Planning for your family member's financial well-being when you pass away is both a necessity and a challenge. There are several things to consider, such as what kind of protection you can afford, what kind of debts you may have when you die, and how much money your family will need to live when you are no longer around.

One of the best ways to protect your loved ones is through a life insurance policy. There is a lot to know before deciding which policy is best for your situation. Here's what you need to know before you start shopping.

What Is Life Insurance?

First things first. A life insurance policy is a contract between you and a life insurance company that guarantees the company will pay your beneficiaries a predetermined sum of money if you pass away. In exchange, you agree to pay premiums to keep the policy in force for either an agreed upon amount of time or for the rest of your life.

What are the Benefits of Life Insurance?

The exact benefits your beneficiaries receive depends on the type, amount, and duration of the policy you purchase. However, in general, here are some compelling reasons why life insurance is a good purchase:

• Payouts are not considered income for beneficiaries and are, therefore, tax free. Life insurance's other tax advantages include the tax-deferred growth of cash value and tax-free dividends.
• Wealthy individuals sometimes buy permanent life insurance as part of their trust to help pay the estate taxes due upon their death.
• Policies are flexible, meaning you can supplement retirement savings and even tap into cash values to help you augment savings in retirement.
• Dependents don't have to worry about living expenses because policies are usually designed and sold to cover multiples of anticipated gross income, often covering major expenses like home mortgages, college expenses, and other large outlays.
• Final expenses or funeral expenses, which can add up quickly, are also often covered by life insurance policies, so there is no huge hit to the family bank accounts when you pass away.
• Some policies offer additional benefits and early payouts if there is a terminal illness diagnosis. These endorsements allow the insured to continue living their lives without worrying about significant expenses.
• Individuals entering retirement often use their life insurance policy to supplement their savings. This applies to policies with cash value like the whole, variable, or universal policies. Once the cash builds up, it can be accessed to cover large purchases or other expenses.

Who Needs Life Insurance? 

There are many situations and circumstances that dictate the need for life insurance coverage. When thinking about your life insurance needs, a good general rule to consider is that if you would leave a loved one with a financial burden in the event of your death, then life insurance is necessary.

Here are some examples of people who may need life insurance:

• Parents with minor children
• Parents with special-needs children. Children who require lifelong care can be protected from considerable financial obligations with life insurance to ensure their needs will be met after their parents pass away.
• Adults who own property together, whether you are married or not. One adult's death could mean that the other could no longer afford loan payments, upkeep, and taxes on the property.
• Seniors who want to leave money to adult children who provide their care or who want to provide direct financial support for their children after the parent passes away.
• Children or young adults who want to lock in low rates early in life.
• Families who expect to owe estate taxes.
• Businesses with key employees can buy a key person policy to protect the business in the event of the key person's death.
• People with preexisting medical conditions. Some insurers offer policies even if a person has been diagnosed with cancer, diabetes, or other life-threatening health issues.

Types of Life Insurance

The two major categories of life insurance are a term life insurance policy and a permanent life insurance policy. Let's take a closer look at each type.

Term Life Insurance

As the name suggests, term life insurance lasts for a predetermined number of years and then the policy ends. Typically, policies are offered in a 10-, 20- or 30-year period of time, but other lengths are available. When your original term ends, you may have the option to renew your life insurance plan, but your rates can change based on your health, age, lifestyle, and other factors.

Term life insurance is offered in several ways. The most common policies include:

• Decreasing Term Life is renewable term life insurance with coverage decreasing over the policy's life at a predetermined rate.
• Convertible Term Life lets policyholders convert a term policy to permanent insurance.
• Renewable Term Life is a yearly renewable policy that provides a quote for the year the policy is purchased. Premiums increase annually and are usually the least expensive term insurance initially.

Permanent Life Insurance

This type of policy stays in force for the insured person's entire life if premium payments are paid and the policy is not surrendered. It is more expensive than term life. Forms of permanent life include:

• Whole Life insurance policies accumulate cash value. This cash value can be used for several purposes, such as a loan or cash or to pay policy premiums.
• Universal Life policies have a cash value component that earns interest and features flexible premiums. The premiums can be adjusted and designed with a level death benefit or an increasing death benefit.
• Indexed Universal is a type of universal life insurance that lets the policyholder earn a fixed or equity-indexed rate of returnon the cash value component.
• Variable Universal life insurance lets the policyholder invest the policy's cash value in an available separate account. It also has flexible premiums and can be designed with a level death benefit or an increasing death benefit.

Deciding which type of policy to buy requires analyzing your current and future financial situation, including how much money would be required to maintain your beneficiaries' standard of living or meet the need for which you're purchasing a policy.

 Life Insurance Payout Options

Common life insurance payout options include:

• A Lump-Sum Payout allows the beneficiary to receive the full death benefit at once and is the most common form of disbursement for life insurance products.
• Installments or Annuities set up the beneficiary to regularly receive proceeds and accumulated interest over time. Interest income is subject to taxation, so you might be better off getting a lump sum of money, depending on how large the policy's death benefit is.
• Retained Asset Accounts are like a checking account held by the insurer, with the initial balance being the death benefit. The beneficiary can write checks against the balance in the account and accrue interest over time. Unlike checking accounts, retained asset accounts do not allow deposits.

