One of the best things you can do to create a solid financial plan is to protect yourself and your loved ones from hardship caused by the unexpected. Budgeting and saving are great ways to improve your finances, but having adequate life insurance provides additional protection. Life insurance can be intimidating to think about, but it’s not as complicated as most people think.
In this guide, we cover everything you need to know about life insurance, including how it works, the types of coverage available, how to determine exactly who needs it, and other common questions.
How Life Insurance Works
A life insurance policy is a contract between you and an insurance company. In that contract, you agree to make premium payments for a specified term (sometimes for the duration of your life), and the insurance company agrees to provide a specific benefit at the time of your death.
A premium payment is income for the life insurance company and secures your coverage amount. It can be paid monthly, twice a year, or annually depending on your preference. The contract is legally binding and government regulated. If you continue to make premium payments, the insurance company must meet their obligation to provide your beneficiaries with the stated benefit in the event of your passing.
A beneficiary is a person (or persons) who will receive the proceeds of the life insurance policy when the insured person dies. You can name one person or multiple people as beneficiaries when you select a policy, but you will usually only have one primary beneficiary.
You are not locked into a life insurance policy, and can typically terminate it by ceasing to pay the premiums.
Types Of Coverage
There are two main types of life insurance: whole and term. Whole life is permanent insurance that remains in effect for the entire life of the insured party as long as the premium is paid. Whole life insurance also includes a savings element commonly referred to as cash value. For this reason, premiums for whole life insurance are usually more costly than term life.
Ethos specializes in term life insurance, which is temporary life insurance coverage. When you get a policy, you will choose a coverage term of 10, 15, 20, or 30 years in addition to your coverage amount. During that term, you will pay premium payments to maintain your coverage. If you happen to pass away during that term, the entire policy coverage amount will be paid out to your beneficiary. If you survive the term, you will need to apply for a new term policy when it expires if you wish to maintain coverage.
Example A: Let’s say a 25-year-old female gets a $400,000 20-year term policy and pays $25 per month. Her beneficiary would receive the full $400,000 in the event of her passing during that 20-year term.
Example B: In this scenario, let’s say she lives through the end of her 20-year term and is now 45 years old. At this time, she will have to reapply for a new term policy if she wishes to do so.
Mind you, these examples are hypothetical. The cost associated with term life insurance coverage depends on factors such as your age, coverage amount, and general health, to name a few.
There are three main types: level term, increasing term, and decreasing term. Let’s dive into what each of these means.
This is the most common type of term life insurance. It means that your death benefit or coverage amount and premium payment amount will remain the same throughout your term. Upon selling or converting a term policy, the premium amount is usually determined by your current age at that time (not how old you were when you got your previous policy). With term insurance, the younger you are, the more likely you’ll get a lower premium rate since your age puts you at a lower risk.
Locking in a level term policy is wise because as you get older, you don’t have to worry about your monthly premiums increasing.
The last option is the opposite of decreasing term. While the monthly premiums may or may not remain the same, the coverage amount increases over the life of the policy. This can help someone who’s worried about inflation or expects their insurable needs to increase over time.
Increasing term can also benefit the insured individual in the form of a short term savings plan through Return of Premium (ROP) term life insurance. With ROP, your beneficiary would receive an additional death benefit equal to the amount of premiums paid if you were to pass away before the end of your term. Or, the lump sum will be paid out to you if you outlive your term. ROP policies tend to cost 25% - 50% more than regular term policies but at least you’ll get all your premium payments back at the end of your term.
Example: Let’s say a 30-year-old individual gets a 25-year increasing term life insurance policy and pays a $100 monthly premium. After the 25-year term ends and they’re 55 years old, all the premium payments they put in will be returned to them which in this case will equal $30,000.
This category is renewable term life insurance with a level premium where coverage decreases over the life of the policy term at a predetermined rate. This may be a good option for a policyholder who expects their liabilities to decrease as they get older. For example, you may expect to have less debt or pay off your mortgage by the end of your life insurance term so you may not need as much coverage as you do today.
Who Needs Insurance?
Most Americans need some type of life insurance. Here are a few examples of people who could benefit from having it the most.
If you’ve recently purchased a home, life insurance is a great option to cover the expense of a mortgage payment. This will also help support any co-signers on your home in the event that you unexpectedly pass away.
If you are the primary breadwinner in your household, life insurance can help your loved ones pay for living expenses, tuition, debts, and other expenses your income supported.
Your role as a stay-at-home parent is just as important as if you were working outside of the home. If you’re caring for your children as opposed to paying for childcare or managing a household rather than paying for services, odds are you’re saving a huge amount of money. Life insurance will help fill these gaps for your family.
As a parent, you're responsible for protecting your kids, and this includes providing financial stability for them. Having adequate life insurance in place can help make their lives easier and filled with less hardship. If you’re a single parent, it’s important to dot all your I’s and cross your T’s when it comes to providing financial security for your family since there is no other income to fall back on. How would your kids’ lives change if they didn’t have your income and support? It’s a tough topic to think about, but it’s wise to prepare a Plan B using insurance to ensure that they can continue to live comfortable lives.
