How Much Should You Pay for Life Insurance?
Life insurance policies protect your family. They do this by providing a death benefit for your family in the event that you die before all of your financial obligations are met. In some instances, the insurance policy provides living benefits in the form of a cash value savings that you may use during your life for any purpose you want. Regardless of the type of insurance you buy, make sure you understand how much you should be paying for your insurance.
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Types
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Two main types of life insurance are available. Permanent insurance is a type of life insurance that is designed to last your entire life. You pay premiums in exchange for a death benefit and a cash reserve, called a cash value, that you can use for any purpose. Because of the cash value savings component and the fact that the insurance is priced to your age 100 or 120, permanent insurance premiums tend to be more expensive than those for term life insurance. Term life insurance is a low-cost way to purchase life insurance because term life does not have a savings component and only lasts for a set period of time, called a term. If you want the lowest possible premiums, buy term life insurance. If you want additional features from your policy and lifetime coverage, buy permanent.
Time Frame
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When you buy your life insurance plays a major role in how much you pay. Regardless of the type of insurance you buy, the older you get, the more expensive life insurance becomes. Expect to pay the highest premiums after you reach age 60 or 65. Beyond this age, premiums often become prohibitively expensive for many individuals.
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Health
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Health plays a major role in how much you pay for premiums because the insurance company needs to know that you will live a long life to profit from selling you an insurance policy. Your health contributes to a risk rating. Expect to pay more than average for a "substandard" rating and less than average for a "preferred" or "preferred plus" rating. "Standard" is the average rating and you pay the average premium for your risk group.
Occupation
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Your occupation can play a role in how much premiums are for your policy. Risky professions, such as professional pilot or coal miner, come with additional costs due to the inherent riskiness of the job.
Size
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Many life insurance companies use banding as a way to lower costs on life insurance. Banding is a pricing scheme similar to the idea of buying in bulk. The more life insurance you buy, the lower the per thousand dollar cost of insurance. You should expect to pay less, on a unit basis per thousand dollars of insurance, by buying a large death benefit.
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