One of the best things you can do to create a solid financial plan is to protect you 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, for sure, but it’s not as complicated as most people think.
In this guide, we’re going to go over everything you need to know about life insurance from how it works and the types of coverage available to determining exactly who needs it and other common questions in between.
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 the stated benefit in the event of your passing.
A beneficiary is the 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 get 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 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 higher 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 whether it be 10 years or 30 years and a coverage amount. During that term, you will pay premium payments on time. If you happen to die 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.
For example, 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 amount in the event of her passing during that 20-year term.
Let’s say she makes it to the end of her 20-year term and is now 45. At this time she will have to reapply for a new term policy if she wishes to do so.
Mind you, this is a hypothetical example. How much you pay for term life insurance coverage depends on factors like your age, coverage amount, and general health just to name a few. We will discuss that in more detail later in the guide.
With term life insurance, there are three main types: level term, increasing term, and decreasing term. Let’s dive into what each of these mean.
1. Level term is the most common type of term life insurance purchased. 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 the 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.
2. Decreasing term 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 an 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.
3. Increasing term 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.
For 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.
Who Needs Insurance?
Most Americans need some type of life insurance.Here are a few examples of people who could benefit from having life insurance.
Homeowner - Did you recently get married or buy a house? You owe it to your partner to make sure they can afford their current lifestyle with or without you being around to pitch in.
Breadwinner - If you are the primary breadwinner in your household, consider how your family would cover living expenses if you weren’t around. Would your kids be able to go to the same schools? Would your partner be able to pay the mortgage?
Stay-at-home parent - Your role as a stay at home parent is just as important as if you were working outside of the home. Let’s say you’re caring for the kids as opposed to paying for childcare and taking care of your household whether it’s doing laundry, making meals, or keeping up with errands and appointments. Odds, are you’re saving your household a ton of money. If your family has something to lose as a result of your absence, you need life insurance to help fill in the gap.
Single Parent or Parent in General - As a parent, your sole responsibility is to protect your kids and this includes providing financial stability. Having adequate life insurance in place can help make their lives easier and filled with less hardship. As 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 topics to think about, but it’s wise to prepare a Plan B using insurance to ensure they continue to live comfortable lives.
Individual 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 and you probably don’t want to place an unnecessary burden on your loved ones.
Grandparent - It’s never too late to obtain term life insurance. Want to leave enough cash for your grandchildren to go to college debt free or have enough put aside to cover inheritance or state taxes? A term policy can help.
Unless you’re super rich or have very few financial responsibilities, you can benefit by getting a term life insurance policy. Having a policy will help secure your loved ones’ financial future. There are many options with term from $25,000 to $1 million policies determined by 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 insure your life to protect those you love.
The Risks of Not Having Life Insurance
Passing away without life insurance can lead to some 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 years prior
- No true financial safety net or back up plan (an emergency fund can be drained quickly in the event of a true costly emergency)
- Missed opportunity at a tax benefit (Most income obtained as a result of a life insurance death benefit does not have to be reported, making it 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 just 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 Benefits and Long-Term Care options. These are two different riders that can be added to some term policies. The Accelerated Living Benefits 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) in order for the insured to survive, or can not perform activities of daily living (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 which are incurred in a nursing home or similar facility. With both the Long Term Care and Accelerated Living Benefits 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, you should consider:
- 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’s financial needs if you’re married
- Whether you’ll want to add in riders like Accelerated Living Benefits of Long Term Care
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 these factors carefully when determining your insurable need.
Understanding Riders in Depth
Life insurance riders are added to a policy to modify provisions that already exist. If we were talking food, your life insurance policy would be the burger and riders would be all the toppings that you’d want to add.
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 (living benefits mentioned earlier).
The ‘Other Insureds’ rider provides coverage for one or more 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’re also covering a child. You can include coverage for your kids with this rider and it wont expire until there are 18 or 21 years old depending on the policy you have.
If you just want to have joint coverage with your spouse only, you can do that too.
Getting Life Insurance
When it comes to getting a life insurance policy, Ethos makes the process very easy. You just need to follow a few steps.
Step 1: Get a quote
A life insurance quote should always be free and it’s used to illustrate the coverage and policy terms you’d like. It only take a few seconds to do this on our site. You’ll need to provide information like your gender, age, and use of nicotine products for an accurate quote.
Step 2: Select your term and coverage amount
You can decide how long you want your term policy to last. Be sure to consider your current and long-term needs when deciding the coverage amount and term to apply for.
Step 3: Apply online
Once you receive your quote, you can apply online. This is where you’ll submit more personal information like your name, address, and more details on your medical history. You’ll also name your beneficiaries which are the people you’d like the death benefit funds to go to. You can name one or more beneficiaries.
Step 4: Processing and Waiting
After your submit your application, it can either be automatically approved and sent to underwriting, or you may need to provide additional information for processing. This means you may need to verify some more information and get ready to pay your premium. Some companies require a medical exam during this stage but Ethos does not require a medical exam for policies under $1 million. 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. When you accept, 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 provides you the option to protect your family’s financial future in the event of an unexpected passing. Riders allow you to also add components to your policy like insuring your spouse or children along with the option to receive a portion of the death benefit early for medical reasons thanks to the Accelerated Living Benefits and Long Term Care riders.
Ultimately, you’ll have more peace of mind once you fully understand insurance and assess your own needs.
Take the first step to getting started by obtaining a quote.