If you are considering getting life insurance, you have begun making one of the most important decisions of your life. Your life insurance policy will determine the future of your dependents and heirs when you pass away. Ensuring their future is secure is especially important and is one way to keep your legacy going.
What is life insurance?
Life insurance, just like other insurance you may purchase, is a legally binding contract between you and the insurance company you choose to take a policy with. The purpose of this contract is that the insurer pays out a certain sum of money to the beneficiaries named by the insured person when they die. To get a life insurance payout to your beneficiaries, you will have to pay premiums in the form of monthly payments during your lifetime.
Types of life insurance
There are a few different types of life insurance that are worth knowing about to help you decide which policy might be the best for you.
Long-term care insurance
Here is an explanation of long-term care insurance as well as what the coverage provides.
What is long-term care insurance?
Long-term care (LTC) insurance is a type of coverage that provides care for those in a nursing home or those needing healthcare at home. It also provides adult daycare or personal care for people that are 65 or older that need constant supervision. This is most likely because they have a chronic condition or a disability that keeps them from taking care of themselves. Many individuals use long-term care insurance because it offers more flexibility and better options compared to other programs like Medicaid.
What is covered by LTC insurance?
When you have LTC insurance, you can use the money to help you with everyday tasks that you might no longer be able to do. This includes bathing, dressing, preparing food, and other daily tasks that might be a challenge for you.
Most insurance plans allow you to use the money in a variety of different settings, including:
- Your home
- Adult daycare or service centers
- Respite care
- Hospice care
- Facilities like assisted living, alternate care, or residential care
- Nursing homes
- Special care facilities for certain conditions like Alzheimer’s
You can also have a nurse or a person come to the home. If you choose to have someone come to the home rather than going to a care facility, the person in the home can help you with all personal care tasks like bathing. You can also request skilled nursing care. If you need therapy, the plan usually covers physical, rehabilitation, occupational, and speech therapy.
Medicare
If you have Medicare, you might be wondering if it covers life insurance or if you can add it to your Medicare plan. Medicare is a federal program that gives medical insurance and care to people that are above a certain age or that have certain health conditions or disabilities.
It does not cover the costs of life insurance premiums. So, if you want to have life insurance, you will need to pay the premiums with another form of income. Medicare does not offer any kind of benefit payments to your relatives when you pass away.
Differences in Medicare Part A and B
Medicare Part A covers different things than Part B. When you have part A, you can expect the following to be covered:
- Inpatient stays at the hospital
- Hospice care
- Home healthcare
- Care in a nursing facility
Medicare Part B covers the following things:
- Doctor office visits
- Home health care
- Preventative care in certain cases
- Outpatient care and other services related to outpatient procedures
Medicare Supplemental (Medigap) Plan
A Medicare Supplemental Plan is sold by private companies. It’s meant to help you pay some of the costs that the original Medicare does not pay, including life insurance. You can also get plans to help you cover a lot like copayments, deductibles, and coinsurance.
To be eligible for a Medigap plan, you have to have Medicare Part A and Part B already. It only covers one person, so you will need to get separate plans with separate life insurance policies for both you and your spouse if you choose to get a Medigap plan.
Annuities
An annuity is another type of contract sold by insurance companies that offers a fixed income to someone. Most of the people who use annuities are retirees as it helps people to be able to live comfortably without worrying about using too much of their savings or not having enough savings. When you have annuities, you can receive income and a cash flow even when you are retired or unable to make money.
Immediate
Immediate annuities begin giving you payouts and money as soon as you deposit a lump sum. The sum will depend on the policy you have and the company you choose to work with for insurance annuities. Immediate annuities are usually purchased by those that have a large sum of money to deposit. This includes those that have a settlement or have won the lottery.
Deferred
Deferred annuities are a more common type of annuity since not everyone will have a huge lump sum that they can put into the contract. These contracts do not begin paying out until they have made an initial investment that has reached a certain amount. The person using this contract will also state what age they want to begin getting the payments from the insurance company.
Fixed
Whether you have immediate or deferred annuities, you will need to choose whether you want them to be structured as fixed or variable. Fixed annuities have regular payments. You will get a payment on the same schedule every month or whenever you choose to get payments.
Variable
Variable works a little differently. You will get large payments in the future if your investment does well, but if the annuity does not do well, you will have much smaller payments. This doesn’t work for everyone because smaller payments mean you will not have a stable cash flow. This means you will be stuck using your savings more and more. Without receiving regular annuities to help you supplement your income, you will have to rely on your savings, which might not be possible for all your living expenses.
Guaranteed investment contract (GIC)
A guaranteed investment contract might have been a term you have heard when getting a 401(k). If you are not sure what this is or how it’s used, here is more information on how you can use it.
What is a guaranteed investment contract?
A GIC works similarly to a certificate of deposit. They are low-risk investments, so many people choose to get one since they don’t have much to lose. Since they are low-risk, though, they also have a lower rate of return. When you have a GIC, the investor will pay a deposit of money for a certain period. The insurer will then pay the investor a certain interest rate.
A GIC is added to your 401(k), so you will first need to work with your employer to set up a 401(k) plan. Most employers will ask if you want to add a GIC; they might also call it a funding agreement.
