How to find out the cost of life insurance
Which options are best for you?
Of all the things you can buy, why pay for something that you will never need? Life insurance is just such a product. You pay for a policy that really doesn't do anything for you but you usually need it anyway. When you buy, you are actually buying it for your wife or husband and your children, of course. But how much does life insurance cost? The answer, like many things in business is "it depends". The key is not the costs but what benefits does your family need.
Term Life Insurance Option
The first price determining option for a policy is whether you want a "Term" or "Whole" policy. "Term" refers to the length of time that a policy covers. Such a policy will pay a set amount for a set price. For example, it might cost $20 per month to buy a policy that pays $15,000 in the event of the death of the policy holder. At the end of 10 or 15 years, the policy expires. Up until that time, neither the payment nor the payout amount changes. Sometimes the policy is renewable but for a different monthly cost.
Term life cost depends on your health factors. Your age at the start of the policy is key among these. The younger you are, the less likely you are to die and therefore the cost of term life will be less. Similarly, if you do not smoke, you are less likely to die so your cost is less. Women have a longer life expectancy than men so the cost of their term life is less. Some insurance companies evaluate other health factors such as obesity, history and how long your parents lived. Many companies will require you to undergo a medical exam before a life insurance policy is issued.
Whole Life Insurance Option
A "whole" life policy pays a benefit in the event of the death of the policy holder but it also increases in value over time. A portion of the monthly payment covers the cost of the life insurance while another portion boosts the policy value. Over many years, the increase in value of the policy can be significant. For example, a policy that will pay $15,000 may cost $30 per month. At the end of a year, the amount of $240 covers the cost of life insurance and the surplus amount of $120 is added to the policy value. If the policy holder were to die at the end of the first year, the policy would pay $15,120 to the policy holder's estate. Usually, interest is paid on the surplus value as well. This may mean that the example policy might be worth perhaps $15,250 at the end of two years.
Term or Whole Insurance Differences
Most term insurance plans establish a monthly payment amount that pays for a declared value of insurance. Neither amount changes for the term. Since costs are less for young people, getting such a policy as early in your life as possible is a good idea. Most whole life policies establish an initial monthly insurance cost amount but this changes over time as the insured holder gets older. Obviously, when the person is younger, the cost of insurance is less. In time, the cost can be significantly higher. Eventually, the cost will be more than the amount of the monthly payment. To keep the policy in effect, any surplus value can be used to cover the excess monthly insurance cost. If the surplus is not enough, the insured may need to increase their monthly payment. If the increase is too high, the insured can cancel.
Why Buy Term Insurance?
It can often be wise for young people to buy term life insurance. They often have a significant amount of debt due to student loans, credit cards and a mortgage. Term life insurance would cover such debts if the policy amount is adequate. Since a higher value is required for such start of life debt, more coverage is necessary. Term life is the cheapest option available since all of the monthly payment amount covers insurance cost and it is established based on the age of the applicant. Mortgage life is a form of term insurance as well. Details vary, but many such policies are purchased to cover the value of the mortgage. As the value of the mortgage goes down due to the monthly principal payment, the value of the mortgage insurance goes down as well. Usually, the payment is not adjusted to reflect the declining loan value. People with mortgages may want to investigate term life rather than a mortgage policy.
Why Buy Whole Life Insurance?
If a person wishes to provide a long lasting benefit to their family, they may want to consider whole life. While these policies usually pay less of a death benefit, they do establish more of a surplus value each month. The whole life policy becomes a long term investment which can earn capital while it is in effect. Depending on the tax laws, death benefits may be subject to different levels of taxation than other investments. A good broker will be able to explain specific details.
How Much Does Life Insurance Cost?
By now, it should be clear that there are many options which dramatically affect the cost of insurance. Each person's circumstance is different depending on age, their debt amount and their health. The basic cost of the insurance policy depends on the amount of insurance required. A payout value of $100,000 will cost more than the cost of a $50,000 amount. Usually, the cost is expressed as an amount per thousand dollars of desired coverage. When this amount is known, the monthly payment amount is easily calculated. For example, if the cost per thousand is $1.25 for a young man, it would cost him $12.50 per month for a policy. Be aware, however, that there may be small administrative fees which add to the cost. In the end, "how much does life insurance cost?" is always, "It depends".
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(price as of Mar 12, 2014)