Life Insurance FAQ's

In United States what you need to know before buying life insurance or burial insurance. A full detail of life insurance FAQ’s to guide seniors of US

What is a life insurance policy?

A life insurance policy is a contract between you and your life insurance provider. How it works is, you make payments to the insurance company for the time period specified by your policy and on your death, your beneficiaries receive a lump sum cash amount. You can have as many beneficiaries as you want. They can be friends, relatives, etc. This amount offers some financial security and protection to your loved ones after you are pass away.

The main components of life insurance policies include the following:

Death Benefit

 

This is the amount of money your beneficiaries receive when you pass away. The death benefit amount depends on the insurance policy you chose.

Premium

This is the amount you pay for the insurance policy for as long as the policy dictates. This payment can be made every month, 3 months, 6 months or year. The cost of the premium is decided by the insurance company based on a number of factors like age, health, risk posed, etc. Depending on the type of insurance you go for, this premium may include the cost of coverage or both the cost of coverage and a cash value amount.

Cash Value

Mostly life insurance FAQ’s are about cash value.  with cash value, part of your premium payments go to a separate account. The cash value accumulates, tax deferred and serves as a savings account. You can even withdraw from it during your life. Some insurance providers may limit or not allow withdrawal depending on the reason for it.

Riders                     

According to life insurance FAQ’s about riders, with riders you get the options of customizing your insurance policy to accommodate your personal needs. The types of riders available depend on the insurance company. Some common insurance riders include:

  • Accidental Death Rider

     This provides additional coverage in case you pass away due to an accident

  • Waiver of Premium Rider

      This rider waives premiums if you become disabled and not capable of working

  • Disability Income Rider

      This provides you with monthly income if you become disabled

  • Accelerated Death Benefit Rider

      In case you are diagnosed with a terminal illness, this rider allows you to collect part of or the entire death benefit during your life

  • Long Term Care Rider

      This allows you monthly payments if you have to stay at a nursing home

  • Child Term Rider

      This rider provides death benefit if your child passes away before a certain age

What are the different types of life insurance?

This section covers the different types of life insurance available and will help you understand which is the best life insurance for you. Life insurance has two major categories:

Term Life Insurance

Term life insurance policies only pay the death benefit if you pass away during the time period of the policy. This time period can range from 5 to 30 years, mostly in multiples of five. Though the policy is easy to understand and the cheapest option in life insurance, there are very high chances that you will outlive your policy. If you want to extend the policy, you will have to pay more for premiums.

This policy only offers death benefit and has no cash value.

Term life insurance has two types

Level Term

The death benefit stays constant throughout the duration of the policy.

Decreasing Term

The death benefit drops over the course of the policy.

Whole Life Insurance

Whole life insurance, as the name suggest provides coverage your entire life as long as you pay your premiums. The death benefit is paid when you pass away, even if you live past 100 years. It provides both a death benefit and cash value.

There are three main types of whole life insurance.

Traditional Whole life

With this insurance, the death benefit and premium stay the same over the course of the policy.

Universal life

It allows you the flexibility of adjustable premiums and death benefits. 

Variable universal life

This policy ties your cash value to investment accounts. Though there are higher risks associated, if the investment goes well, you can withdraw from it. It has a lot of administrative charges and fees deducted before the payment goes to the cash value.

Final Expense or Burial or Funeral Insurance

This insurance is designed specifically to take care of your end of life expenses like burial and funeral costs, unpaid bills or loans.

Guaranteed Life Insurance

This insurance requires no medical questions, no health assessments and offers guaranteed acceptance. But this policy has a two year waiting period and higher premiums.

What is a life insurance quote?

Life insurance quotes are an estimate of your rate with an insurance provider.

Why should I care about life insurance?

Many people do not give importance to life insurance thinking that don’t need it. That isn’t true. You should start thinking about life insurance the moment you have someone depending on you for income. Here are a number of reasons why you should start thinking about life insurance.

Children or dependents

If you have young children, a stay at home spouse, a disabled family member, etc., basically anyone who is completely dependent on you for income, you should start thinking about how they would look after themselves if you passed away unexpectedly. With life insurance, you have the peace of mind that they will be taken care of after you.

Funeral and Burial Costs

The average funeral in the United States costs around $7,000 to $10,000, this cost may easily go up if you have more people attending. Death is always a very depressing and stressful event. Having your loved ones arrange a huge amount in this situation can be very burdensome. With life insurance you can be at peace knowing you have at least relieved them of the burden of arranging such a huge amount in a short time period.