Individuals With High Debt
Even if you’re single and rent, or live with your parents, you may want to consider getting a small life insurance policy if you have a lot of debt. Some student loans won’t be discharged due to bankruptcy or death. This coverage can help alleviate this financial burden on your loved ones.
Having a policy will help secure your loved ones’ financial future. There are many options with term coverage that you can tailor to your lifestyle, budget, and needs. We are taught to insure our cars and our health, but one of the most important things you can do is to insure your life to protect those you love.
Risks Of Not Having Life Insurance
Passing away without life insurance can lead to serious consequences, including:
Leaving your family in debt
Leaving your children with an uncertain financial future
Your family possibly having to move or downsize
Not qualifying for a policy later in life when you could have locked in a term policy in the years prior
No true financial safety net or back-up plan (an emergency fund can be drained quickly in the event of a costly emergency)
Missed opportunity as a tax benefit (most life insurance death benefits do not have to be reported as income, making them tax-free income)
How Much Coverage Do I Need?
How much coverage you need depends on a variety of factors. There are a lot of myths surrounding life insurance that just aren’t true. For example, some people believe life insurance is too expensive or that a high amount of coverage is unnecessary.
Others might steer clear from insurance because they believe having a policy is only worth something if you die. This isn’t entirely true.
Some term policies come with Accelerated Living Benefit or Long-Term Care options. These are two different riders that can be added to some term policies. The Accelerated Living Benefit rider allows an early payment of a portion of the death benefit if the insured has a terminal illness, a medical condition that requires an extraordinary medical intervention (such as an organ transplant), or cannot perform activities of daily living on their own (such as bathing, eating, toileting, and dressing).
The Long-Term Care rider allows payment of part of the death benefit to the insured in order to help them pay for health care expenses incurred in a nursing home or similar facility. With both the Long-Term Care and Accelerated Living Benefit riders, early payment of the death benefit will be deducted from the amount payable to the beneficiary upon the insured’s death. This allows you to spend a portion of your death benefit or coverage amount before you pass away if you become sick or disabled.
To determine how much life insurance coverage you need, consider the following:
Your current income and income goals
How much debt you have
Your current health
Any risky habits or hobbies you have
Whether you rent or own a home
How many kids you have
Your spouse or partner’s financial needs
Whether you’ll want to add riders to your policy
The average rule of thumb is to obtain enough life insurance coverage to equal 10x your income, but that can be more or less than what you truly need. You want to weigh all of these factors carefully when determining your needs.
Understanding Insurance Riders
Life insurance riders are added to a policy to modify provisions that already exist. If we were talking about food, your life insurance policy would be the burger, and riders would be all the toppings.
Some riders provide benefits in the event of the insured’s disability, while other riders provide for the partial payment of the death benefit while the insured is still alive (like the Accelerated Living Benefit mentioned earlier).
The ‘Other Insureds’ rider provides coverage for one or more of your family members in addition to yourself. The rider keeps your coverage and premium payment the same throughout your term. It’s called a family rider when you also cover a child. You can include coverage for your children with this rider, and it won’t expire until they are 18 or 21 years old, depending on the policy you have. If you only want to have joint coverage with your spouse, you can do that too.
Getting Life Insurance
When it comes to getting a life insurance policy, Ethos makes the process easy. You only need to follow a few steps.
Step 1: Get A Quote
It only takes a few seconds to do this on our site. You’ll need to provide information like your gender, age, location, general health, and use of nicotine products for an accurate quote.
Step 2: Select Your Term & Coverage Amount
You decide the duration of your term policy. Be sure to consider your current and long-term needs when choosing a coverage amount and term length.
Step 3: Apply Online
Once you receive your quote, you apply online. This is where you’ll submit more personal information like your name, address, and details on your medical history. You’ll also name your beneficiaries (the people you’d like the death benefit funds to go to). You can name one or more beneficiaries.
Step 4: Processing & Waiting
After submitting your application, it will either be automatically approved or sent to underwriting. It’s also possible that you may need to provide additional information for processing. This means you may need to verify some information. Some companies require a medical exam during this stage, but in most cases, Ethos does not require one. We also use Docusign to efficiently send forms and collect signatures so you can receive coverage as soon as possible.
After our underwriter approves your application, you’ll have the option to accept the policy. Upon acceptance, your coverage begins, and you’ll start paying your premiums.
Take the First Step
Getting life insurance doesn’t have to be confusing or a hassle. The process can actually be clear and concise. Term insurance is an affordable means to protect your family’s financial future in the event of an unexpected passing. Riders allow you to add components to your policy such as insuring your spouse or children along with the option to receive a portion of the death benefit early for medical reasons.
Ultimately, you’ll have more peace of mind knowing your loved ones are taken care of—no matter what. Take the first step to getting covered by getting a quote today.