Life Insurance: Is It Worth It And When Do You Need It
Modified date: Aug. 26, 2021
Were all going to live forever, right? Okay, maybe not. But chances are, youll live out many more decades and even get a chance to enjoy those retirement savings youve worked so hard to build.
Retirement isnt the only thing you need to plan, though. If, for some reason, you dont live to the ripe old age of 105, what happens to those you leave behind? In some cases, a good life insurance policy can make a big difference to your survivors. But life insurance isnt for everyone. In fact, in some cases, it may not be a wise idea.
If you want to even begin to ballpark the cost of life insurance, you can answer super quick questions to get a few quotes to determine how much life insurance will cost you and how much coverage.
You Have Extreme Hobbies
If you’re a thrill seeker with a penchant for extreme sports, you’ll probably be deemed higher-risk by a life insurance company. But it’s similar to having a high-risk job you’ll pay more to be insured, but the cost is worth it considering the likelihood you’ll die from unnatural causes.
If you do have an extreme hobby like rock climbing, scuba diving, or something equally thrilling it’s best not to lie about it on your life insurance application. If you die within the first two years your policy is active and you didn’t disclose your regular high-risk activity, the insurance company has the right to decrease the death benefit, or cancel it all together.
As for the cost, you’ll typically see either a higher base premium or an extra annual fee calculated as a percentage of your coverage amount.;Every insurance companies assesses the risk of hobbies differently, so it’s good to comparison shop if this applies to you.;
To maximize the benefits of life insurance, it’s wise to include a;financial advisor, accountant, and estates attorney;in your decision-making process to ensure you have proper coverage that adapts as your life changes.
What To Do If You Took Out A Life Insurance Policy On Someone Else And No Longer Want It
Canceling a life insurance policy is straightforward. You simply inform the life insurer that you no longer want the policy and then stop paying premiums. If you have term insurance, the policy simply will end at that point, and you no longer will have coverage.
If you have a whole life policy, youâll receive the cash value amount, minus any fees that are due. Such fees often are known as a surrender charges.
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What Are The Eligibility Requirements For A Life Insurance Buyout
Each life insurance settlement company has different requirements when it comes to life insurance settlements.
In most cases, you should be 65 years or older to qualify for a life settlement. The older you are, the more valuable your policy becomes and the more likely you will find a willing buyer.
Most buyers also want a policy with a minimum value of $100,000. If you have a policy with a lower policy value, the potential death benefit may not be worth it for investors.
In summary, if you want to sell your life insurance policy for cash, you are in the best possible position if:
- Your life insurance policy coverage is $100,000 or more.
- You are 65 years old or older.
As discussed above, buyers will likely want to see your medical records when reviewing a potential sale. In those records, they want to see something that indicates a shorter life expectancy than the policys term, this increases the likelihood they will get a payout.
How Much Life Insurance To Buy
Before you apply for life insurance, you should analyze your financial situation and determine how much money would be required to maintain your beneficiaries standard of living or meet the need for which youre purchasing a policy.
For example, if you are the primary caretaker and have children who are 2 and 4 years old, you would want enough insurance to cover your custodial responsibilities until your children are grown up and able to support themselves. You might research the cost to hire a nanny and a housekeeper or to use commercial child care and a cleaning service, then perhaps add some money for education. Include any outstanding mortgage and retirement needs for your spouse in your life insurance calculation. Especially if the spouse earns significantly less or is a stay at home parent. Add up what these costs would be over the next 16 or so years, add more for inflation, and thats the death benefit you might want to buyif you can afford it.
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What Is Life Insurance
Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.
For the contract to be enforceable, the life insurance application must accurately disclose the insureds past and current health conditions and high-risk activities.
Fill Out And Return A Death Claim
The life insurance company requires the policy’s beneficiary to . To receive the appropriate paperwork, contact the claims department listed in the life insurance policy. If you don’t have a physical copy but know the name of the company, call the 800 number listed on their website to ask about filing a claim.
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How A Life Insurance Policy Works
When purchasing life insurance, there are three parties involved:
- Policyholder: The policyholder is the owner of the policy, makes premium payments and can make changes.
- Insured: This is the person whose life is insured. The policys death benefit will be paid out upon this persons death, if the death occurs within the policy period.
- Beneficiary: This is the person or people listed on the life insurance policy who will receive the death benefit when the insured dies. Beneficiaries can also be trusts, estates or organizations.
