because of the high risk of offering insurance to the person there is no payout for two years. But the premiums, plus interest, return as payment to beneficiaries if the insured dies in those two years.
· Life Insurance Riders
Insurance companies offer the option to personalize many policies to specialized needs. Riders modify the insurance policy many ways, but their availability changes depending on providers. You usually pay an extra premium for each one of the riders or sometimes a fee to exercise the riders. Although some insurance policies include some specific types of riders in the basic premiums.
- Accidental death benefit rider adds extra life insurance coverage if death is an accident.
- Waiver of premium rider means you can stop making payments if you become disabled and can’t work.
- Disability income rider pays you a monthly income if you can’t work because of a serious injury or illness.
- With a diagnosis of a terminal illness, accelerated death benefit riders allow you to collect some or all of the policy’s death benefit.
- Long-term care riders, like the accelerated death benefit, can pay for nursing homes, assisted living, or for in-home care. In-home care helps with activities of daily living, like eating, bathing, and using a toilet.
- Guaranteed insurability riders let you buy more insurance later, without medical review.
Every policy is unique. Always review the policy documents with your insurance agent to understand the details. Look at what your policy covers, how much it pays to your beneficiaries, and under what conditions.
How Life Insurance Helps
You may only think about life insurance as a payment after you are gone. But it can be even more than that. Life insurance provides protection for your family’s goals throughout all phases of your life.
Some less considered aspects of coverage include:
- Loss of Income
- Mortgage Payments, Food, Utility Bills
- Funeral Expenses
Loss of Income
Income protection insurance protects you against losing your income because of unemployment, illness, or an accident. It may not cover pandemics.
The three main options determine how the policy pays out. Choose one or decide on a policy that combines all three.
- Unemployment – If you lose your job
- Illness – If you get sick and can’t work
- Accident – If an accident leaves you not able to work
This may be a rider on your life insurance policy or a separate policy. Ask your broker about those options.
Your monthly premium guarantees you can cover your bills, like your mortgage or rent, loan and credit card repayment and utility bills. So, you maintain your previous standard of living during the time you can’t work.
The two main types of loss of income protection are short-term and long-term. Long-term policies give you a regular, tax-free income until you return to work or are old enough to retire. Short-term policies payout for up to a year, then stop paying even if you can’t return to work yet.
Mortgage Payments, Food, Utility Bills
Lay-offs, injuries, debilitating illnesses, and death come out of nowhere, but you still need to pay your bills. The right kind of life and loss of income insurance helps cover the bills at a difficult time.
Insurance payouts allow families to continue with daily life while coping with illness, injury or death. It is difficult to think about, which is why so many Americans avoid planning.
When you have a life insurance policy with a cash value, you can often use it as collateral for a loan. Many small businesses get started this way! No need to risk your house or other personal assets. You can take a loan against the life insurance, often quite quickly and easily. Your credit rating is not a consideration, so this is often an excellent option.
Life insurance policies often pay out very quickly, making it easier to cover funeral expenses. With gentle names like final expenses or senior life insurance, these plans make sure you’ve tied up your financial loose ends. But larger life insurance policies are usually a better deal, dollar for dollar.
This form of whole life insurance can be used by the beneficiaries for anything, not just funeral expenses. Burial expenses insurance is straightforward, even without a medical exam. But the most affordable policies with higher death benefit amounts require a medical questionnaire (and that the insured is not terminally ill.)
This can be excellent insurance coverage for people who want just a small policy. Especially if they can’t qualify for larger, less expensive policies because of their health or age.
Additional Uses for Life Insurance
Most Americans buy life insurance to provide financial resources to their beneficiaries. They want to protect those who will suffer financial hardship when the insured dies. But for wealthier Americans, the life insurance tax advantages offer even more strategic opportunities. Options for tax-free dividends, tax-deferred cash value growth and tax-free death benefits are increasingly attractive.
· Retirement Funding
Policies with cash values or an investment component will provide a reliable source for a retirement income. This comes with higher fees and lower death benefits. So, it is often only a good choice if you max out other accounts with tax-advantages.
· Avoiding Taxes
Death benefits on life insurance policies are generally tax-free. Wealthy Americans use a trust to buy permanent life insurance to pay estate taxes due when they die. This preserves the value of their estate as they leave it to their heirs. Tax avoidance to minimize your tax liability is entirely legal. Tax evasion, on the other hand, is illegal.
· Collateral for Borrowing Money
Most permanent life insurance policies accumulate a cash value over time. The policyholder borrows against the value of the policy. In reality, you borrow from the insurance company, using the policy’s cash value as your collateral.
Unlike other loans, your credit score doesn’t matter. Flexible repayment terms allow the loan interest to go back into your cash-value account. However, this type of policy loan can reduce your policy’s death benefit.
Life insurance is not just for healthy or wealthy people. Since the industry offers a broader range of policies than many people know about, getting insurance is pretty affordable.
Premiums consider two simple factors. Firstly, the value of the payouts you want. And secondly, your age and health. You qualify for better rates by being healthier than other people your age. However, other healthy people your age pay the same price.
Generally, when you are younger and healthier, it is easier to qualify. And as you age or get sick, the harder it gets. Finally, lifestyle choices, like smoking or skydiving, make your rates higher and make it harder to qualify.
On top of that, many companies specialize in policies for chronic health conditions. Almost anyone will qualify for some life insurance if you pay a higher premium or accept a lower death benefit.
Usually, you need a death benefit sufficient for those you want to take care of, even when you’re gone. This certainly varies from person to person according to their lifestyle, values, and personal situation.
So, there are many American families without life insurance, or who are drastically underinsured. The best explanation is that they haven’t looked into how important coverage can be for their family. Each family’s needs are different, but there are some things everyone has in common. Life insurance is absolutely something every family needs.