A life insurance policy can be a vital way to ensure financial support for loved ones in the event of an untimely passing. Life insurance is often a necessity if the policyholder is the only earner in their family supporting several children and a spouse. A policy also can be important for newlyweds, new homeowners, or couples expecting a baby.
National Life Insurance Day is May 2, and more people are considering whether they need a policy, what type is best for their situation, and how to shop around for the best price and plan. Finding the right policy depends on the buyer’s financial situation and their family’s needs.
What is life insurance?
Life insurance is a contract between a policyholder and their insurance company. The policyholder pays regular premiums, often monthly or annually, and in exchange the company pays a lump sum to their beneficiaries upon their death. The beneficiaries can then decide how to use the money to ensure they are taken care of during this challenging time.
There are several different types of policies, and all of them offer various benefits and risks. The policyholder’s finances, desire for flexibility, and tolerance for risk all play important roles when it comes time to purchase. The current life insurance market gives consumers many policies to choose from.
These fall into two main categories:
- Term life insurance. This type of policy covers a specific time period, and typically lasts from 10 to 30 years from the start date. The policyholder makes fixed payments during this time, and their beneficiaries receive a cash payment if they die during that time period. Term life insurance is one of the most simple and affordable options on the market, and it is sufficient for most people.
- Permanent life insurance. These policies cover a policyholder’s entire life and include an investment component called cash value, which accumulates gradually and allows you to borrow from it or surrender the policy for the money.
- One type of this insurance – whole life – offers lifetime coverage as long as payments are made. These policies are generally more expensive to purchase than term life insurance, but the costs can be offset as the policy’s cash value builds – typically after 12 or more years. Whole life insurance policies may be best if the policyholder has had a serious health issue and has had trouble obtaining another policy, or if they want permanent coverage, or if they are interested in the cash value component of these types of policies.
- Universal life insurance is another type of permanent coverage that has the ability to grow cash during the policyholder’s lifetime. It provides more choices than whole life insurance, such as the ability to adjust the plan and raise or lower premiums and the death benefit. It can be less expensive than whole life insurance, but it can also include more fees or higher prices for larger amounts of coverage. Universal life insurance provides more flexibility in death benefits and premiums than whole life insurance.
- Variable life insurance gives the policyholder control over whether their savings are invested into stocks, bonds, mutual funds, etc. Premiums are fixed.
- Universal variable life insurance is similar to universal life, but with the investment control of variable life. Premiums are flexible.
Other forms of life insurance can include joint life policies, which are geared towards people who are married, and business-owned insurance policies that ensure the business can continue after a tragic loss.
Who needs life insurance?
Life insurance isn’t a top priority for many people until later in life, but the optimal time to purchase it is much earlier, since the costs rise as people age and become more likely to have health problems. But the decision to buy it depends largely on their circumstances, financial situation and plans for the future.
Typically, people need life insurance if they have dependents – children who still live at home or haven’t yet graduated from college, or anyone who is financially dependent on their income, such as a spouse, sibling or aging parent. If they support a family member that depends on the revenue you bring in, they want to make sure that revenue continues in the event of a death. For most people, the idea is to help their dependents get through the first five to 10 years after a tragic loss.
Other common reasons for buying life insurance can include:
- Paying for funeral/burial expenses
- Providing a charitable donation
- Paying estate or inheritance taxes
- Providing a financial legacy for heirs
- Paying off debts, such as co-signed loans or mortgages
Life insurance can keep the policyholder’s business alive after their death, provide revenue for their family to end or sell the business, or allow their business’ co-owner to buy out the other’s half of it.
Life insurance policies are also recommended for people who work in dangerous conditions, such as firefighting, construction, aviation, or those who engage in high-risk hobbies.
Although life insurance is less of a necessity once people reach retirement age, some have used it to replace the loss of any retirement income. Permanent life insurance can provide a potential income source since it allows the policyholder to access their cash value once it has built up to a certain level.
How much is life insurance?
One of the biggest reasons people don’t prioritize purchasing life insurance is because they think it will be too expensive, according to the 2020 Insurance Barometer Study by LIMRA and Life Happens. But the study said that the average cost for a healthy 30-year-old is around $160 per year, or about $13 a month.
