What New Parents Should Know About Life Insurance
If you're considering starting a policy or wondering if it's even worthwhile, keep in mind that life insurance can be a great investment.
The most common forms of insurance - health, home and automotive coverage policies - are generally mandatory or even required by law. This may be part of the reason why so many misconceptions exist surrounding life insurance. At its most basic, life insurance is designed to protect a family against unexpected loss of income. That's why new or expecting parents are often encouraged to take out a life insurance policy. However, the sensitive nature of the topic and subsequent pressure to act quickly may prevent some families from taking the time to research plans and make an informed decision on how to proceed with a life insurance plan. If you're considering starting a policy or wondering if it's even worthwhile, keep in mind that life insurance can be a great investment depending on the circumstances.
Life insurance basics
Life insurance works similarly to any other insurance policy. After beginning a plan, the policyholder pays a regular premium. If the person dies while the plan is in effect, barring any exemptions specific to the policy, the insured person's family or other beneficiary receive what's known as a death benefit. The benefit can be as small as to cover the funeral expenses, or as large as would be required to sustain the family for many years. In any case, a larger death benefit will require a higher premium.
"Life insurance is often misunderstood."
According to statistics from the Insurance Information Institute and the Life Insurance Market Research Association, life insurance is both unpopular and misunderstood . As many as 54 percent of Americans are estimated by LIMRA to be unlikely to purchase a life insurance policy. The primary reason behind this sentiment has to do with cost, but LIMRA found that most consumers vastly overestimate the true expense of life insurance premiums, some by as much as 213 percent.
While life insurance can be a good investment for a family, this depends on the family's goals and financial health.
Term life or permanent?
There are a number of specialized insurance products out there, but the two most common life insurance plans are term life and permanent life.
Term life, according to NerdWallet, is probably the safest bet for most people , including young families. In a term life plan, the insured person is covered for a predetermined amount of time, usually anywhere from 10 to 30 years. If the policyholder dies at any point during this term, his or her family receives a death benefit payout. This is a wise investment for a family because they likely depend on the income of one, if not both, parents. The death benefit payout from a life insurance policy is supposed to provide the family with some income to stay afloat should disaster strike.
Permanent life insurance is the other most common policy, and is a little more complicated than term life. According to the New York Department of Financial Services, premiums on permanent life policies are paid for theinsured person's entire life , as the name suggests. However, these premiums add up to a cash value, which can be borrowed against to pay for premiums down the road, or to pay for other expenses. In this way, a permanent life insurance policy is a bit like a long-term savings plan. Permanent life insurance may be a wise investment for families who want to build additional savings that heirs can inherit, but it does not usually work well for the purposes of income replacement.
How to save on life insurance
The primary cost of life insurance is the monthly premium paid into the plan. The size of this premium depends on a number of factors, including the insured person's health, age and specific policy rules.
Premiums for life insurance, like most any other form of insurance, depend on the risk of the person or thing being insured. In the case of life insurance, anything that impacts a person's health could be cause for the provider to increase premium payments. [That's why most insurance policies and premium estimates are contingent on a physical exam and background check. It's important to prepare for these checkups to get the best deal on insurance going forward.
As personal finance advice website Money Crashers suggested, make sure toreceive clearance from your doctor regarding any chronic conditions you may have, and confirm that these are either being treated or will have no bearing on your overall health risk. Conditions like high cholesterol, high blood pressure or diabetes are all things that insurance companies may consider risk factors. In the weeks and days leading up to the exam, if possible, try to eat healthy, get some exercise and cut back on alcohol.
NerdWallet also suggested a few steps to take to make sure your insurer is a safe bet. When shopping for providers, research them using services like A.M. Best . This agency monitors the financial health of insurance companies and assigns them a rating to give a good estimate of how dependable they are. There would be nothing worse than buying into an insurance policy with a less-than-reputable provider who can't actually afford pay benefits. This is one of the easiest ways to save big on insurance, since it will give you the peace of mind to know that your trust is being put in the right place.
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