Almost half of Americans (48%) are thinking about life insurance more than ever after the pandemic. A new survey conducted by Fabric, a company specializing in life insurance and creating a free will, along with OnePoll, also found that 50% of Americans are still not confident in their understanding of how life insurance costs are determined.
I have found many consumers, in addition to not understanding the costs, are also unsure of how various life insurance policies work. I connected with Allison Kade, millennial money expert from Fabric, to better understand the basic information consumers should know before buying a policy. Responses have been edited for clarity and length.
What types of life insurance are available to consumers?
There are many different types of life insurance, but the two most common kinds you’ll see are term life insurance and whole life insurance.
Term life insurance provides death benefits if you die during a certain period (thus the word “term”). For example, if you had a 30-year term policy, you'd be covered if you were to pass away during that 30-year span. Many people choose term life insurance to help protect their loved ones during a specific, high-need time such as when they’re raising kids. After 30 years, for example, your kids might be out of the house and your need for life insurance might be lower.
Term life insurance is usually medically underwritten, which means that the application considers your health situation when determining coverage and cost. That’s why people take physical exams to be covered, though Fabric is among a new breed of companies using algorithms to allow many applicants to skip the medical exam.
What are the pros and cons for each type of policy?
- The biggest pro of term life is affordability. Term life insurance tends to be best for parents looking to protect their families while their kids grow up. The term length you choose can vary.
- The main con of term life insurance, of course, is that it only lasts for that specific duration. After your term expires, you have the option to let your coverage lapse, apply for a new term life insurance policy or renew your existing policy. Renewing or getting a new policy will both come at a significantly higher cost because you’re older.
- The main pro of whole life insurance is that it lasts your whole life and never expires as long as you stay up to date with your monthly premium payments. This is particularly helpful for those who have people permanently dependent on them financially, such as a child with disabilities who’ll need financial support through adulthood. The other pro of whole life is that it builds a “cash value” component that you can withdraw from or borrow against over time (though that could negatively impact the death benefit for your beneficiaries.)
- The main con of whole life is that it’s far more costly and complicated. The fees for the investment or cash value component aren’t always transparent, and monthly premiums can be vastly more expensive.
Why is it most important to carry a life insurance policy?
The purpose of all life insurance is to help provide a secure financial future for your family after you’ve passed away. If you were no longer here, would your loved ones be forced to sell your home to keep up with mortgage payments on their own? Could they afford your final expenses? Would they be able to maintain their existing standard of living? How about paying down debts like student loans or credit cards? What about paying for college? Life insurance provides your beneficiaries with money that can help bridge that gap.
Many people determine how much coverage is appropriate for them based on the needs approach. This would involve estimating how much money your family would need in order to help replace your lost income and make debt payments in your absence. It could also include one-time expenses like funeral costs and ongoing expenses (debt, mortgage, rent, groceries, etc.) after you’re gone.
Life insurance generally gets more expensive as you age, which is a reason to apply sooner than later.
What should you ask before buying a policy?
Here are some questions consumers should ask before purchasing a policy:
- Can I apply online? Do I ever have to get on the phone with an agent who might try to upsell me on products I may not need?
- How much coverage should I get for myself or my family?
- Will I need to take a health exam in order to qualify for coverage?
- Do I feel like this company understands my needs?
- Is the company financially stable?
- Do they have good customer service?
Jeanette Pavini is an Emmy Award winning journalist specializing in consumer news and protection. She is the author of “The Joy of $aving: Money Lessons I Learned From My Italian-American Father & 20 Years as a Consumer Reporter.” Jeanette is a regular contributor to TheStreet. Her work includes reporting for CBS, MarketWatch, WSJ Sunday, and USA Today. Jeanette has contributed to “The Today Show” and a variety of other media outlets. You can follow her money saving tips and ways to give back on Facebook: Jeanette Pavini: The Joy of $aving Community. Find links to her social media and her book at JeanettePavini.com.