What Are The Two Main Types Of Life Insurance And How Do They Work
If you’re shopping for life insurance over 50, it’s important to understand how each type of life insurance protection works. That’s the key to getting the amount of protection you need at an affordable price.
Term life insurance provides coverage for a specific period of time or term – typically between 10 and 30 years. After that term, your insurance coverage is gone, and there’s no value or payout. That’s why it’s sometimes called “pure life insurance,” meaning it provides life insurance and nothing more. Term life insurance quotes are generally less expensive than permanent life insurance, which can build cash value .1 You can apply for a new term life insurance policy after the old one expires, but your rates will typically be higher. There may also be an age limit that prohibits you from applying for new coverage. However, many term life insurance policies can be converted to a whole life insurance policy before the term expires – without getting a new medical exam. While the premiums will rise, that may be an option for continuing coverage in later years.
Whole life insurance provides guaranteed death benefit protection for as long as you live while earning cash value. A whole life insurance policy doesn’t expire as long as regular premiums are paid. The cash value grows, tax-deferred, at a guaranteed rate, and the premiums never increase. Policies from a mutual life insurance company may also provide dividends, which can help cash value grow faster.5
Youre An Empty Nester
Lets say youre a couple in your 50s. The kids have left home and can support themselveshooray! But, youre still paying off your mortgage while working towards your retirement. You need some life insurance to protect that income of yours. The untimely death of you or your spouse could leave the other with debt and thats the last thing either of you want the other to face heading into retirement.
How Does Pricing Work For Converting Term Life Insurance Policies
The price that you will pay for your newly converted policy depends on the age at which you decide to make the conversion and the amount of your death benefits. The younger you are, the less expensive it will be.
Your agent will only be able to give you a rough estimate of conversion prices because insurance companies are constantly changing their rates.
This does not necessarily mean that you should jump the gun and convert to a different type of life policy too soon. Talk to your insurance agent and a financial advisor to be sure that a permanent policy is right for you before converting your policy.
However, if youre not quite ready to part with your term policy, but want to take advantage of your conversion option, most insurance companies will allow you to convert only a portion of your term coverage to permanent life insurance.
Real Life Example
Bradley applied for a term life insurance policy at age 62. He was approved at the preferred plus rating class for a $250,000, 10-year term life policy for which he paid $500 per year.
Two years later, Bradley was diagnosed with major heart issues for which he needed surgery. During this time, he realized that his 10-year term policy was no longer sufficient to protect his loved ones.
Bradley applied to countless different insurance companies trying to get a new term policy but was unable to be approved due to his recent heart problems.
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How Do You Convert Term Life Insurance
Most term life insurance policies automatically include a conversion option, which is the option to convert your term policy to a permanent life insurance policy, within policy specifications.
Here are a few keys to successfully converting your term life insurance policy:
- Conversion rules and options differ from company to company.
- Permanent life insurance is very different from term life, so make sure you fully understand it before making a conversion.
- Often conversions are not reversible, so once done you can not convert back to your term policy.
- Find an experienced agent who is willing to go over all aspects of your new policy before conversion.
Your agent should be able to help point you in the right direction, but it is always helpful to have some information beforehand to protect you. If you switch life insurance policies, you will automatically still be insurable so dont worry about that.
Why You May Need Life Insurance After Age 50
Life insurance is designed to help protect those who your death will financially impact, and different types of policies can protect them in different ways. Depending on your situation and needs, there are many reasons to consider getting life insurance above age 50.
1. Family protection. People are starting families later, and many 50-year-olds still have children at home. Life insurance can help provide for lost income, help protect your family from losing your home, help pay your children’s way through college, and allow your spouse to take time away from work to care for your family’s needs. At age 50 or older, term life will generally be the most affordable option for getting the death benefit needed to help ensure your family is provided for.
