Your Super Guide to Life Insurance – The Real Truth

It is possible that you have seen life insurance ads where little, innocent and adorable little children ask their dad, “Papa, what is life insurance?”

Although this is a strategy to prey on your emotional side, usually, the tendency of people is not to bother about life insurance unless they are forced to do something about it. The trigger usually occurs when there is a changing event in their life where they get involved with someone else’s life like marriage or birth of a child and sometimes even with getting a mortgage (most likely, legally required).

According to Emilie R Goldman, a financial planner in San Mateo, California, life insurance is a thing which tends to be put on the back-burner. There is a common tendency to be amazed at the levels of premiums required as it is mistakenly understood that one’s employers cover all their insurance needs.

However, this could not be further than the truth. We would like you to treat this informative article as an essential guide to life insurance, the requirements, and benefits so that you will be covered adequately even when you least expect it.Getting life insurance can be compared to tearing off a Band-Aid. It’s something that needs to be done, even if it isn’t something that you don’t care to do, and once it’s done, you can move forward.

Here are a few answers to the most commonly-asked questions regarding life insurance:

What Type of Life Insurance do I Need?

The standard policy that is issued to most people is basic term insurance. This insurance is what most insurance agents who get paid to advise, will recommend. These kinds of policies are designed in such a way that if the policy owner passes on during the term of the plan, a guaranteed amount (sum assured) will be paid out to the beneficiaries. This type of policy is cheaper than other categories of life insurance.

The premiums of a term life insurance policy will vary with the age of the policy owner as well as the gender (males pay more than females). You will also pay more premium if you are a smoker. Hence, if a healthy woman of 30 years of age pays $38 for a policy with a sum assured of $1 million and a term of 20 years, a woman of 45 could pay $48 for half the sum assured, with the same term. The premium will increase significantly if the policy owner is a smoker and if they have some chronic, life-threatening health issues like diabetes, heart disease of cancer.

DON’T LET YOURSELF BE MISSOLD! An agent may try to sell you a universal policy which costs more and the insurance agent will also get more commission from such a plan. You may not need such a plan, and this is a classic case of misselling. It is unethical, but it does happen. There are scenarios where a permanent policy IS suitable for particular people, for example, in the case of a family member who supports a child with special needs or say, you are wealthy, and there is a potential of incurring estate taxes. So, you need to be aware of the difference between term life and whole life policies, about which a qualified insurance agent will explain you.

How Much Insurance do I Need?

The tendency is to go by the rule of thumb on how to buy life insurance which states that you should buy ten times more than your total monthly income. However, there are variations to this rule, and a competent insurance agent will be able to identify these aberrations and make adjustments accordingly.

The amount of life insurance mainly required depends on the level of monthly income the that needs to be replaced for family members as well as the particular expenses that are likely to be incurred.

If your spouse passed away, would you need to take leave? Would you need to make your mortgage paid up or would you want to continue with the monthly installments? What about college fees? And any other sundry debts?

Matt Becker who is a financial adviser from Florida specializes in life insurance for younger families. He says that the insurance that working parents should buy should be able to replace 5 to 50 years of income. This system also depends on the age of their children and whether or not a single spouse has the capacity of supporting their children on one income.

Becker goes on to add that if the parent is a stay-at-home parent, that individual should consider the income that would be required for someone else to carry out all of their daily tasks.

Mr. Becker has created a guide-cum-worksheet highlighting the costs of childcare, cost of food, transport for children and the amount of the overall monthly household bills.

How Many Policies Do I Need?

The requirements of a family are never the same over time. Hence, some people may think of buying policies of different terms. The explanation for this is relatively simple. You may buy life insurance policy for a sum assured of $1 million and a life insurance termof 20 years which should cover your children’s college fees.

You may also take out an overlapping policy for $500,000, for 30 years, which should keep you sufficiently covered until retirement. Mark Maurer, president of Low Load Insurance Services says that if a person does that, they are effectively creating layers to meet particular milestones. However, Maurer also adds that bulk term insurance bought for higher sums assured work out cheaper than policies purchased in increments, mainly from $500,00 and higher.

Buy a policy as and when required to get the most out of it. For example, a pregnant woman may pay higher premiums due to a pre-existing medical condition like being overweight and higher cholesterol levels.

Whom Should I Name as a Beneficiary?

The nominated beneficiaries should be each other in the case of spouses. In the case of the death of both parents, then the beneficiary would be a minor child. If a single parent died later, the matter is not so simple, and there is a possibility of involvement ofsurrogate courts.

The easiest and cheapest way to avoid any dispute is toform a testamentary trust following the individual’s death. The trust is the named beneficiary, and it also dictates who should receive benefits and how much.

But there are other options as well. You could establish a revocable living trust which is like a will, but additionally, it avoids the necessity to go to probate court for the final settlement of the will. A living trust isn’t part of a public record as long as it continues to be adequately funded.

You can also go for the “bulletproof option,” whereas a parent, you can establish an irrevocable life insurance trust representing the owner and beneficiary of the life insurance plan. This provision serves the dual purpose of financial protection from creditors (applicable to doctors who are avoiding malpractice suits) and removal of the proceeds from the estate to effect tax exemption.

Is My Life Insurance Subject to Income Tax?

According to Brett J. Barthelmeh a Boston estate planning attorney working for Squillace & Associates, there is no income tax levied on income from life insurance. However, the amount gets included in the deceased’s estate.