Factors to consider when choosing life insurance
Since there are many different types of life insurance plans and many companies that offer these plans, you might be unsure of how to choose one.
Here are some important factors to consider before choosing a life insurance plan:
- What is your current financial situation? To determine the coverage you need, you will need to determine what assets and liabilities you have. You also need to factor in your income and the monthly expenses you have.
- When is the best time to get life insurance? It’s best to get life insurance when you are healthy and young before you start getting older and potentially having health issues. When you take out a plan when you’re young, you can pay lower annual premium rates.
- How much coverage do you need? Not everyone will need the same coverage. Consider your unique financial situation and your family’s needs. You need to ensure that whatever plan you are taking is securing your family’s future.
- What influences life insurance rates? Your marital status, age, and current health situation are some of the factors that affect life insurance rates.
Advantages of life insurance
The main benefit of life insurance is that it protects your family financially when you experience a tragedy. Although there are many benefits to life insurance, many Americans choose to go without it, leaving their families and loved ones struggling during the hardest times of their lives.
Can be given as payouts
One of the main advantages is that life insurance payouts are not taxed. So, if you die while your life insurance plan is in effect, your loved ones will receive a lump sum of money that is not income for tax purposes. When it’s time to file tax returns, your family does not have to report the life insurance payout as part of their taxable income.
Having life insurance leaves your family in a better situation once you pass away. They will be able to receive the same money you currently give them for living expenses and other expenses. Make sure you take out life insurance that is equal to around 10 times your annual income so that the policy will cover all the expenses of your loved ones.
Your life insurance also covers the expenses that are related to your funeral. These costs can be high. Without life insurance, your loved ones are stuck taking out loans or paying these costs out of their pockets.
Endorsements in terminal illness
Life insurance can also give you endorsements for when you are experiencing a terminal illness. This depends on your policy, but there are many policies where you can begin getting money if you are diagnosed with a terminal illness and are only given a certain amount of time to live. Your loved ones can begin withdrawing some of the money from your life insurance to pay for your healthcare or other expenses you might have because you can no longer work.
Supplement for retirement savings
Life insurance is also a great supplement that goes along with your retirement savings. Some plans do more than just provide death benefits. They also allow you to collect cash value, and then you can use this money for large expenses like down payments on a home or buying a car. Keep in mind this is meant to go along with your 401(k); it should not replace it completely.
Disadvantages of life insurance
There are not as many disadvantages to life insurance as there are advantages. One of the main disadvantages is that it can be very expensive if you are older or if you already have many health conditions. This is because life insurance costs are determined by your medical history, medical profile, and age.
When you are purchasing whole life insurance, you need to make sure you are able to keep up with the monthly payments; otherwise, you have to pay surrender fees in the event you can no longer afford it. Whole life insurance really only benefits you if you can pay the large premiums for ten years or longer.
Many people like the idea of the cash value of life insurance, but it doesn’t benefit everyone. However, the rate of return is lower with the cash value of life insurance than it is if you had invested the money with a Roth IRA or a 401(k). Most financial experts advise that you first invest the money in your 401(k) and other financial accounts with lower premiums before you invest your money in cash value for a life insurance plan.
Common uses for life insurance
So why do some people use life insurance? Everyone can use their plans a little differently, but there are some common uses that everyone can benefit from when taking out life insurance.
- Paying off debt and replacing income. If you pass away and you have dependents, they can use the life insurance to help them continue living the way they were before when you provided them income. They can also use the money to pay off debts you may have had.
- Paying taxes. Before your dependents or heirs can receive their inheritance from you, they may need to pay estate or state taxes. You can use life insurance to help you pay some of these costs.
- Paying medical bills. Your loved ones might be left with high costs from your medical care, burial, or funeral. They can use your life insurance plan to help them offset some of these costs to make their lives a little easier after you have passed away.
- Inheritance. Some people only buy life insurance so that their loved ones are left with an inheritance after they go. Just make sure you partner with a lawyer to ensure your beneficiary is named so that the right person will receive the money once you have passed away. It’s also good to have the terms of your life insurance written out in a will so that everyone knows who the money is going to.
How to choose the right type of life insurance
Here are the main tips to follow when trying to find the right type of life insurance:
- Consider the main reasons you want it, and then pick a plan accordingly.
- Calculate the coverage you need by taking your annual expenses and then multiplying them by the number of years you think your family might need to replace income.
- Determine the premium amount and then find a policy that can offer a good deal.
- Make sure to use a reputable insurance provider. Read reviews of different companies and only choose one with plenty of reviews and clients.
- Make sure you give the insurance providers all the facts. Some people try to hide the fact they might have an illness or disability. This can void your plan and cause your heirs to lose all the money you have invested.
- Get a comprehensive plan with things like an accidental death benefit rider, a permanent disability rider, and a terminal illness rider.
- Change your life insurance plan as needed if your income or situation changes.
Types of life insurance: Everything you need to know before taking out a plan
Choosing a life insurance plan can feel overwhelming if you don’t have all the facts. With so many providers and plans, it is a complex decision that really matters. The good thing is that you can take your time to find a plan that’s right for you without rushing. Once you’ve reviewed this guide and talked