2. Coverage for final expenses. These policies are designed specifically to cover funeral and death-related costs, but nothing more. They have a low benefit amount can be affordable, even for those in their 60s and 70s, and they typically don’t ask health questions or require a medical exam. Funeral costs often run over $10,000, and there may also be final medical and/or hospice costs after you are gone. A final expense policy can help take these financial burdens off your family – but they won’t help replace income for your financial dependents.
- The funding of buy-sell agreements and stock redemption plans
- The funding of supplemental retirement programs
- Key person indemnification
- Payment of loans and mortgages
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To Pay Inheritance Tax
If the value of your estate will exceed the inheritance tax threshold then your family may have to pay this tax before they can inherit it. Unless they have the means to pay this tax, they’d probably need to find the funds from the estate itself. Often people don’t wish for their family to dip into the estate. Especially if it will mean selling property or other assets. There can be practical and sentimental reasons why this would be difficult. You can help avoid this situation by putting in place life insurance for the expected amount of inheritance tax due so that when you die, the money is paid to your beneficiaries through a trust without adding to your estate .
Equally, gifts that you make to people during your lifetime are potentially taxable if you die within seven years after making the gift. Putting life insurance in place to cover the tax, should you die before the gift becomes exempt, can be very wise.
Any tax planning can be quite complex and subject to changes in rules and regulations. Speaking to a specialist life insurance adviser* can help you to work out what you need to address and the best way to do this. Your beneficiaries may wish to help with the cost of any life insurance that will reduce a future tax bill too.
Should I Convert My Term Insurance Into A Whole Life Policy
If you carry a term life insurance, and you’re nearing the end of your term, you may start to receive messages from your agent or insurance company encouraging you to convert your insurance into a whole life policy.
While “life insurance for your whole life” may sound appealing, keep in mind: whole life insurance is much more expensive than term life, and the rate of return on the investment portion of your insurance premiums is often low. Average policyholders would do better to maintain their current policies to the end of their terms and then invest the difference in premiums themselves.
However, if you believe your heirs will be hit with a hefty estate tax bill, or if you have a pre-existing medical condition, you might want to consider purchasing whole life insurance.
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What Determines My Eligibility For Term Life Insurance
In general, the main influencer of life insurance term length eligibility is age. Older age comes with a higher risk of health issues, so your options might be limited to shorter term lengths if you apply for a policy at an older age. If you do qualify for a longer term length when applying at an older age, note that your age combined with the longer term length will cause the policy to be more expensive.
When Do You Need To Buy Life Insurance
Modified date: Feb. 8, 2022
Life insurance isnt usually on a twentysomethings list of financial priorities.
And thats okay. Maybe.
If youre happily single and childless, you can probably skip this post . But if marriage or a family is on the horizon, read on.
Although age may play a role in how much life insurance coverage you need, the decision to buy life insurance has nothing to do with age. So when do you need life insurance? Heres the simple rule:
You need to buy life insurance when somebody else depends on your income.
Here are some common examples:
- If youre 25 with a wife who is staying home with a newborn, you DO need life insurance.
- If youre 29 and single, you DO NOT need life insurance.
- If youre 27, married, and both you and your spouse work, you might not need life insurance yet, but you may want to start thinking about it anyway.
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How Long Should Your Term Life Insurance Policy Last
How long is term life insurance? Term life insurance policies eventually end. Though they technically dont end until age 95, by the end of the term period, the price increases so much that most people let it expire.
Thats why its imperative to get this part right. If you race past this question without much thought, youre likely to regret it 10 or 15 years from now.
Go too long, and youll pay for more than you need. Fall short and, well, you could be left with no coverage when you need it.
Do I Need Life Insurance Later In Life
Im a senior do I need life insurance?
Maybe, maybe not. As with any financial decision, the answer depends entirely on you.
Although life insurance has versatile uses, at its essence, life insurance is primarily suited for people who have financially-reliant dependents. This is because if the breadwinner is suddenly gone, the dependents will suffer a huge financial loss. For many who are retired and on Social Security, life insurance may not be the best solution. If youre retired, debt-free , and have enough set aside to cover burial expenses, you may not need life insurance.