Prices can vary widely among companies for the same types of coverage, so it’s best to shop around before buying. There also are independent insurance brokers available that can comparison-shop and look at a variety of products to find the best price.
When thinking about how much coverage to purchase, experts recommend considering the financial obligations need to be covered vs. the assets on hand to cover these costs. A life insurance policy would fill the difference between these.
Pandemic effects on life insurance
As fatalities and illnesses rose in the United States due to COVID-19, so too did life insurance policy claims.
Globally, the industry was hit with $5.5 billion in claims in the first nine months of 2021 compared to $3.5 billion in the entire previous year, according to insurance broker Howden. That’s higher than what had been expected, particularly with the new availability of vaccines. But the highly transmissible Delta variant, which was more likely to result in hospitalization than the original coronavirus, contributed to the surge.
Death-benefit payments rose 15.4% in 2020 to over $90 billion in the U.S., according to the American Council of Life Insurers.
Insures continue to offer new life insurance policies, but the effects of the pandemic on the industry remain to be seen. Companies have reported an increase in applications since 2020.
They are now trying to predict how future COVID-19 variants, and the way people and governments/businesses may react to them, affect the way they do business. It could mean that insurance companies will need to set aside more reserves to pay claims, or it could force them to raise rates.
For consumers, the pandemic does not affect current life insurance policies. If a policyholder dies as a result of COVID-19, and the policy is active with premiums paid, the beneficiaries will receive a death benefit. And insurers cannot adjust current premiums if a policyholder has had COVID-19 or is at a higher risk of contracting it.
But it could take longer for some consumers to obtain new coverage, especially if they are in high-risk groups, have traveled to COVID-19 hot spots, or have been ill with the virus themselves. Their applications may be postponed while they provide medical records that they have fully recovered.
Several large insurance companies have restricted sales of new life policies for older adults who are more at risk of contracting COVID-19. Some have enacted longer waiting periods for people who have been hospitalized due to the virus.
Trends to watch
The pandemic has led to a rise in demand for life insurance, especially among younger consumers. Of the 61% of overall respondents in a 2021-22 ReMark survey that said they wanted to learn more about life and health insurance policies, most of those were millennials. Life insurance sales are expected to receive another boost as the economy improves and consumers grow more confident in their financial future.
Those sales may not happen in person, however. Less than a third of people buying life insurance policies since the pandemic have done so solely in person, according to industry research firm LIMRA. Most were made partly online, and partly with a financial professional, particularly among younger and middle-aged consumers.
To capture new customers and meet an increasing demand for coverage, insurers are launching various initiatives.
These include revisiting their product strategies to target low-income customers and gig economy workers who don’t have employer-provided group insurance. These groups are using websites and mobile apps more, and insurance companies are tailoring their marketing efforts to reach them digitally.
More life insurers also are promoting health and wellbeing, offering wellness initiatives and digital content that encourages customers to eat better, exercise more, quit smoking and reduce alcohol consumption.
When purchasing life insurance, it’s wise to shop around and seek advice beforehand; quotes for the same coverage can vary widely by company, and the policyholder needs to make sure the company has a strong financial strength rating.
Policies become more expensive as people age and become more susceptible to health risks. They are also more expensive for people in high-risk jobs or hobbies.
Most people don’t necessarily need permanent life insurance policies; it may be sufficient to have a policy that replaces their income until they reach retirement or their children are old enough to take care of themselves. Whole life insurance policies can be quite expensive, whereas term life policies are more reasonably priced.
When considering canceling an existing policy and buying a new one, be aware of possible early termination fees or costs to activate a new policy, as well as the potential for tax consequences or waiting periods for accessing cash reserves.
Salaried workers who receive life insurance through their employers may still want to put their own policies into place. Many employer policies don’t cover workers when they leave their jobs, and the policies often don’t provide enough coverage even if the employee stays with the company.
At the end of the day, purchasing life insurance is a personal choice, and it’s advisable to seek the advice of an accountant, attorney or financial adviser to ensure the correct coverage that can adapt to changing life circumstances.