Life insurance is a crucial element of financial planning, but far too many people overlook it. Maybe they don't want to think about the circumstances that might lead to their heirs using it, or maybe it just seems so complicated. Don't fret, though — life insurance isn't nearly as complex as it looks.
Do you think of life insurance as a way to defray the costs of your funeral? Plenty of people do, perhaps because when employers or unions offer life insurance as a benefit, they tend to offer just enough to cover a funeral. However, the purpose of life insurance is far greater than that. It is one of the best way to give your dependents a safety net if you die unexpectedly.
You may have heard people tout whole life insurance as an investment. It is, but it's also basically for rich people who need another type of tax deferment for their estate. Whole life insurance is expensive, often four to ten times as expensive as term life insurance. Term life insurance is a far better choice if your priorities are to provide for your dependents.
Do you have a mortgage? How about student loans that you're paying off? Who has to pay those off if you should pass away unexpectedly? If your parents, grandparents, or any other loved one co-signed on those loans, they're going to be stuck with a monthly bill they haven't planned for. And in the case of student loans, they have no asset to sell to cover the bill. Your life insurance policy, however, can help repay all those debts so your loved ones aren't hit with a double blow.
It's tempting to grab the first reasonable life insurance offer you receive, but don't be too quick to sign on the dotted line. Life insurance companies vary greatly in what they offer, and you should weigh your options before making a decision. For instance, if you smoke, certain insurers are more willing to look the other way. Some insurers provide especially good deals to millennials or Gen Z shoppers.
Applying for life insurance involves more than just filling out a form and writing a check. In most cases, you have to take a fairly involved medical exam — and that's after you've provided your entire medical history to the insurer. But in many cases, the medical examiner will come to you. You'll also have to do a phone interview that takes about 30 minutes. The insurance rep on the phone will want to ask questions about your medical history and lifestyle to help prepare your quote.
If you're a smoker, you're significantly overweight, or you have another lifestyle issue that could raise your life insurance rates, don't count on last minute changes to make a difference. Quitting cigarettes right before your exam doesn't affect your rates, and neither does a crash diet to lose a few pounds. Most insurers want to see a year of stability in your lifestyle before letting it affect your rates. However, some insurers are willing to adjust your rates a year or two into your policy if you do sustain lifestyle changes, so ask about that feature if you plan to intensify your wellness routine.
Don't lie when applying for life insurance. You're likely to get caught, and if you are, you'll be denied coverage or pay a higher rate. If the insurer discovers you lied after your policy goes into effect, they're likely to cancel your policy — and they have a two-year window to look for fraud. Here's the worst-case scenario: after you die, if the insurer confirms that you lied and committed fraud on your application, they'll refuse to pay out the benefits to your beneficiary, even after you paid all those premiums.
All those melodramas that revolve around who's named on the life insurance get one thing right: you can change your beneficiary. If you get married, get a divorce, have a child, get involved with a nonprofit, or just change your mind about who you want to receive your benefits, call your insurance broker and they'll make the change. You can have more than one beneficiary, which means you don't have to choose a favorite child. And yes, you can even leave your life insurance benefits to a pet.
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