How Life Insurance Works
life insurance represents a contract between a policy holder (typically an individual) and insurer (commonly large company). This contract stipulates that upon the death of the policy holder, the insurer will pay a selected beneficiary (usually close relative, i.e. spouse or children) an amount of money (the benefits).
There are many important factors to consider when it comes to purchasing life insurance. This includes, how much and what type of policy as well as what company and agent to work with. Before diving into these aspects however, it is important to first decide of life insurance is necessary given your personal situation.
Do I Need Life Insurance?
Although there are many flavors of life insurance including polices that include cash value and investment options, it should be noted that life insurance is designed to protect family, businesses and assets from the untimely death of a key person. This means, that despite what some insurance agents will preach, insurance is not really necessary for a single, childless, asset-less, debtless person with a job. This person may wish to purchase insurance in advanced to lock in lower premiums in anticipation of a family or business, but without any dependents, life insurance would be a luxury.
When To Obtain A Policy
Many people with corporate jobs or other benefits packages through works will have a basic policy (typically term) provided by their employer. Check with your Human Resources (HR) department for specifics concerning your policy. In many cases the included life insurance policy will not cover family needs and should be supplemented with additional coverage. The following are examples of when life insurance is most commonly needed:
- Birth Of A Child
- Purchase of Large Asset (House, Land, Etc.)
- Death or Illness of Parent (Sibling(s) Still At Home)
- Entering Into Business Partnership
- Taking On Capital Expenditure (Business Purposes)
- During Any Large Business Acquisition
Amount Of Insurance Needed
If you have current experienced or are getting ready to go through one of the scenarios above, it is probably time to purchase life insurance coverage. Even though policies are sold in bucketed segments, how much money your dependents will need will depend heavily on your personal needs. A good method for deciding would be to play a “what-if” scenario for your family or business, if you were no longer there to produce. This includes income and services for the family along with many categories for the business including services, sales, network, leadership and management among other duties.
For the family dependents include your spouse, children and possibly anyone else living with or dependent on you. This could include parents, aunts, uncles, nieces, nephews, grandchildren among many other possibilities. For the business it is a little more complicated, but should represent the amount of income you mean to the business. For example if you are in a 50/50 partnership and the business is worth $1M annual, your effective contribution may be $500K. The policy would need to cover that contribution for the amount of time that it would take to replace your contribution, maybe 2 years or a policy for $1,000,0000.
There is no exact formula and the loss of a loved one can never be replaced, however it should be noted that the higher the amount of the policy, the higher the monthly or yearly premium to keep it in force.
Life Insurance Types
Before going through the various types of life insurance policies available, be sure to cover the material presented on the home page of this website. Information presented there includes when to get insurance and how much is necessary among other facts.
The information below contains factual information about each life insurance type and some general recommendations for when a particular option. Although these endorsements are made by a former life insurance producer, they should be viewed as general guidelines. Every situation is different and direct counsel with a financial professional is suggested before making any concrete decision.
Term Life Policy
Term life also called term assurance guarantees coverage for a fixed term and at a fixed rate of payments (typically annually or monthly). Common terms are 10, 20 and 40 years. Once the time period has expired the insurance is no longer valid, with no additional benefits.
Buying Term Life Insurance
Term life insurance is the most clear cut and clean form of insurance. It is also the cheapest way to get insurance for a death benefit. Most employers offer a version of term through group life, which may be paid wholly as part of employee benefits.
The major pros with term life insurance are that it is inexpensive and is risk free. The major cons being that once the term is up, rates are much higher (as insured is older) and there is no carry over or added benefits as there can be with other life insurance types. A term life insurance policy is a good baseline to have and if purchased early in life can be as low as $15-$20 a month.
Should I Purchase A Term Policy?
It is a good practice, if not provided by an employer, to purchase a term life policy with an amount that would cover any burial and estate costs, pay any outstanding debts and provide a few years annual income for dependents to recover. It is best to think of term life insurance like insurance for basic health, auto, home, renters, etc. It is designed to get you back to financial center, or as close to possible, should an untimely accident occur.
