Why should I buy life insurance?

Life insurance is primarily a tool to provide financial protection for your loved ones after you are gone. People with dependents, large debts, or specific financial goals often purchase a policy to ensure their family can continue to meet financial obligations in the event of the policyholder's death. 

Key reasons to buy life insurance

To replace lost income
If your household relies on your income, a life insurance payout can act as a financial safety net for your family. This money can be used to cover daily expenses, maintain their standard of living, and fund long-term needs. 

To pay for final expenses
Funeral, burial, and cremation costs can be a significant financial burden for grieving family members. A smaller, specific type of policy called final expense or burial insurance is often used to ensure these costs are covered. 

To pay off outstanding debts
Many debts, such as mortgages, car loans, and credit card balances, do not disappear when you die. A life insurance death benefit can prevent these financial obligations from falling to your spouse or other co-signers. 

To fund future expenses
A policy can ensure that major future costs are covered. This can include a child's college tuition, childcare expenses, or continued care for a dependent with special needs. 

For long-term financial planning
Certain types of permanent life insurance build cash value over time, which can serve as a financial resource during your lifetime. You can borrow against this cash value to cover emergencies, supplement retirement income, or pay for other major life events. 

To leave an inheritance
Even if you don't have other significant assets, a life insurance policy can be used to create an inheritance to pass on to your heirs. In most cases, the death benefit is income-tax-free for your beneficiaries. 

For tax advantages
The death benefit paid to beneficiaries is generally not subject to federal income tax. Additionally, for those with a large estate, life insurance can be used to provide heirs with cash to pay estate taxes, preventing them from having to liquidate other assets. 

To protect a business
For small business owners, a life insurance policy can provide operating funds to ensure the business can continue after the owner's death or be used to fund a buy-sell agreement with partners.

What factors should I consider when evaluating insurance policies?

Who is dependent on your income? Consider anyone who would face financial hardship in your absence, such as a spouse, children, or aging parents.

• How much coverage do you need? This depends on your income, outstanding debts, and the future needs of your beneficiaries.

• Term or permanent policy? Term life insurance is a more affordable option that provides coverage for a set period, while permanent life insurance offers lifelong coverage and builds cash value.

• Buy younger and healthier: The cost of life insurance is primarily determined by age and health. The younger and healthier you are when you buy a policy, the lower your premiums will be.

What is mortgage protection insurance?

Mortgage protection insurance (MPI), also known as mortgage life insurance, is a type of policy that pays off the remaining balance of your mortgage in the event of your death. It can sometimes include coverage for critical illness or disability. 

How mortgage protection insurance works

• Payout to the lender: The main difference between MPI and a traditional life insurance policy is that the beneficiary is your mortgage lender, not your family. If you die, the payout goes directly to the lender to settle the mortgage, not to your loved ones.

• Decreasing coverage: MPI is a decreasing-term policy. This means that as you pay down your mortgage, the insurance payout decreases accordingly. However, your monthly premiums typically remain the same.

• No medical exam: Many MPI policies offer guaranteed acceptance and do not require a medical exam or an extensive health questionnaire. This can make them an option for people with health issues who may not qualify for a traditional term life policy.

How does Mortgage Protection Work?

• Payout to the lender: The main difference between MPI and a traditional life insurance policy is that the beneficiary is your mortgage lender, not your family. If you die, the payout goes directly to the lender to settle the mortgage, not to your loved ones.

• Decreasing coverage: MPI is a decreasing-term policy. This means that as you pay down your mortgage, the insurance payout decreases accordingly. However, your monthly premiums typically remain the same.

• No medical exam: Many MPI policies offer guaranteed acceptance and do not require a medical exam or extensive health questionnaire. This can make them an option for people with health issues who may not qualify for a traditional term life policy.

Is Mortgage Protection Insurance right for me?

MPI is not required by law or lenders, unlike private mortgage insurance (PMI), which protects lenders if you have a down payment of less than 20%. 

You may want to consider MPI if you fit one of these specific situations:

• You can't qualify for traditional life insurance: If you have a serious medical condition that makes standard life insurance too expensive or inaccessible, MPI can be a guaranteed way to cover your mortgage.

• Your top priority is the mortgage: If your only goal is to ensure your family can stay in the house, MPI provides a straightforward way to pay off the mortgage with no risk of the money being used for other expenses. 

What is Final Expense Insurance?

Final expense insurance, also known as burial or funeral insurance, is a type of whole life insurance policy with a smaller death benefit, specifically designed to cover end-of-life expenses

. These policies are generally easier to qualify for than traditional life insurance, often without a medical exam, which makes them a popular choice for seniors and those with health issues. 

How final expense insurance works

• Purpose: The policy's primary purpose is to pay for funeral and burial costs, which can range from $7,000 to $10,000 or more, depending on the service. The death benefit can also be used to cover other outstanding expenses, such as medical bills, credit card debt, and legal fees.

• Death benefit: Payouts are much smaller than with traditional life insurance, typically ranging from $2,000 to $50,000.

• Fixed premiums: The premium payments are locked in and will not increase as long as the policy remains active.

• Guaranteed coverage: It's a type of whole life insurance, so it provides coverage for your entire life as long as you pay the premiums. It will not expire after a set term.

• Simplified underwriting: The application process is generally simpler and faster than for standard life insurance. Many policies only require you to answer a few health questions rather than undergo a full medical exam.

