“Million dollar life insurance on my flesh…”—lyrics left by rapper Nipsey Hussle as a crude reminder that none of us can escape the fate of death, so we all better be prepared.
But despite his best efforts to keep us “woke,” a 2016 insurance study showed that nearly 50% of Millennials surveyed did not own a life insurance policy. A staggering statistic, but not surprising as this generation bears the brunt of a $1.5 trillion dollar loan debt, leaving little room for additional expenses.
Though it’s questionable whether $1 Million is enough to cover all of the late rapper’s financial obligations, one thing is for certain: he wasn’t depending on a GoFundMe® account.
Neither should you… Here’s what you need to know about life insurance.
What is Life Insurance?
A life insurance policy is a contractual agreement between an insurance company and a policy holder. In this agreement, the insurance company agrees to pay the insured’s beneficiaries a lump-sum of money (or death benefit) upon their death in exchange for monthly or yearly premium payments.
This death benefit is used to cover burial and other final expenses of the policy owner.
Additionally, a death benefit covers the subsequent income loss of the insured that would be used to care for their dependants and estate.
Types of Coverage
There are two primary types of coverage to choose from when considering purchasing a life insurance policy.
Term Life Insurance
Term life insurance is a policy that covers you for a set term period. This term can range anywhere from 5 years to 40 years. If the insured dies within their term, the death benefit will be paid out to their beneficiaries.
Typically, policy holders choose this insurance type to cover the period of time—or term—in which they are working to become self insured.
Being self insured simply means that you have the cash and liquid assets to meet the financial needs of your dependants and estate upon your death without needing an insurance policy.
Permanent Life Insurance
Permanent life insurance is an umbrella term that describes policies that cover you for the duration of your life. These policies include, but aren’t limited to:
- Universal life insurance
- Whole life Insurance
- Variable life insurance
Unlike a term policy, permanent life insurance policies build cash over the life of the policy.
As a result, this coverage type is often seen as an investment tool—enabling the insured to invest the cash accumulated from their premium payments.
Why you Need Coverage Outside of Your Employer
Though most employers offer term life insurance policies up to as much as an employee’s annual salary, it’s typically not enough. According to life insurance expert, Ebony Ruffin, it’s important to get additional coverage.
The reality is that most people won’t stay with the same company for their entire career. In that transition, it’s important to know that the coverage you had with your previous employer won’t go with you when you leave.
“When you leave the company, that life insurance coverage does not go with you for free. So, if you want to maintain that coverage, it will cost you and it will probably cost you more than the market rate for that term coverage,” Ruffin shares.
Factors that Impact Life Insurance Premiums
There are several important factors that impact the rate that you will pay for life insurance, regardless of the type of coverage you choose. Here are five factors that you should be aware of.
- Age. It’s important to note that the longer you wait to get coverage, the more it will cost you. Obviously, as you age, there is a greater chance for the insurance company to have to make a payout on your policy. As a result, you can expect to pay a higher premium the older you get.
- Gender. If you’re a male, you can expect to pay more for your life insurance premium. Statistics show that women tend to outlive men by five years. As a result, women enjoy lower premiums over their policy’s duration.
- Health. Your health history plays a significant role in your cost for coverage. Those with high risk health indicators, such as heart disease or cancer, can expect to pay more as a result. Most insurance companies require a physical exam as a part of the underwriting process to determine your premium. Though “no exam” policies exist, you can expect to pay substantially more for them.
- Family Health History. Your family health history is a great indicator of your future health. Insurance companies take this information into account when evaluating your risk level and, ultimately, your rate. Expect to answer questions concerning health conditions that may have impacted your immediate family as your complete your application for coverage.
- Smoking. Getting a lower rate on insurance coverage may be incentive enough to kick the habit. Because smokers are at higher risk for other medical conditions, they can expect to pay more for coverage.
What to Consider When Choosing a Policy
Choosing the right life insurance policy is largely dependent on your current financial situation and what your overall financial goals are. Sa El of Simply Insurance encourages those in the market to consider factors such as your budget, future life events, and your financial risk aversion.
“Knowing how much you can afford on a monthly basis is going to be very important. You need to figure out what you can comfortably afford for at least 20 to 30 years,“ Sa El states.
In many cases, the expense of a permanent life policy could very well be too much for most people to carry for the duration of their life.
According to Policy Genius, 45% of whole life policies are abandoned within the first ten years due to the policy holder’s inability to afford the premium each year.
You should also keep in mind that life changes can impact your future policy needs. This may mean that you need to increase or decrease your coverage. Sa notes that it’s much easier and affordable to increase term coverage than it is to acquire additional whole life coverage later on due to age.
Finally, are you ok with losing money? When choosing to use term life insurance, there is an inherent chance that you will outlive your policy term. In this case, you will lose the premiums that you paid into the policy over its term—which could equate to thousands of dollars.
Securing your Coverage
Having a $1 Million dollar life insurance policy may not be a necessity for you. The amount of coverage that you acquire all depends on the financial obligations that will have to be taken care of if you were to pass away.
Don’t take your health or current financial situation for granted. Contact a trusted life insurance agent near you to discuss your options and get insured.