Whole Life Policy
Whole life insurance (assurance) is a permanent form of coverage that remains in force for the insured person’s whole life and requires continual premium payment. These types of policies also build up a cash value which was developed to be a reserve that would build up against the death benefit. There are many forms of whole life insurance and ways to utilize the cash value, including withdraws, borrowing and investment opportunities.
Universal Life Insurance
Universal Life (UL) popular primarily in the United States is a form of permanent insurance that has many sub form with the primary two being Fixed and Variable. Universal Life allows for excess premium payments to accrue cash value. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, as well as any other policy charges and fees which are drawn from the cash value, even if no premium payment is made that month.
Variable Life Insurance
Variable Life Insurance (VUL) is a key form of Universal Life with the unique feature that the cash value within a VUL can be invested in a wide variety of separate accounts. This is similar to a mutual fund investment strategy, however many unique opportunities exist in the marketplace. Unlike whole life, there is no endowment age, which allows the value of a VUL policy to build up to a level higher than the death benefit. As with most Universal Life policies, VULs are common vehicles used to avoid or limit tax burden, particularly with high income earners. Special tax considerations are made for borrowing against these types of insurance policies.
While there are perfectly legitimate reason to have a permanent or cash value type of insurance policy, realize that these types of policies carry higher premiums and thus higher earnings for insurance companies and higher commissions for agents. Many insurance salesmen will push these types of policies as primarily investment or tax evasion vehicles, which is not only faulty and unethical but also illegal.
Life Insurance Quotes
Before getting a full blown insurance policy put in force, it is a good idea to shop around and retain some quotes from various providers. This is fairly easy to do, and insurance companies can provide premium quotes to fair degree of accuracy especially for term life policies. Basic information such as age, height, weight and smoker will be asked to give you a relative idea what monthly or annual payments will be.
Before actually getting an insurance policy however, a physical and blood work will need to be done before final premiums are calculated. This is done to ensure no chronic diseases exist such as HIV. It is also done to measure health factors such as cholesterol, smoking etc. Once this final lab work has been completed the insurance premium will be set.
An important note, however is that once the policy paperwork is signed the life insurance policy is in force. The insurer is covered in the gap between the time they sign the paperwork and the lab work is complete. If someone happened to the policy holder’s health or if they happened to die unexpectedly, the policy would hold based on the signing information.
Getting A Quote For Life Insurance
While it may be tempting to put your information in a form online for an instant quote, you may want to think twice before clicking enter. Many of these quote forms online are simply lead forms used to send your personal information to various insurance companies, producer offices, and independent agents.
Many companies offering online quotes are insurance lead broker; especially life insurance that gathers leads online and sells them to local agents near where the person lives. Depending on the lead program, these leads are often sold to more than just one agent, often three or more. This information is then often sold to 3rd party email marketing or auto dialer providers for other purposes.
There are literally hundreds online to provide you the cheapest quotes for life insurance. It is not necessarily a bad thing, because it puts people looking for insurance in contact with agents in their local area. It is simply important to know what you are getting into before putting all your info in the boxes.
Not all online quote options are like this. For example if you go to a large provider like ING or State Farm, they are going to at the worst give your info to one local agent near you. Of course if you want to avoid this all together you can simply call up some providers over the phone. Large providers of multiple insurance types like State Farm, American Family and All State will probably be willing to give you general premium quotes over the phone, but be prepared to be pressured for an appointment.
Getting A Quote Online
Life insurance like other financial services is a high commission sales driven industry. When you start putting your information out there for quotes and other inquires, either online or over the phone; be prepared for the sales cycle. It is part of the process, just like when you walk on to the car lot, you know a sales guy is going to come greet you. And this is not a bad thing. Most life insurance agents are hardworking financial professionals with families to support and protect just like you. Just be sure you are working with a qualified, licensed producer / company and it will be fine.