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Life Insurance Facts

Life Insurance Facts – Reasons You Should Invest Early

Life insurance is a contract between a person who purchases an insurance policy and an insurance company (insurer). In the event of death, the insurer must pay the policyholder’s beneficiary a sum of money according to the policy. However, it is essential to understand the facts about life insurance before making decisions. It is certainly something to consider if you are newly married or are planning on having children.

Life Insurance Facts
Life Insurance Facts – Reasons You Should Invest Early

Affiliate

First Citizens Bank is an over 100-year-old family-controlled bank with a community focus. The bank’s emphasis is its customers and building lasting relationships. First Citizens offers free checking with paperless statements and online savings accounts.

  • No monthly fees
  • No minimum balance
  • Low opening balance
  • Free digital and mobile banking
  •  Access your account digitally, at branches, or at ATMs
  • Link checking and savings accounts for overdraft protection

Who Should Buy Life Insurance

Anyone who would like to protect their loved ones financially after death should be purchasing life insurance. A life insurance policy can help pay for funeral costs and other debts. Policy benefits will also replace lost income and provide financial security to the family that has experienced this loss. 

Having life insurance makes sense if you don’t have the assets to cover your debt and your family’s financial needs in the event of your death.

Life Insurance Facts

1. Its Best To Invest In Life Insurance Early

You should purchase a policy right after graduating from school and starting your career. Younger people often prioritize other expenses such as student loans, mortgages, and car payments. 

There are two reasons why you should purchase life insurance despite all this other debt:

1. The policy can help cover the kind of debt mentioned above in the event of death, which would relieve any loved ones from having to take on this burden. 

Some people mistakenly believe creditors will forgive their debts upon death, but that isn’t necessarily the case. If you have a cosigner for any loans, a life insurance policy will help prevent them from getting straddled with debt.

According to the 2021 Insurance Barometer Study, 42% of American households would face financial hardship within six months should a wage earner die unexpectedly; 25% would suffer financially within a month

Leaving your family financially secure is all the more reason to invest in a life insurance policy.

2. Delaying the purchase of a life insurance policy as you grow older increases your risk of being insured, and so your premiums will reflect that risk with higher monthly payments. 

According to Policygenius, an online insurance marketplace, insurance premiums rise by an average of 8 to 10 percent for each year you postpone buying insurance coverage. 

2. People Don’t Buy Insurance Because They Think It’s Too Expensive

Many Americans are under the misconception that life insurance is expensive and therefore unattainable. More than half of Americans overestimate the cost of life insurance by as much as three times the actual cost. 

How much can life insurance actually cost? Life insurance rate calculations consider several factors: 

  • age 
  • gender 
  • smoking status 
  • current health 
  • family medical history
  • driving record (if you have many violations, you may be regarded as high risk)
  • occupation
  • lifestyle

However, based on data provided for a 40-year-old purchasing a 20-year, $500,000 term life policy (this is the most common policy type sold), the average cost of life insurance is approximately $27 a month or $324 per year. The average cost is lower for shorter duration policies and higher for longer duration policies.

As mentioned above, policy rates will vary from person to person based on the factors insurers need to assess before determining rates. For instance, average rates for women are usually lower than for men, all else being equal. Women have longer life expectancies than men. In the US, the average life expectancy for women is 81.7 years and for men is 76.6 years at birth.

In another example, a family history of chronic health diseases like cancer, heart disease, or diabetes will increase the cost. These health diseases lower life expectancy.

However, a life insurance policy can cater to one’s needs and still be affordable. 

3. It Costs Less In The Long-Run To Start A Life Insurance Policy Early

The cost of waiting to purchase life insurance can be a costly decision. Policy Genius conducted a study where they collected sample monthly premiums from different insurers for a 20-year term life insurance policy for a non-smoker with a preferred health rating. 

The study concluded that the average cost of a 20-year, $250,000 term policy would be $17.25 a month or $207 annually for a healthy 25-year old male. In contrast, a 45-year old male would pay $35.75 a month or $429 a year. The cost of delaying the purchase for 20 years is $4,440 over the policy’s life.

Of the people surveyed by Policy Genius, 40% of insured wish they had purchased their policies at a younger age. 

4. Many Americans Are Uninsured Or Underinsured

Approximately 40% of the adult population, or 102 million Americans, are uninsured and underinsured but believe they need to buy life insurance or increase their coverage. 

To figure out how much life insurance you need, the rule of thumb is to calculate 10 to 15 times your income. This calculation helps account for inflation and typical household expenses to ensure long-term financial security for designated beneficiaries. So, if your annual income is $50,000 per year you would need a life insurance policy between $500,000 and $750,000.

Another way of calculating life insurance needs is to use the DIME methodology. DIME stands for debt, income, mortgage, and education. The DIME method consists of adding up the following:

Outstanding debts + income multiplied by the number of years the family will depend on the income + outstanding mortgage + the cost of children’s education.

The total will equal the amount of life insurance that should be purchased.

Another option is to calculate 1% of your annual income. Then divide by 12 to get your monthly cost and look for a policy that has premiums in that range. 

So, if your annual income is $60,000, 1% of that is $600 a year or $50 a month in premiums.

5. Life Insurance Can Be An Investment Too

A policyholder gets coverage for a set period with term life insurance, usually 20 or 30 years. You pay premiums each month, and in the event of death, the policy is paid out to a beneficiary.

The pros of having term life insurance are:

  • Least expensive since you only getting life insurance.
  • Different term options are available.
  • Simple to compare policies.

The cons of having term life insurance are:

  • Once the term is completed, you get nothing since there is no cash value or investment component.
  • Must reapply at the end of the term if you still need life insurance.

Another life insurance policy option is permanent life insurance. This policy covers you for life instead of just for a set term. Certain types of permanent life insurance also have an investment component that allows a life insurance policyholder to accumulate a cash value.

The benefits to having permanent life insurance are:

  • The investment component can grow tax-deferred. You would not be required to pay taxes on the cash until you withdraw it.
  • You can borrow against the cash value if you need to make a significant purchase, such as a new home.
  • You may be eligible for accelerated benefits (also known as living benefits) if you fall ill with a specified condition. Accelerated benefits enable policyholders to receive benefits before death if they are diagnosed with a severe or terminal illness and need money to pay medical bills or housing in a long-term care facility.

The disadvantages of permanent life insurance are:

  • More expensive than term-life insurance.
  • More complex due to the investment component, making it difficult to compare plans.

6. Unemployed People Still Need Life Insurance

If you are a stay-at-home parent and believe there is no need for you to get life insurance since you have no income, think again. If you were to pass away, your spouse might need to turn to childcare to keep working at their job. They would now incur this expense that they didn’t previously have. Life insurance benefits could help cover this cost.


Affiliate

First Citizens Bank is an over 100-year-old family-controlled bank with a community focus. The bank’s emphasis is its customers and building lasting relationships. First Citizens offers free checking with paperless statements and online savings accounts.

  • No monthly fees
  • No minimum balance
  • Low opening balance
  • Free digital and mobile banking
  •  Access your account digitally, at branches, or at ATMs
  • Link checking and savings accounts for overdraft protection

Final Thoughts on Life Insurance Facts

These six life insurance facts hopefully underscore the importance of the need to invest in a life insurance policy sooner rather than later. Life insurance is an important part of a personal financial plan and something you should check annually.

Thanks for reading Life Insurance Facts – Reasons to Invest Early!

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Nadia Tahir is a freelance writer and content creator. She mostly writes in the areas of lifestyle and personal finance. She also enjoys writing on her blog about motherhood at This Mom is On Fire.

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