A life insurance policy can be the difference between financial security and disaster for families whose primary bread-winner passes away unexpectedly. A significant loss of income can leave uninsured families struggling to pay bills, including final expenses. This is particularly serious when you consider that nearly half of all Americans don’t have enough emergency savings to cover three months worth of expenses, and more than a quarter have no emergency funds at all, according to a Bankrate survey.
Still, life insurance isn’t the answer to all of life’s financial challenges, especially if you buy a policy without fully understanding how it works, or what life insurance can and can’t do for you. Here are five things your life insurance company won't always tell you about life insurance:
1. Not everyone needs life insurance.
While most people can probably benefit from having life insurance, it’s not for everyone.
For example, most financial experts agree the majority of people don’t need to buy life insurance for their kids. The purpose of life insurance is basically to: replace lost income (most kids have no income); pay final expenses (they’re likely to be manageable); or accrue cash value. You may think a whole life policy could give your child money toward his or her education once the policy matures. However, there are other ways to save for a college education that offer tax benefits a whole life policy doesn’t.
Likewise, if you’re a young worker with no dependents and no debt, you might not need life insurance right now. You could put what you’d spend on premiums into your retirement savings. Or, if you’re older with no dependents and already have a legacy set aside for your descendants, you might choose other types of investments.
However, anyone who has debt and dependents could probably benefit from having life insurance protection.
2. Online tools can help you figure out how much life insurance you really need.
Years ago, people relied on their insurance agent or company to advise them on how much life insurance to buy. The internet has made it easy to know exactly how much death benefit you really need.
Online tools and "robot advisors" have become very useful resources for helping consumers figure out how much life insurance is appropriate for their unique circumstances. A quick web search for “life insurance calculator” will yield numerous results, including calculators not provided by insurance companies or anyone in the insurance industry. For example, Life Happens - Non Profit and Nerd Wallet both offer life insurance calculators.
3. No single “best” type of policy fits everyone.
Life insurance comes in three basic types: term (the cheapest kind, it has an end date), whole (costs more, has no end date, accrues cash value and premiums are fixed) and universal (also permanent and accrues, but with premiums that can vary). Insurance agents are happy to sell you any kind of policy, but of course their commission rewards are greatest when they can sell you more expensive policies.
Each type of life insurance has advantages and drawbacks for different people, depending on a lot of factors like your age, health, why you need life insurance, and how long you need it. To ensure you’re getting the best value, understand the policy and how it works for you before you buy.
4. Your term life policy doesn’t (always) have to end.
Term life is cheapest because it has a definitive end date. Term life aims to provide insurance for when you most need it, such as until your kids finish college. However, most term policies sold today are convertible — at the end of the initial term you can either continue with a new term (at a higher rate), or convert the term policy to whole life (also at a higher rate).
5. You may be able to sell your term policy for cash.
If you’re a senior and you own a convertible term policy that will soon expire, you may think your choices are limited simply because there was no "cash value" built up in the policy over the years. Your life insurance company is unlikely to tell you otherwise and, in fact, many insurers prevent their agents from informing you of any alternatives to either letting the policy expire or converting it to a more expensive new policy. But the truth is that you may be able to unlock the value in your policy by selling it to outside investors for a lump-sum cash payment.
According to the Life Insurance Settlement Association, in the right situation, a policyholder can turn a term life policy into cash in their hands, provided that it is able to be converted to a new policy and has a death benefit of at least $100,000. By selling your life insurance policy, you can avoid higher premium costs and generate some cash to help fund your retirement. Call (888) 521-8223 or visit www.lisa.org to learn more.