Preparing for unexpected loss can be uncomfortable and daunting, but it’s imperative that people have plans in place, especially if there are others who depend on your income. Life insurance is one crucial investment that ensures your family members and loved ones are financially protected — but it is not the only solution.
In this article, we answer common questions people may ask:
- What is life insurance?
- Why might a person need alternatives to life insurance?
- What are some best life insurance alternatives?
What is life insurance?
Life insurance is a formal agreement where, in exchange for premiums, an insurance company promises to pay a set amount of money to beneficiaries upon the death of the insured—this ensures that a policy owner’s loved ones have access to financial resources that they may need.
However, life insurance is only one answer to make sure those you care for or care about have a financial cushion, and it may not always be applicable to every situation. Some people may find that coverage is no longer necessary—for example, their children are grown and financially independent —and look into selling their life insurance policy for cash. Others may not be in a position where they can qualify for life insurance, and are in need of other options to keep their families protected in the case of their death.
Who needs life insurance?
If a person has a spouse or other family members who depend on their income, it’s recommended that they have life insurance—or other forms of financial protection—in place. Regardless of age, health, or background, everyone faces the inevitability of death, and life insurance helps assure the insured that their passing won’t negatively impact those who depend on them. On the other hand, if someone is single and has no dependents, there may not be good cause for them to have life insurance.
Every life insurance policy differs based on the premium, so it’s recommended that policy owners know the worth of their policy. If you’re thinking about possibly selling your existing policy, you can find further information here.
What are the best alternatives to life insurance?
A life insurance policy can be expensive to maintain, and is not the most beneficial solution for everyone. A policy owner may no longer be able to afford their premium payments, or find that their coverage is no longer relevant to their needs. In that case, their best option may be to cash in a life insurance policy.
If a person doesn’t already have life insurance, but seeks a solution that provides some form of financial protection, they can potentially benefit from alternatives to life insurance. In the case of alternatives to life insurance, there are four options in the market:
- Self-funding via investing & saving
- Guaranteed issue plan
- Accidental death and dismemberment (AD&D) insurance
- Asset-based or combination policy
Each option has its own set of benefits, but it’s crucial to get all the information first before making any decision.
Self-funding via investing & saving
One of the most direct alternatives to life insurance is self-funding, which is when you put aside your own money to either invest or save. Depending on when you start and your diligence, you can accumulate a considerable amount of funds by the time you reach retirement age. If you choose to invest, it’s best that you consult with reliable financial and legal advisors who can walk you through your circumstances and help you choose the best options. If you want to go the more traditional route for saving money, you may consider putting it into a high-yield savings account that your beneficiaries can access in the event of your death.
The main drawback to self-funding is the lack of rules regarding how and when your funds can be used. Depending on other unexpected life events, you may occasionally rely on your investment or savings, pulling away money meant to provide for your loved ones after you are gone. If you’re considering self-funding, make sure that your financial situation allows for it, and that external factors will not affect the amount you’re able to save.
Guaranteed issue plan
Standard life insurance may require people to meet set requirements before they become policy owners, such as a full disclosure of their medical records or the completion of a medical exam. If you have certain conditions, such as a terminal illness, you may be ineligible for a standard life insurance policy. A guaranteed issue plan is a coverage that offers policies to anyone regardless of their health status. It is a viable alternative for people who do not qualify for standard life insurance, as it guarantees coverage for most people.
That said, a guaranteed issue plan may not be the best solution if you’re looking for cost-effective options. One reason is that the coverage amount is usually low, ranging from anywhere between $10,000 and $25,000. This means that your beneficiaries may only receive enough money to cover immediate expenses, with little to nothing remaining for long-term financial assistance. Another drawback is that premium payments for a guaranteed issue plan can cost more than a standard life insurance policy. Depending on your age, premium rates can vary considerably among providers of this type of plan.
Accidental death and dismemberment (AD&D) insurance
According to the CDC, unintentional injuries or accidents are the fourth leading cause of death in the United States. If you are killed or dismembered (i.e., you lose a body part), accidental death and dismemberment (AD&D) insurance ensures that your family receives a set monthly amount or a flat payment that can substitute for your income. Often offered by employers, AD&D insurance can also be purchased privately.
Before committing to AD&D insurance, it’s extremely important to read the fine print, as many policies are very limited in their coverage. For instance, if a policy owner were to pass away from an illness or other underlying cause, their beneficiaries would not receive payment. Additionally, any funds that they do receive may not be enough to cover long-term costs. It’s highly recommended that you browse several policies and compare their benefits to choose the right AD&D coverage for your situation.
Asset-based or combination policy
The final life insurance alternative is an asset-based or combination policy, which provides the benefits of both long-term care coverage and life insurance. This option provides money for long-term care that standard life insurance policies don’t always cover. While you are alive, you can access your benefits from an asset-based policy if you need to pay for prolonged medical costs. But if you pass away, then your beneficiaries will still receive their set amount of money.
An asset-based or combination policy can get expensive, and typically costs more than standard life insurance. If your health struggles require you to rely on your long-term care coverage, you may need to know how much the plan pays for, as there can be a limit to the benefits. Should your medical expenses surpass that limit, you may be put in a situation where you have to pay money back.
Preparing for unexpected loss can be difficult, but life insurance—and alternatives to life insurance—can help to protect your loved ones from potential financial struggle. Coventry aims to provide the details you need to make an informed decision, especially one that can greatly impact the lives of those you care about. If you’re a policy owner and want to know how much your policy may be worth,, read our Coventry Direct page for more information.