What is Life Insurance?

Life Insurance 101: Answers to Your Top 11 Questions

Bana Jobe

For anyone looking for a quick and easy “Life insurance 101″ resource, this one’s for you! With more people signing up for first-time plans this year post COVID-19 (including supplemental Life insurance to ensure they have the right coverage amounts), we asked our team of experts about common questions they hear.

Here’s what they said about these plans and the role they play in protecting loved ones if the unexpected happens:

What is Life Insurance?

Life insurance is a type of  insurance that pays a benefit to your designated beneficiary(ies) in the event of your death. In exchange for a monthly or yearly premium, you get a plan for the listed covered amount upon that event.

Life insurance plans can be bought on your own or as a group, such as through an employer. Most employers include a set amount of Life insurance as part of their benefits plans.

What Are the Two Types of Life Insurance?

Life insurance falls into two categories: Term and Permanent.

Term Life insurance issues coverage for a set amount of time, or term. If you’re still living by the time the plan expires and don’t renew coverage, there is no payout from the policy. These plans are typically cheaper and are the most common option.

Permanent Life insurance, such as whole life, issues lifelong coverage with a cash value. That means some of what you pay in premiums can be taken back out according to the policy’s terms; however, these plans are typically more costly.

How Does Life Insurance Work?

It works a little differently than medical insurance. You still pay premiums in exchange for coverage. But unlike health plans, the benefit comes in the form of a cash payment to beneficiaries (the loved ones you select). There are no deductibles, networks, or copays with Life insurance plans.

At What Age Should I Get Life Insurance?

About half of all Americans are covered by a Life insurance plan. Many people choose to buy coverage once they have someone they want to protect, such as a spouse, child, or another dependent. This protection helps those you leave behind pay for final arrangements and other living expenses and can be used to pay off any debt you may leave behind, such as student loans.

Other people receive Life insurance coverage automatically through their job but can purchase what’s called “Supplemental or Voluntary Life” to ensure they have enough.  Employer plans are in effect only while you’re employed, although in some cases you can pay to take the coverage with you when you leave your employer.

Most experts suggest the earlier you are covered, the better. Term premiums are less costly for people in their 20s and 30s. The longest terms available are generally 10 or 20 years.

Keep in mind that the unexpected is just that – unexpected. So, it’s important to have coverage at any age.  

Is Life Insurance Right for Me?

Many people have grown more interested in Life insurance policies after witnessing the tragic impacts of COVID-19, where uninsured families who lost their primary earner couldn’t even afford to pay for funeral arrangements. According to The Hartford’s 2021 Future of Benefits Study, 21% more people chose to add Life insurance for the first time ever during their open enrollment window in the fall of 2020. About four in 10 people said they would consider buying Life insurance because of the pandemic.

Protecting family with life insurance

If you’re wondering if Life insurance is right for you, consider the impacts of an unexpected loss on your loved ones. From funeral expenses to the costs of living, the weight of these bills after the loss of part of the family income can burden survivors with added financial stress. Ensuring they are covered with Life insurance – just in case – can offer some financial protection at an extremely trying time.

What Is the Average Cost per Month?

It likely costs less than you think it will. Market research group LIMRA estimates that roughly half of people assume Life insurance is more expensive than it actually is, by three times as much. In reality, people in their 20s and 30s can often buy a plan or supplement their employer plan for as little as a cup of coffee per week.

What Are the Differences Between an Individual Policy vs. Employer-Sponsored Group Life Insurance?

You may have the option to enroll in a group plan through your job in addition to buying a personal policy on your own.

For private plans, the policyholder can choose their carrier and coverage level to find a plan that best meets their needs — but you must shop, buy, and pay for them on your own. These plans also aren’t tied to any single job, so you can keep them no matter where you work, and you can buy them at any time (not just during open enrollment).

For employer-sponsored plans, the policyholder may be more limited in their carrier and coverage options — but you get the benefit of not having to research and compare insurance carriers and plans. Your coverage ends if you change jobs unless you choose to “port” or “convert”. Group plans may be the less costly option, as most employers offer basic plans as part of their benefits package. Your employer will usually offer the option to purchase supplemental Life insurance if you’d like to increase the value of your plan.

Employer plans offer the convenience of having premiums auto-deducted from your paycheck so that you don’t have to worry about remembering to make payments. If you buy supplemental coverage through your employer, you can take advantage of their negotiated group rates. You may also have access to value-added perks through group plans, such as legal, emotional or financial guidance. You usually enroll during open enrollment.

How Much Life Insurance Do I Need?

The amount of coverage you need can vary based on your specific situation. Many experts suggest getting a single Life insurance plan or a combo of plans that offer coverage of 10 to 15 times your annual income. But that’s just a general guideline and not a hard-and-fast rule. For the best advice, check with a financial advisor or calculate your coverage needs using a coverage calculator.

How Much Coverage Do You Need?

This calculator can help you assess and determine what’s right for you in 3 simple steps.

How Often Should I Review My Coverage?

Review your Life insurance coverage at least once a year, or more often after major life events — such as changing jobs, getting married, purchasing a home or having a baby. You may find coverage gaps or options to enhance your plan. Or, you might decide to switch from a term policy to a permanent policy as your situation changes.

What Do I Need to Consider Before Buying Life Insurance?

You should think about your current spending and debts as well as your income. What would happen if your loved ones became responsible for those debts? Also factor in your daily spending and how the monthly or annual premiums of your plan may impact your budget. If you have a child, consider their living expenses, including the cost of their education. Are there expenses or costs you can reduce to make space for the Life insurance premiums if you’re not covered by an employer plan, or have added supplemental coverage?

How Does Life Insurance Pay Out?

Insurance companies know that filing a claim after a loved one’s death can be a very emotional process. Many carriers will try to make it less stressful by offering supportive resources in addition to the monetary benefit. Beneficiaries will typically need to provide a death certificate and then wait up to a few weeks for the funds to be released as long as there are no concerns regarding beneficiary status. The beneficiary can either contact the insurer through the employer or directly.

Just make sure you review (and if necessary, update) your designated beneficiaries regularly, no matter what type of policy you have. Aim to check your beneficiary list at least once a year, or whenever a major life event happens.

Making the Choice That’s Right for You

We’d all rather not think about our own passing, but Life insurance can be an important part of anyone’s long-term financial plan. And as you learned, it’s easy to enroll. Consider your loved ones and how your loss would impact their lives — not just emotionally, but financially too.

After all, a little peace of mind can go a long way.

This informational material shall not be considered financial advice. The Hartford assumes no responsibility for any financial, investment, or tax-related decisions. Those seeking resolution of specific financial, legal, tax, or business issues, questions, or concerns regarding this topic should consult their own financial, investment, tax, legal, or other business consultants, advisors, or other professionals.

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