Life insurance is simply a contract between an insurer (the insurance company) and a policyholder (that’s you). The purpose of the contract is to furnish financial protection to the loved ones who survive when you pass away. The survivors are called beneficiaries because they benefit from the death benefit payout.
The policyholder (you) makes payments, typically once a year, or once a quarter, or once a month. These are called premiums. In exchange for the premiums, the insurer will pay a lump-sum amount to your beneficiaries in the event of your death.
The cost of premiums and the amount of the payout are mutually agreed upon before the policy begins. Premium costs depend on factors such as the policyholder’s age, medical history, occupational hazards, and personal risk. As long as premiums are paid as scheduled, the insurer is obligated to pay the agreed death benefit if and when death occurs.
Some life insurance policies continue only for a predetermined number of years. That’s called the “term” of the insurance, so this insurance type is called term life insurance.
The most common policy term is a 20-year period. Once the 20 years is up, the obligation of both the insurer and the policyholder is finished. It can usually be renewed, however, but the premiums for the new term will be higher, sometimes remarkably higher.
Term life insurance is pretty elementary. Other types of life insurance are a bit more complex. Instead of term insurance, you could consider getting:
- Whole life insurance which provides coverage for your entire life (not just a certain number of years.) In addition to a death benefit, it contains a savings component. There is a consistent premium that remains the same throughout the life of this longterm life insurance policy.
- Universal life insurance, like whole life, also accumulates cash value. The premiums are more flexible than whole life, since you may be able to adjust or even skip premiums that you pay each year, depending on how well your policy is growing.
Often policyholders have the ability to borrow against their policy’s value for these two types of life insurance. Ask an insurance agent about other life insurance policy variations they offer for whole life and universal policies.
Many insurance companies allow policyholders to customize a policy for specific needs, by adding what’s called a “rider.”
Some common ones are an accidental death benefit rider, additional coverage if the insured’s death is accidental, or a waiver of premium rider where premiums are waived if the policyholder becomes disabled and unable to work. The disability income rider pays a monthly income in the event the policyholder becomes disabled.
How do I know if I need life insurance?
Tim Maurer, author of Simple Money: A No-Nonsense Guide to Personal Finance, describes life insurance as one of the pillars of personal finance and says it’s vital for most households. He also recognizes there’s a great deal of confusion, and even skepticism, regarding life insurance.
If you have a spouse or dependent children, or someone else depending on you for finances, life insurance is practically a no-brainer. Those you are at a place where you’re independent financially, perhaps retired, without anyone who would be left in a financial bind if you perish, may want to forego life insurance.
One of the side benefits of life insurance is using it as a financial tool. But prior to getting more life insurance containing an investment component, most financial advisors would suggest that you first build up emergency cash reserves, pay off debt, and max out your 401k or Roth IRAs.
How much life insurance do I need?
Because of their prior experience, an insurance agent is likely to be the best resource to help you determine what fits your situation. Here are just some of the questions that enter into this decision:
- How much annual income needs to replaced if something happened to you?
- How many years would your family need to replace your income (and services you perform if they would have to hire someone instead)?
- How much debt do you have? Mortgage, car payments, etc.
- Do you want to provide for your children’s education? If so, how much?
- What’s the probable cost of your funeral?
Even after deciding what life insurance fits your needs, you’ll be wise to re-evaluate at regular intervals. Births, adoptions, marriage, divorce, and large purchases such as a house, could alter the type of coverage you need.
How much will it cost to get life insurance?
If you skip all the additional features, you’ll find there are low premiums for a simple term policy. Healthy, non-smokers in their 20’s or 30’s might pay from under $500 to $600 per year for a 20-year term policy with a one million dollar death benefit.
It could be 10 to 20 times as much for a variable or whole life insurance policy with the same death benefit. Smokers pay a lot more, as do people with significant health problems. Or they might even be declined for coverage.
But there are even greater potential qualification issues looming on the horizon. Get ready for technology’s influence on insurance!
How is technology influencing life insurance?
Technology is the application of scientific knowledge for practical purposes. The life insurance industry is changing and some say it’s due for a major disruption in the near future.
The website Financial Times (FT.com) tells us that “insurtech” start-ups are aiming to challenge the big players in insurance. Their aim is to disrupt insurance in the same way that Uber, Airbnb, Netflix, and Spotify have caused upheaval in other industries.
Life insurance technology trends and the way insurance companies use that information is fascinating and appealing to some, but disturbing to others. One recent change is the growing practice of collecting personal data regarding lifestyle, fitness, and health.
A significant technology trend is “wearable tech.” Wearable electronic devices and insurance disruption appear to be working hand-in-hand. For close tracking of health and fitness, wearable technology involves carrying electronic wristbands and smartwatches close to the body. These and other devices capture a variety of data about driving, eating, activity levels, exercise habits, and other behavior.
The data is often shared via computers or smartphones to third parties like insurance companies. Not surprisingly, the idea of wearable devices for healthcare or to qualify for better rates on life insurance is causing controversy because it falls into the personal realm.
Some consumers are eager to participate in usage-based insurance since their policy premiums can be lowered when they comply with habits and lifestyle choices the insurers prefer. Others see it as an invasion of privacy.
All of the activities you do while wearing your smartwatch could be passed along – the number of steps you’re walking, blood pressure and heart rate. There’s even a possibility your insurer can figure out when and how often you’re having sex.
John Hancock, for example, one of the oldest and largest life insurance companies in North America, recently decided they “will stop underwriting traditional life insurance and instead sell only interactive policies that track fitness and health data through wearable devices and smartphones,” according to Reuters.
John Hancock did explain that customers wouldn’t have to log their activities to qualify for coverage – but they also won’t get the discounts if they choose not to.
What happens when life insurance companies track fitness data?
The logic behind insurance policies and fitness data is that it gives policyholders strong incentives to maintain a consistently healthy lifestyle. It’s also clearly going to be an advantage for the insurance companies too. The longer a policyholder lives, the more money the insurer makes as they continue to receive premium payouts prior to paying a death benefit.
There are some other problems that need to be resolved with fitness tracking policies. Disadvantages include the cost of purchasing items like Fitbit and Apple Watches. Wearable technology is pricey, putting it out of reach for some lower-income individuals.
Current algorithms can track higher intensity movements, like walking and running, but they aren’t always accurate for an activity like biking. If you’re recovering from surgery or have other temporary limits on your activity, like recovering from childbirth, what will happen to your premium payments in the meantime?
Older adults whose activity isn’t as strenuous as younger policyholders may be at a disadvantage, too and lower activity levels may cause them to lose out on discounted programs.
The practicality and ethical questions of life insurance fitness data gathered through wearable tech will get sorted out eventually. Life insurance based on health could be a great incentive if the result is people who live longer, higher quality lives.
For some, though, the idea of giving up even more personal information doesn’t sit well. Hopefully, insurers will come up with creative ways to offer reasonable solutions that will be fair to everyone.
Article republished. The original text is available here.