Factors That Affect Your Life Insurance Premiums

• Age is the most important factor because life expectancy is the biggest determinant of risk for the insurance company.
• Gender is a factor because women statistically live longer, so they generally pay lower rates than males of the same age.
• Smoking puts a person at more risk for many health issues that could shorten life and increase risk-based premiums.
• Health issues that are uncovered during medical exams. Most policies include screening for health conditions like heart disease, diabetes, and cancer.
• Lifestyles must be disclosed because dangerous lifestyles can shorten life expectancies.
• Family medical history because specific health issues in your immediate family means your risk of developing certain conditions is much higher.
• Driving records are reviewed to see if there is a history of moving violations or drunk driving that dramatically increases risk.
• Type of policy. Term is cheaper. Whole life is more expensive.
• Policy amount. The higher the amount of coverage, the more it will cost.

All these factors can influence how much life insurance to buy. Any of the above can add to your risk profile. In turn, your premiums will be higher.

Life insurance providers typically do not offer discounts, unlike home or auto insurance. However, there are still ways to get a lower rate. Aside from the other benefits, you'll pay less if you can demonstrate that you've improved your health by not smoking, maintaining a healthy weight, you exercise regularly, and you are managing existing conditions with your doctor.

If you think you're paying too much, you're always free to comparison shop for a different policy with other providers.

How Much Life Insurance Do I Need?

First, you'll want to determine your purpose for signing up for a life insurance policy. Are you choosing to get life insurance to ensure that your spouse can afford the mortgage after your death? Do you have dependents? How much debt do you currently have? All of these and more should be considered to determine the amount of life insurance you should get.

While it is sometimes suggested that you calculate your needed death benefit amount by multiplying your yearly income by five to seven times, this suggestion is not a substitute for proper planning. If you are considering signing up for life insurance, you should take the time to plan accordingly.

How Do I Buy Life Insurance?

Once you've determined the type of policy and the amount you need, we suggest getting life insurance quotes from several companies, which Medi-Solutions can help you with.

After you have reviewed quotes and selected which company you want, you will complete that company's application process. Many of the largest life insurance companies offer an online or phone application process for your convenience. You may be asked to get a medical exam to assess your general health or complete a health questionnaire as part of the application process. Like any other process, you'll also need to provide certain basic facts about yourself, so make sure to have the following available:

• Driver's license, passport, birth certificate, or other proof of identity
• Pay stubs, employment letter, tax returns, or other proof of income
• Signed lease, property tax statement, utility bill, or other proof of residency

You will be asked to give the insurance company permission to access medical and financial records to verify your information, such as an Attending Physician Statement from your doctor. There may be a follow-up phone call from the insurance company to check that your details are correct and get answers to any remaining questions.

After your application is approved, you have agreed on a premium, and you are satisfied that you understand your policy and agree to the terms, sign two copies and mail one back to the insurer. You will pay the premium, and your coverage will take effect.

Remember that the time between applying for life insurance and when your coverage starts is typically a few weeks. Be sure to keep a copy of your policy in a safe place and let your beneficiaries know where it is.

Purchasing Life Insurance with Preexisting Conditions

It is possible to purchase life insurance with some types of preexisting conditions. A preexisting condition is a medical issue you were diagnosed with or treated for before applying for life insurance.

There are a few things to know if you're in this situation.

First, the ability to buy a policy depends on the conditions you suffer from. If you have diabetes, asthma, HIV, obesity, or other similar manageable conditions, you can likely purchase coverage. The catch is that you'll pay a higher premium due to the increased risk. But if you have a terminal illness, such as cancer, ALS, muscular dystrophy, or other catastrophic illnesses, it will be harder—but not impossible—to find an insurance company to approve coverage.

Each insurer will have its own preexisting condition criteria, so do your homework to find a company that will work with you based on your medical situation.

If you have a preexisting condition, one option is to purchase a guaranteed issue life insurance policy. With this type of policy, no medical exam is required. You're guaranteed acceptance if you're within a certain age range. Also, payouts don't involve a large amount of money, as many of these policies cap death benefits at around $25,000. This type of life insurance also often has a graded benefit, which means the insurer won't pay out if you die within a few years of buying the policy.

Whatever else you do, never lie on your policy application. Life insurance companies ask questions about your health, and the process typically requires you to give the insurer permission to access any medical records needed to validate your information. If you don't buy a guaranteed issue policy, you will be required to undergo a medical exam as part of the underwriting process, and they will look for specific markers in your blood work and other tests that indicate an underlying medical condition.

If you commit fraud and it's discovered later, an insurer could reject future claims. Also, if the insurer finds fraudulent information, it may record the fraud in the Medical Information Bureau database, which is shared with other insurers, thus hurting your chances of buying coverage from another company.

DISCLAIMER:  Medi-Solutions Insurance Agency, LLC is not affiliated or endorsed with the Social Security Administration or the Federal Medicare Program. Information is for educational purposes only and should not be construed as an offer of insurance, advice, or recommendation. The information provided is not intended as tax, financial, investment, or legal advice. Please consult legal or tax professionals for specific information regarding your situation.

 

Other articles:
Learning Center.