Estate Taxes

If you own a large estate, big houses, expensive cars, you will be well aware of how much taxes are imposed. With life insurance you can easily transfer your inheritance to your heirs without worrying about the inheritance taxes as the proceeds from your life insurance policy will take care of that.

How do I get life insurance?

Once you decide on an insurance policy, you can buy it from the company, an agent or broker. In life insurance FAQ’s people tend to know application process for life insurance. The application will ask you basic questions about your health, age, weight, habits and financial questions on your income, worth and assets.

Most companies will require a medical exam after that, though some don’t. The medical exam can be done at your home, place or work or a clinic and usually takes around 30 minutes. The life insurance company arranges the paramedic for the exam.

This medical exam will mostly include the following:

  • Blood pressure and heart beat
  • Weight
  • Blood and urine samples
  • Your personal and immediate family’s medical history
  • Questions on smoking, drinking and other habits that may affect your health

The medical exam may be more detailed depending on your age, health and the coverage you opted.

Here are a couple of tips to help you do well on the exam.

  • Avoid high salt content and fatty food at least a week before the exam
  • Refrain from drinking alcohol, taking caffeine and smoking at least 24 hours before the exam
  • Get a good night’s sleep
  • Remember to take your ID with you
  • Tell the paramedic about any medicines you take and their dosages

The insurance company then uses these results to determine how much risk you pose, this process is called underwriting. It can take between 3 to 6 weeks depending on the insurance company. The underwriting determines the cost of the premiums. Based on the results, the company will accept or reject you.

Do I qualify for a life insurance policy?

You probably do. Life insurance companies have underwriting, a process that analyses and evaluates the risk you pose and thus determines if you qualify for insurance, along with the results of your medical exam. Based on the risk, they categorize you in a rating class. The rating class determines the cost of your premiums.

What if my life insurance application is declined?

The first thing you need to understand in this case is the reason. Go to a good agent or broker and have them help you find companies that better match your requirements. It is often very likely that you can apply to a different company and get coverage.

How much life insurance do I need?

Though unpleasant it is important that you start thinking about how your loved ones will be taken care of after you die. Here is a list of things that you should consider when deciding on how much coverage you need. You can get help from life insurance companies, agents of brokers or online in estimating the amount.

Your debt

Consider all your debts, loans, credit cards, mortgages, etc. They should all be paid off in full. Take a little extra coverage to settle any other charges like interest.

Income replacement

The purpose of life insurance in most cases is income replacement. So if you are the sole bread earner in the family, you should consider a coverage that can replace your income plus a little more to guard against inflation. According to most life insurance companies, a reasonable amount of life insurance is about 6 to 10 times that of your annual salary.

Your savings

If you are able to save from your income, you don’t need to completely replace it. So you can insure a smaller amount.

College Tuition

If you have kids, you should consider a plan that will cover some if not all of their college tuition. Don’t aim on saving for the best college rather an in state college.

Final Expenses

With the average American funeral ranging between $7,000 and $10,000, leaving loved ones to take care of it all alone can be very burdensome. Consider the cost of funeral and burial in the amount you insure. 

What should I look out for when buying life insurance?

Finding the right life insurance can be a very tiring and long process. It gets even more complicated when you don’t know where and what to start with. With all the options out there, a little bit of research at your end may help you understand better thus make it less complex.

Here are a number of things you should keep in mind when looking for life insurance policies.

Beneficiaries

Your beneficiary is the person who will receive the death benefit when you pass away. You can have one or as many beneficiaries as you want. When choosing a beneficiary keep the following in mind:

  • Avoid naming a minor as they may not be able to receive the funds
  • Keep the beneficiaries list updated, e.g. if you get married or divorced
  • Keep your state’s laws in mind

Term life or whole life

As mentioned before, term and whole life are the two main types of life insurance. Term life insurance covers you for a specified time period whereas whole life covers you as long as you live. With term life you will have no buildup of cash value, whole life insurance, on the other hand, gives you that benefit.

Like every decision, you should keep in mind your needs, current situation and budget when deciding which one to go for. Though term life insurance is the best life insurance choice for many, whole life may be right for you if you want to leave your money to your family, are young and earn a high salary.

Insurance company

When choosing an insurance provider go for one that is financially stable and reliable. You can find ratings from different companies online and use those to get an understanding of the provider’s financial position and performance. Financial stability means there will be higher chances of the company paying your death benefits when your beneficiaries claim it.

Agents or brokers

Though you can buy insurance directly from providers, there are some that sell policies through agents or brokers.

Who are agents or brokers?

