Few people expect to die at a young age. This perceived lack of risk might result in insufficient life insurance protection.
A study of widows and widowers whose partners died between the ages of 30 and 55 found that three out of four felt their spouses had inadequate life insurance coverage. Most of them had to make difficult financial adjustments, such as working longer hours, borrowing from family and friends, and moving to a smaller residence, according to the National Association of Insurance and Financial Advisors.
The consequences of having inadequate life insurance coverage can be tragic. Understanding the basics of life insurance is the first step toward owning the coverage that is most appropriate for your family’s situation. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
Premiums
The premium is the amount charged to keep a life insurance policy in force. Some insurance policies have “level” premiums, which means they can’t be increased during the life of the contract, although a higher premium may be required to renew the policy. When reviewing your life insurance options, be sure to choose a premium payment that fits into your budget.
By the way, some insurance industry experts forecast that premium growth should continue to slow this year as the rate-pricing environment weakens amid increased competition and favorable loss cost trends in the industry, according to a special report issued by the Insurance Information Institute.
Loss cost is the expense incurred from an insurer from claims. In automobile and homeowner insurance, which makes up the personal lines of insurance and accounts for about 50 percent of premiums, insurers have seen declining accident claims frequency, said Robert Hartwig, chief economist at the III.
Death BenefitThe death benefit is the amount of money that will be paid when an insured individual dies. If the surviving spouse received a $250,000 death benefit and wanted to pay off a $150,000 mortgage and set aside another $50,000 for the children’s college education, that would leave only $50,000 to pay the family’s future living expenses — not much for a household suddenly short one wage earner.BeneficiariesThe person (or persons) designated to receive the death benefit upon the insured’s death is the beneficiary. Policy owners can change beneficiaries during their lifetimes. Marriage, the birth of a child or grandchild, or the poor health or death of an existing beneficiary are some of the reasons that may trigger the need for a new beneficiary.
It’s a good idea to review your life insurance policies regularly to ensure that your coverage continues to meet your changing needs. A little planning now can go a long way toward helping secure your family’s financial future.