• Cash value: Like other whole life policies, final expense insurance builds cash value over time, which you can borrow against if needed.

Who should buy final expense insurance?

• Seniors and individuals with health issues: If you are older or have a pre-existing medical condition that makes it difficult or too expensive to qualify for a traditional life insurance policy, final expense insurance can be an accessible alternative.

• Those without sufficient savings: If you don't have enough money in savings to cover end-of-life costs, this type of policy can prevent your family from being burdened with large, unexpected expenses during a time of grief.

• People with limited needs: If your primary concern is covering funeral costs rather than replacing lost income for your family, the smaller death benefit of a final expense policy is often sufficient. 

What’s the difference between term and whole life insurance?

Term life insurance provides temporary coverage for a specified period, whereas whole life insurance is a permanent policy that lasts for the duration of your life. The fundamental differences lie in their duration, cost, complexity, and cash value component.

Which one is right for you?

Choosing between term and whole life depends on your financial goals, budget, and coverage needs. 

Choose term life insurance if:

• You need coverage for a specific period of time, such as until your children are financially independent or your mortgage is paid off.

• You want the most affordable coverage to maximize the death benefit for your budget.

• You are young and healthy and want to lock in a low rate for your most expensive years. 

Choose whole life insurance if:

• You want lifelong coverage and can afford the higher premiums.

• You want your policy to accumulate cash value that you can access for future needs.

• You need to provide for a lifelong dependent, such as a child with a permanent disability.

What are critical and chronic care insurance?

Critical and chronic illness coverage are both supplemental insurance plans that provide a cash benefit for specific health events. They can be purchased as standalone policies or added to a life insurance policy as an accelerated death benefit "rider". The key difference lies in what triggers the benefit payout. 

Critical illness insurance

Critical illness insurance pays a lump sum if you are diagnosed with a specific serious medical condition covered by the policy. 

• Trigger: A diagnosis of a major illness listed in your policy, such as:

  • Heart attack

  • Stroke

  • Certain types of cancer

  • Organ transplants

  • Kidney failure

• Payout: A tax-free lump sum is paid directly to you upon diagnosis. The amount is not tied to your medical bills.

• Usage: The cash can be used for any purpose, including medical costs not covered by your health insurance, lost income, transportation to treatment, or other daily living expenses.

• Suitability: This coverage is useful for people with a family history of specific illnesses or those with high-deductible health plans who want to protect their savings from a major financial shock. 

Chronic illness insurance

• Chronic illness insurance provides periodic payments or a lump sum if you become permanently unable to perform a certain number of Activities of Daily Living (ADLs). 

• Trigger: The inability to perform at least two of the six ADLs, which include bathing, dressing, eating, continence, toileting, and transferring. The benefit can also be triggered by severe cognitive impairment, such as dementia.

• Payout: A portion of your policy's death benefit is paid to you while you are still alive. Depending on the policy, this could be a single lump sum or paid out over a period of time.

• Usage: The benefits are designed to cover expenses related to long-term care, such as in-home care or nursing home stays. However, because the payment often comes directly to you, it can also be used for other financial needs.

• Suitability: This coverage is most valuable for those concerned about needing long-term care later in life. It is often considered an alternative to or a supplement for traditional long-term care insurance.

What are Living Benefits?

Living benefits are features of a life insurance policy that allow you to access a portion of your death benefit while you are still alive. This money can provide financial relief during serious health events, helping to cover medical costs, lost income, and other related expenses. 

Living benefits are typically available in two main forms:

• As optional riders (add-ons) to your life insurance policy.

• As the cash value in a permanent life insurance policy is a built-in savings component. 

Common living benefit riders

Living benefit riders allow you to accelerate (access early) a portion of your death benefit under certain circumstances, such as: 

• Terminal illness: Pays a portion of your death benefit if you are diagnosed with a terminal illness with a life expectancy of 24 months or less.

• Chronic illness: Pays if you are unable to perform a certain number of Activities of Daily Living (ADLs), such as bathing, dressing, or eating.

• Critical illness: Provides a lump-sum payment if you are diagnosed with a specific critical condition, such as a heart attack, stroke, or cancer.

• Waiver of premium: Waives your premium payments if you become totally disabled and unable to work. 

  Cash value as a living benefit

  Permanent life insurance policies, such as whole life or universal life, accumulate a cash value over time, which can also be used as a living benefit. You can access this cash value in several ways: 

• Loans: Borrow against your cash value at a low interest rate without a credit check. Any unpaid loan balance plus interest is deducted from the death benefit when you die.

• Withdrawals: Withdraw a portion of the cash value. Withdrawals are generally tax-free up to the amount you have paid in premiums, but they reduce the policy's death benefit.

• Premium payments: Use the accumulated cash value to pay for your policy's premiums. 

What to take into consideration when thinking about a Living Benefits Rider.

While living benefits offer financial flexibility, it's important to understand their implications: 

• Reduced death benefit: Any money you receive from an accelerated benefit rider or an unpaid cash value loan will be subtracted from the final payout to your beneficiaries.

• Additional cost: Many living benefit riders increase the premium of your policy. For permanent life insurance, the cash value component also significantly increases its cost compared to a term policy.

• Eligibility and restrictions: Each benefit has specific qualifications and limitations, such as a waiting period or specific diagnosis requirements.

• Tax implications: While the benefits are often tax-free, it is wise to consult a financial advisor for your specific situation. Accessing cash value can have tax implications, especially if you withdraw more than you paid in premiums.