Agents and brokers assist you in finding the right life insurance quotes. They are bound to help you find the right policy based on your needs and budget, explain everything about it, even the discrepancies, in return they receive a commission from the life insurance company. Though they perform similar duties, there are differences. Agents represent one or more life insurance companies. They sign a binding agreement with the insurance company, a contract that allows them to sell certain policies. Brokers, on the other hand, operate on a client based model and have no contract with the insurance companies. If you agree to buy a policy through a broker, the provider issues an insurance binder.

If you plan on buying insurance through an agent or broker remember the following.

  • Ensure that your agent or broker has an active license and can sell the policy you want. Many states have insurance department websites where you can look up the status of the agent’s or broker’s license.
  • Go for the one that represents more life insurance companies. This way you can compare the different available options and choose the best life insurance.
  • Go for the one that can explain how the policy works, the terms and conditions in simple everyday language.
  • Don’t let them pressurize you into making a decision.
  • Understand how they are paid so you know if they are pushing you into buying “the best life insurance policy” because it will earn them higher commission.
  • They have a lot of experience.
  • They ask you lots of questions to get a good idea about your background and needs before recommending policies. 
  • Don’t make them fill out the application forms. Do it yourself, this way there won’t be any misinterpretation of facts and you will get a better understanding

 

Compare

Research is very important! Go online, go to agents or brokers and compare the different policies that meet your needs and are within your budget. This way you can choose the one the best life insurance that fulfils your requirements and suits your needs.

Reevaluate the policy

Your needs change throughout your life, so an insurance policy you buy now may not be the best life insurance policy in the future. You may need to increase or decrease your coverage. Talk to your provider in that case. Most providers have an annual policy check, even if you feel your policy is fine, it is still best that you have it reevaluated. If you pay more premiums due to a health condition, reevaluation may help lower your premiums, if your health has gotten better in at least the past one year.

Lose weight

Life insurance companies will charge you higher premiums if their standards declare you overweight.

Drive carefully

Being a reckless driver will put you at a higher risk of getting in an accident, meaning you pose greater risk, thus your premiums will be higher.

Payments

Try to make premium payments annually. Though it may not seem very budget friendly, it will save you money in the long run. Many providers charge more for frequent payments and offer discounts on yearly payments.

You may forget to make premium payments sometimes, this may put your policy at the risk of getting cancelled. Instead of paying manually, opt for credit card charges or automatic bank drafts.

Do not lie or hide anything

This is something that you should definitely keep in mind. Lying or interpreting information may result in higher premiums or cancelling of the policy. Do not hide any health issues or speed tickets either, even if you thing they don’t matter. Being transparent will allow the provider, agent or broker to match you to the best life insurance policy.

Let guaranteed life insurance be your last resort

If you are healthy, there will be plenty of life insurance companies willing to accept you. Guaranteed life insurance may be an option for you if have a health condition that stops other companies from accepting you. But with so many companies, providers are constantly looking for new ways to fill gaps in the market, so do plenty of research before settling for guaranteed life insurance.

Buy now!

Do not put off buying life insurance! It will only cost you more. Life insurance costs more with age and there are chances that you may develop a health condition that may stop life insurance companies from accepting you.

Though age isn’t the only factor that decides if you need life insurance, Noexam.com concluded that the best time to get insurance is in your 30s. Business Insider calculated the price of life insurance rises by about 63% between the ages of 30 and 40.

Does life insurance build cash value?

Whole life insurance builds a cash value, term life, does not. Cash value may take a very long time to accumulate. Here are a number of things you need to understand about it.

  • Cash value is the liquid part of your death benefit. It grows at different rates, the rate of accumulation, depending on your insurance company.
  • If you borrow from it and die before paying back, the death benefit is reduced by the amount you borrowed. From the day you borrow, interest is accrued, it may eat away the benefit leaving behind nothing for your beneficiaries.
  • If you are unable to pay your premiums, you can use cash value to pay for your premiums.
  • On your death, your beneficiaries will receive the death benefit, not the cash value. It stays with the insurance provider, unless you purchased a rider that gives both the death benefit and cash value to your beneficiaries.
  • If at any point in time, you want surrender your life insurance policy, the insurance provider pay you the cash value.

Can I change my life insurance policy after I buy it?

Yes, in most cases. Depending on your circumstances, you may want to get more or less coverage or cancel your current policy for a new one.

The life insurance policy you get today may be the best life insurance for your current needs but that my change down the road. You may need more coverage if you get married, or have children, move to bigger house, earn more or develop some health condition. This will result in higher premiums. If your policy can not be reevaluated, you should consider a new insurance provider. But keep your old provider and take a top up insurance with the new provider as it is more cost effective.

Hope these life insurance FAQ’s help to solve problems of United States citizens to understand life insurance myths and decide best options to settle for their life insurance policy.

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