Often, the insured and policyholder are the same person. However, there are situations where someone may want to take out a life insurance policy on another person. Bankrates insurance editorial team has done the research to help you understand the process of taking out a life insurance policy on someone else.
Disputing Life Insurance Beneficiaries Creates A Legal Concern
Disputing life insurance beneficiaries requires a legal case presented in court. This is not something the life insurance company can do, even if your claim seems valid. Only the courts have the legal right to make a change to a life insurance policy after the policyholders death.
When different individuals claim the right to a benefit, the insurance company will bring an interpleader action to the courts. This places the policy benefits into a court-controlled account while the courts make a final ruling on the beneficiary claims. This is done either through litigation or through a settlement and works best when the parties have a life insurance attorney on board.
This process is not easy to navigate, and a successful dispute requires skilled legal help. However, it is possible, with the right circumstances in place, to successfully prove that the beneficiary designation on the policy does not accurately reflect the persons wishes at the time of death. Once the courts make the decision, the insurance company will distribute the funds per the courts orders.
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Where To Buy Affordable Life Insurance
Even once youve decided life insurance works well for your needs, you can stall when it comes to lining up a policy. There are, after all, so many choices, and signing up for a policy takes time. You have to answer a bunch of questions, wait for a quote, and then go through a time-consuming physical exam that includes having blood drawn. Or do you?
Times When Its Tempting To Insure Another Individual
Most people who buy life insurance never have to worry about legal terms such as insurable interest and consent. Thats because the majority of buyers are insuring themselves, and they name a partner or child as a beneficiary.
For most families, the discussion about life insurance ends when both partners think they have the right amount of coverage in force for their needs although people should still revisit their coverage periodically to see if they still have the right amount. They pay the premiums and know that, in return, their loved ones have a financial safety net in place if they were to die way too soon.
Not every family works the same way, though, and you may wonder how to encourage someone for whom you have an insurable interest to buy a policy. Here are a few situations where that idea might come up.
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What Happens When You Purchase Life Insurance On Someone Else
When you take out a life insurance policy on someone, the insurance company needs to review the insured person’s health history and other details. To complete that task, the individual being insured will need to answer some basic questions and may need to undergo a medical exam. The proposed insured will need to sign the application to confirm the health history provided and to consent to insurance coverage on his or her life. So, while you can likely purchase life insurance on anybody you have an insurable interest in, you also need their participation to purchase the policy.
Can Someone Secretly Take Out A Life Insurance Policy On You
You may wonder, âCan someone take out a life insurance policy on me without my knowledge?â It’s possible but very unlikely. There are protections in place during the life insurance application process that make this difficult.
What do you need to get life insurance on someone? Most life insurance companies require:
- A medical exam
- Your medical information
- Your consent in the form of your signature
“Although secret life insurance policies are not common, they are possible,â says attorney Ryan Stump of Randall & Stump, PLLC, which frequently represents clients facing insurance fraud and other fraud or criminal charges related to life insurance.
Most life insurance policies require a medical exam, but some only demand a signature of the person to be insured, he says.
âSuch policies can be taken out illegally by someone forging a signature and not informing the person who is the subject of the insurance policy,” Stump says.
Insurable interest is another safeguard that reduces the potential risk of a secret life insurance policy. get life insurance on you? It must be someone who will suffer a significant financial loss if you die. In this case, a spouse, a close family member or even a business partner may have an “insurable interest” in you and be able to insure you lawfully.
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Oh Yeah My Job Offers Group Life Insurance Should I Just Go With That
It depends. If someones in good health, theyre almost certainly going to do better in the individual marketplace, says Steuer. Furthermore, most group insurance is limited to a small multiple of your salary, and the premiums go up over time.
If youre young and have minimal insurance needs or have a health issue that would make you hard to insure otherwise, however, group insurance is great.
People For Whom You Can Buy Life Insurance
It’s relatively common for a husband or wife to buy a life insurance policy on their spouse, especially if one spouse is a stay-at-home parent. In that case, the breadwinner pays for the policy, which would help cover expenses like child care if the stay-at-home spouse died.
Another common situation is to buy a life insurance policy for a business partner. In that case, you have a clear financial interest in them remaining alive. But if they were to die unexpectedly, you would rely on the death benefit to keep the business afloat.
Dolan says that charitable institutions and nonprofit organizations might even take out life insurance policies on generous donors.
“If they are receiving regular payments from an individual, they might consider taking out a policy on that person or a group of people.” says Dolan. “It must be done with consent, though.”
