Life insurance is essentially a contract between you and your insurance company. You can pay monthly or annually for a policy, and if you pass away, your insurance company gives your designated beneficiaries a lump-sum payment. Most people designate their families as their beneficiaries, but you may be able to choose others. You can choose how big of a payment you want, and if you want your policy to last your entire lifetime or for a set number of years (usually five – 30).
When you get a quote, the insurance company will ask some basic questions about you, your health, pre-existing conditions, etc. You’ll have some flexibility choosing how long your policy lasts, the payout amount, etc., and then you’ll add your beneficiaries. Then, how your life insurance policy works is pretty simple. If you pass away, your company will automatically give your payout amount to your beneficiaries (in one lump sum).
Some life insurance policies last your entire lifetime. That means your beneficiaries will receive the payout amount when you die no matter how old you are (as long as you keep your policy active by paying your premium). Other types only last for a set time frame. For example, if you pick a 30-year policy, and you pass away after the 30 years, your family will NOT get a payout. Usually these types are more affordable, so it’s a trade-off.
You may also need a medical exam to start your policy.
Term life is the most affordable option and only lasts for a set number of years (five – 30 years). If you pass away after the term number you select, your beneficiaries will not get the payout. Many people get term life to pay off something specific, such as a mortgage, children’s college costs, etc.
Permanent life lasts your entire lifetime and pays out no matter what age you are when you pass away, if you keep paying your premium. There are a few different types of permanent life that may allow you to withdraw funds early, change your payout amount over time, etc. Many get permanent life if they want to leave an inheritance.
Final expense is more affordable than permanent life. It’s designed for end-of-life expenses, such as funeral and burial costs, medical bills, credit card debt, etc. Many people get final expense if their finances are typically in order, but they’re worried about paying off bills or burdening family members with funeral costs.
When most people buy life insurance
Many people choose to buy life insurance when they have kids or take out a mortgage. But any time your financial (in particular, your future financial) needs change, it’s best to consider it. Consider the following factors to help you decide how long your policy should last and how much you may need.
- Mortgage pay off: Think about how many years of mortgage payments you have left. It’s best to get a policy for at least that number of years and amount left on your mortgage.
- Children at home: How long could it be before your kids will be on their own? What is the total cost to support them?
- Children’s college costs: Public or private schooling? College? And, for how long? Think about how long it will be until your last child completes college and the total cost.
- Partner who relies on your income: You may want a policy that offers a financial means for your loved one to maintain your current lifestyle—or a comparable one. So, think about their total expenses until retirement.
- Inheritance: If you want to leave an inheritance, then you may want a policy that lasts for the remainder of your life (a permanent life insurance policy).
- Funeral expenses: If you only need to cover funeral and burial costs, you can simply get a final expense life policy. Final expense is usually more affordable than other types and can last for a set number of years or your lifetime.
Life insurance with pre-existing conditions
Many people have some type of pre-existing condition (diabetes, elevated cholesterol, blood pressure issues, etc.). These conditions do not automatically disqualify you from life insurance. Each life insurance company may evaluate these conditions differently when assessing a person’s health risk.
Here are some questions insurers might ask about your condition to help determine if they want to offer you life insurance and your price.
Is your condition under control?
Do you take medication to manage your condition?
Do you see your doctor regularly?
Have you had a recent health issue that caused you to see a doctor, have additional testing, or go for treatment?
Why it’s important to disclose pre-existing conditions
It’s understandable to have concerns about sharing your medical history. But, sharing this info is the best way to secure and maintain the appropriate coverage for you. Also, if you don’t honestly share your pre-existing conditions, you could be at risk for your insurer cancelling your policy because of inaccurate data in your application.
What impacts your life insurance price
Your age: Typically, the younger you are, the better your rate will be. That’s why many experts advise people to buy life insurance sooner rather than later to lock in a low rate.
Your health and health history: Most life insurers will consider your current health status and past procedures or conditions.
Your career: A riskier career such as a racecar driver, pilot, window cleaner, or police officer could lead to a higher rate.
Smoking or using tobacco products: Insurers will also consider how long you’ve used tobacco.
Engaging in risky lifestyle activities: Common activities insurers consider are skydiving or scuba diving.
Traveling outside the United States: Typically, insurers will only adjust your rate if you’re frequently traveling to risky countries.
The duration of the policy term: The shorter the term, the lower the cost.
The amount of coverage purchased: As with any type of insurance, the more coverage you purchase, the higher the price.