However, even if you no longer have dependents, dont write life insurance off quite yet. People in the following categories can benefit from life insurance, even in old age:
- Those who have a mortgage, a car payment, or other debt or may encounter unexpected debt
- People who want to leave a more significant inheritance to their children
- Wealthy individuals whose children will likely face estate taxes
- Those who dont have enough to cover their burial expenses
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Can You Convert A Term Life Insurance Policy
Nearly all term life insurance policies issued today include a conversion option, aka an exchange option. If your policy was issued more than 10 years ago, be sure to check if it includes this option.
This option allows you to convert your term life policy to a permanent life insurance policy, typically a universal life insurance policy. Most companies have select UL policies available for conversion.
Be sure to check with your insurance company to see which policies are available for conversion. Conversions guidelines vary by the life insurance company. The most common are:
- Entire Term This allows you to convert your policy at any time during the policy term .
- Period This allows you to convert your policy for a certain period, say, the first five years of the policy term.
- Specific Age This allows you to convert your policy up until a specific age, typically age 70.
One of the most important things to remember about conversion is you need to begin the process before your term expires. Its best to start looking at policies and costs at least a year in advance. This will help you keep your options open as the policy ends and your term conversion expiration date draw near.
Who Might Need Life Insurance Past Retirement
If others still rely on the income you create after you retire life insurance might be a good idea. Or.if you dont think you can ever retire, the same holds true. Of course you should do whatever possible to reverse that situation. Sometimes, its unavoidable and I understand that.
Life insurance costs good money. When you buy life insurance you forgo other things. Thats why you should only buy it if you need it and its the highest and best use of your money. I am the worlds biggest fan of life insurance for people who have dependents. But I strongly recommend you think through the alternatives before you buy insurance to last through your retirement.
Do you see reasons to own life insurance during retirement? What are they?
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Hindsights 20/20 I Have A Short
So youre reaching the end of your life insurance policys term and just want to know your options.
The most obvious option is simply buying a new term life insurance policy. Of course, youll need to re-apply and go through the process all over again but it will almost always be a cheaper option than paying the premiums on your current policy after your term has run out.
Like I mentioned earlier, your premiums wont be as friendly as they could be, but almost always the best option.
Can You Renew Life Insurance In Poor Health
Your options will be more limited, but you still have some. What happens when a term life insurance policy matures? This depends on your original agreement with the company, but there are options.
Keep your existing policy.
Remember, youre no longer insurable due to changes in your health. If you decide you still need the coverage, you may have to endure the higher cost to get it.
- Pros: You do not need to prove insurability again you can keep coverage going.
- Cons: Expensive no rate guarantee means the cost will continue to increase each year.
In many cases, its not worthwhile to change your policy. In the event that it seems beneficial, consider another policy type.
Convert your policy to a permanent one.
Your policy may be convertible to a universal life or whole life policy. Make sure you contact your agent or the life insurance company before the term expires.
Often these conversion privileges expire at some point, but almost always before the end of the term. What happens if I outlive my whole life insurance policy? Thankfully, you cant outlive those!
- Pros: Conversion does not require you to be in good health you dont need to complete an exam you can secure lifetime coverage with a permanent policy.
- Cons: Conversion is expensive expect to pay much more than you were paying for your term policy, but possibly less than the renewal rates to keep it.
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What Is The Relationship Between Term Life Insurance Increasing Premiums And Art
A term life policy provides the most affordable coverage for a limited length of time. After that period of time, insurance companies might offer you an option to continue coverage with yearly increasing premiums or an annual renewable term.
Some life insurance companies offer a term period as short as one year, sometimes called an Annually Renewable Term . These policies can be renewed for one-year intervals, hence the name.
However, these policies are not always the cheaper option, because the life insurance company has to recover all of its costs right upfront. Longer policies allow them to spread these costs out over many years.
Similarly, an increasing premium option will outline preset premium increases but will provide coverage for a longer duration, or for as long as you continue to pay the premiums.
However, before you go with the increasing premium option, you may want to investigate actual permanent insurance policy options.
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