According to Policy Genius, not only do third parties need to consent to a life insurance policy in their name, but they have to actively participate in the application process, which usually includes a medical exam.
HowStuffWorks may earn a small commission from affiliate links in this article.
“Dead pools” or “death pools,” in which people wager on the deaths of celebrities, have been around for centuries.
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Have Questions Weve Got You Covered
Who needs life insurance?
Your need for life insurance varies with your age and responsibilities. It is a very important part of financial planning. There are several reasons to purchase life insurance. You may need to replace income that would be lost with the death of a wage earner. You may want to make sure your dependents do not incur significant debt when you die. Life insurance may allow them to keep assets versus selling them to pay outstanding bills or taxes.
Consumers should consider the following factors when purchasing life insurance:
- Medical expenses previous to death, burial costs and estate taxes;
- Support while remaining family members try to secure employment;
- Continued monthly bills and expenses, day-care costs, college tuition and retirement.
What is the right kind of life insurance?
All policies are not the same. Some give coverage for your lifetime and other cover you for a specific number of years. Some build up cash values and others do not. Some policies combine different kinds of insurance, and others let you change from one kind of insurance to another. Some policies may offer other benefits while you are still living. There are two basic types of life insurance: term insurance and permanent insurance.
Permanent insurance provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher.
Know The Truth About Life Insurance
MYTH: Iâm a stay-at-home spouse, my family doesnât need to insure me.
REALITY: Stay-at-home parents provide a lot of valuable services that are necessary to the success of a family. If your spouse works full time, and you manage the household, will they need someone to clean, cook, take care of and chauffeur the kids? Insurance can provide funds to allow the working spouse to take time off and pay for help with household tasks.
MYTH: My life Insurance through work is sufficient.
REALITY: Everyoneâs needs are different. Your life insurance at work may be enough, but itâs worth taking time to make sure. In order to determine your needs, it helps to understand how much your family depends on you financially and consider the expenses involved with end of life medical bills and burial.
MYTH: Youâll get a better deal purchasing life insurance online.
REALITY: While the Internet provides good information, it is not necessarily cheaper. You will likely pay the same in premiums if you use an agent or purchase a policy online. An agent can help you figure out how much insurance you need and assist you with the application and help you understand the terms of the policy.
MYTH: I can only have one beneficiary.
REALITY: You can have many beneficiaries. You simply need to note what percentage of your death benefits go to each. Experts advise that you consider setting up a trust or estate for minor since insurance companies will not pay minors.
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Why People Dont Buy Life Insurance
Although life insurance can be a crucial financial safety net for their family members, millions of Americans still have no coverage.
People cite different reasons for skipping coverage. Among them:
- Cost concerns. Many Americans are still without life insurance in part because of the cost burden. Depending on your policy, premium payments can be expensive. According to a survey by Bestow, an online term life insurance company, 74% of respondents without life insurance said they would be more likely to purchase a policy if they were more affordable.;
- Application process. In some cases, the application process for life insurance can be time-consuming. You need to find an agent, select the right policy for you, fill out paperwork, and perhaps even get a medical exam. It may take weeks to complete the application process and might even feel intrusive.;
- Confusion. Understanding your choices in life insurance policies, including the various types of policies, available benefits, and contract terms can be confusing. About 24% of respondents in a survey by Bestow cited confusion as their reason for not having life insurance.
Life Insurance Is A Terrible Investment
In case you’ve never read through my series on The Myths of Whole Life Insurance it is important that I point out that the returns on a whole life insurance policy are terrible. Often negative for a decade or two, they are only guaranteed to be about 2% over a lifetime and projected to be perhaps 3-5%. The smaller the policy the lower the return due to more of it being eaten up by administrative and insurance costs.
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Sooner Is Often Better For Rates
Life insurance rates are based on many factors, but the primary driver for the premiums is based on the probability that the insured will die while the policy is in force. Along with health factors, age is among the largest factor in determining life insurance rates. People can die from a lot of different causes but if none of the other causes gets us, age always will. We arent built to last forever.
A life insurance policy purchased earlier in life will generally be much less expensive than a policy purchased in the later years of life. Theres less risk of death when we are younger. The risk of age also carries over to policy types. As we get older, or as your parents get older, youll find your options for policy types will begin to dwindle with many insurers. For example, term life insurance may not be available after a certain age with some insurers. Even at earlier ages, you may find the available term choices to be limited to shorter terms.