Questions About Life Insurance
Have questions about life insurance? Have you ever thought about the financial obligations your loved ones may face due to your sudden death? Will this unfortunate event leave those you love in a financial bind?
Recent statistics from the Forbes Advisor survey show that approximately 52% of Americans have life insurance coverage. Two-thirds of these individuals have employer-based life insurance coverage. The respondents viewed taking up life insurance coverage as an effective way of cushioning their loved ones from debts. Others hoped the death benefit would pass down generational wealth.
Despite the low uptake of life insurance coverage, up to 44% of American households encounter significant financial constraints within six months after their breadwinner loses their source of income. What can we deduce about getting a life insurance policy today?
For starters, general misconceptions about life insurance hinder many from taking the policy. Did you know many people assume life insurance is expensive, requires a mandatory medical exam, or pays only for funeral and burial costs? Others believe they are too young for life insurance, and the policy excludes stay-at-home parents.
In this quick guide, we debunk these myths by answering the top questions Gen Z and millennials ask about life insurance.
Let’s get to it!
Life Insurance Questions GenZ & Millennials Are Asking
What Does Life Insurance Do?
How Does Life Insurance Work?
Life insurance is a legally binding contract between the policyholder (the insured) and the insurance company that pays out if the policyholder dies. The death benefit goes to a named beneficiary, usually a living family member.
Insurance companies profit from life insurance policies by charging, consolidating, and investing premiums from a pool of policyholders. Also, they get to retain premiums from canceled or expired policies. The individual premiums are much lower than what the beneficiary receives as a death benefit.
What Type of Life Insurance Policies Are There?
Term Policies
Permanent Policies
Variable Universal Life
Whole Life
Universal Life
Is Life Insurance Expensive?
It depends. An insurance company can offer diverse life insurance policies with varying levels of protection to its clients. In turn, the premiums on life insurance policies vary depending on the benefits stipulated to suit your needs.
A basic life insurance policy may offer optional benefits like total and permanent disability, terminal illness, accidental death, and children’s cover. Each additional death benefit pushes up the final premium rate for your life insurance coverage.
Other factors affecting the life insurance premium rates include age, gender, smoking, current health status, lifestyle, family medical history, and driving record.
Do I Need Life Insurance If I’m Young?
Yes. Acquire a life insurance policy as soon as possible. As a young and fit person, you have the advantage of good health and agility to generate more income. Also, you may have fewer financial obligations. Hence, you can contribute more premium during this peak period of your career and life.
Fresh graduates with life insurance will cushion their loved ones from paying off private student loans. Likewise, a young single person who postpones starting a family to take life insurance guarantees a reliable income for younger siblings, parents, and other beneficiaries.
And young couples with life insurance have a safety net to provide ample funds for their growing family should the breadwinner pass away unexpectedly.
How Much Life Insurance Do I Need?
You can have life insurance coverage as high as you want. The ideal amount depends on your priorities, current financial status, and the probable financial constraints your beneficiaries will face should you pass away. Insurers have life insurance calculators to help you compare different scenarios and arrive at an estimated coverage ideal for your needs.
Typical metrics in the life insurance calculator include: –
- You and your spouse’s current annual income
- You and your spouse’s current and retirement ages
- Expected investment return
- Anticipated inflation rate
- Immediate cash needs
- Long-term cash needs
- Available resources
- The ages of children under 18 years
Is Life Insurance Taxable?
Ideally, no. Life insurance death benefits are paid tax-free. Still, the following instances may attract taxes on the life insurance payout:
- A beneficiary is receiving interest accrued on the life insurance death benefit. The taxes do not arise in instances of a lumpsum payout.
- Where there is no living or named beneficiary, the death benefit can go into a taxable estate.
- As per the Goodman Rule, a life insurance policy involving three different people may attract gift tax for death benefits exceeding the federal gift tax exemption limits.
- Premiums for employer-paid group life insurance benefits exceeding $50,000 are subject to income taxes.
- Loans taken against the cash value of whole life insurance attract income taxes.
- Surrender proceeds exceeding the cumulative premiums are subject to income taxes.
Do I Need Life Insurance If I’m Not Married?
Yes. Both married and single people have financial burdens that can overwhelm dependents in the event of an unforeseen death. Think of a private student loan, sole proprietor business loan, mortgage, and credit card debt.
- A single person can use a life insurance policy for any of the following reasons:
- Pay off your college loans
- Offset any remaining mortgage payments at the time of death
- Continue supporting a parent, grandparent, or any other family member after death
- Keep a small business running after the sudden death of you or your financial partner
- Leave a legacy by donating to a charitable organization or supporting a worthy cause when you die
What Reasons Do People Buy Life Insurance?
We all need life insurance coverage. Still, not everyone has one. Then, if you are undecided, here are the ten most common reasons why people buy life insurance policies you should consider:
- Save for your retirement while at the prime of your career and health
- Provide financial security by replacing a lost income in the event of a sudden death or incapacitation.
- Supplement savings for college education
- Create an inheritance for loved ones
- Pay off huge mortgages, credit card bills, and personal loans
- Offset burial expenses and lift the burden off the surviving beneficiaries.
- Build up cash value for emergencies.
- Use it as an investment and diversify your risk
- Cushion your business from unexpected financial obligations when a partner dies
- Cover estate and inheritance taxes
Do I Need a Medical Exam To Buy Life Insurance?
Yes. You can get a life insurance policy without disclosing any facts about your health. Only these policies come at a hefty price.
Indeed, an insurance company asks for urine samples, blood tests, and specific physical checkups to assess the person’s health. The health score provides input when determining the policy class and premium rates. Without these facts about your health, the insurer assumes more risk. In turn, the elevated risk results in higher premium rates for simplified issue and guaranteed issue insurance policies.
Then, do you wish to get a life insurance policy without answering any questions about your health or taking a mandatory blood test or physical exam? We recommend going for the simplified issue or guaranteed issue insurance coverage. These are no-medical-exam life insurance policies accessible without taking a medical exam but at a more expensive rate than regular life insurance policies.