Generally speaking, most people shouldn’t face a problem since the exemption limit on federal estate tax has been set at $5.45 million (double of that for married couples). However, this exemption limit tends to vary from one state to another. For instance, the exemption in New Jersey is just $675,000, but in Massachusetts, it is $1 million.

Due to the above reasons, one should be aware of these limits and set up trusts to avoid unnecessary taxation, but many families do not do this. This is the reason why you should have a competent insurance agent who will go into these details and provide appropriate guidance.

Why Should I be Bothered about Taxation of Life Insurance Assets?

A surviving spouse is not taxed on estate assets. In any case, the surviving spouse is likely to spend most of the whole life insurance money for covering various expenses, primarily related to pending funeral expenses and medical bills of the deceased spouse and so on.

But if both spouses died with a sizeable chunk of money in insurance policies, then the element of taxation comes in, which needs to be dealt by a qualified insurance agent, preferably well before a claim is made.

Where Can I Buy Life Insurance?

You would do well to shop around a bit. That way, you will be able to identify carriers who provide the best rates and with the maximum benefits. Do not collaborate with an insurance agent who is affiliated with only a single carrier. Instead, tie up with an independent insurance agent who will be able to provide details to you about the best-rated insurance companies, which will considerably increase your options.

You need to realize that some insurance companies may provide, for instance, a better deal for overweight applicants than others. Other carriers may offer good deals on older applicants with cheap life insurance without exam policies. A competent insurance agent will consider all these options before providing you with details of the best life insurance companies and provide term life insurance rate tables to back up the data provided.

What are my Other Options?

The online route is also a useful way of getting information on life insurance policies. There are a few well-known online low-costlife insurance brokerage firms like AccuQuote and PolicyGenius. While AccuQuote has been in existence since the inception of the internet, PolicyGenius is a relatively newer company.

Both the above companies and any others that you may happen to come across will provide you with user-friendly calculators which will determine the amount of coverage you need based on your set of circumstances. Moreover, these online brokers will provide you details of the best life insurance companies who have the highest ratings from agencies like A. M Bestwhich monitor the financial standing of companies in the market.

What about Relying Insurance Provided by my Employer?

This is not recommended due to a variety of reasons:

• Possibly Insufficient Coverage:Although the life insurance provided by your employer may be incredibly cheap or free, your coverage may not be enough. You need 8 to 10 times your current annual salary as coverage. Does your company provide you this level of coverage? You need to check and ensure that you are sufficiently covered.
• Not a Permanent Setup: You may change jobs. Or, you may move from full-time to part-time employment. Any changes in your employment status will directly impact the coverage of your employer’s life insurance.
• Health Issues Factor: If you have a health problem and have to leave your job, you will not be eligible to be covered anymore under your employer’s life insurance policy. Under such circumstances, you will also find it difficult to get a new life insurance policy to replace the one that you had from your erstwhile employer as you would have to buy a life insurance with medical conditions policy.
• If you have health issues, it is also possible that you are stuck to your current job, because you cannot afford to change jobs for fear of losing your life insurance coverageor you would have to pay more money to buy a preexisting condition insurance policy.
• Lack of Control: If you rely solely on the life insurance that your employer provides, you will never have any control over the amount of coverage or the type of insurance policy by which you are covered. Your employer may under-insure you, hence, in the event of a claim, you won’t be sufficiently covered. Your employer may have bought insurance from a carrier which is not among the best-rated life insurance companies.
• Chances of Withdrawal of Life Insurance: If your employer suddenly stops offering you the facility of life insurance due to changes in HR policies of the company or due to cost-cutting measures, you will not be able to do anything about it – you will be left high and dry, without life insurance coverage.
• Insufficient Coverage for your Spouse: Your employer may provide sufficient life insurance coverage for you. But what about your spouse’s life insurance coverage? Although your spouse may be included thelife insurance policy provided by your employer, it is possible that the coverage will not be nearly enough. So, you have to look at both sides of the coin if you are married or live with a partner.
• Is your Employer’s Life Insurance Policy Cheap? Consider this scenario. You are quite satisfied with the life insurance provided by your employer because you see the sum assured and are very impressed with the lump sum that will be available to your nominated beneficiary if anything happens to you.

But if you rely solely on this life insurance policy, the chances are that you haven’t compared the cost of premiums (probably being deducted from your salary) with premiums of other life insurance companies for similar policies. You may find that your policy is more expensive than that of other carriers. This occurrence is highly likely in the case of employer-provided life insurance, as these are policies that provide life insurance with no medical exam. In such a situation, you may do well to opt out of your company’s insurance program and go in for a private insurance policy of your own, if possible.

It is quite common for an employer’s life insurance policy to be cheap at the very outset, say when the employee is in their 30s. However, there is a typically steep increase every five years, of which the employee is not aware. By the age of 50, the premiums on the policy become highly expensive, but now the employee has no option but to continue with it as buying a new life insurance policy is not a viable option due to the potentially high premiums that may need to be paid.

Life Insurance is as Vital as a Refrigerator

Could you manage to run your home without a refrigerator? A refrigerator is an essential domestic appliance that is an intrinsic part of any household. However today, there are numerous options available in refrigerators and depending on your choice, you can pay anything between a few hundred dollars to thousands of dollars for a fridge.

Buying life insurance is like buying a fridge. It is a necessary expense, but that said, there are several options available. You need to be aware of those options andmake a choice in what is best-suited for you and your family. So, with this in mind, don’t make the mistake of not buying any insurance at all. Get in touch with a competent life insurance agent and make the required investment in life insurance at an early age, so you can rest assured that you and your family will be well provided for in the event of the unforeseen.