What is life insurance?
- Life insurance is a contract, between you and an insurance company to provide money to a person you designate, in the event that you die during the time the contract is in force. This contract is often referred to as the "policy" as well. In essence, during your lifetime you pay money, known as the insurance "premium" to the insurance company. It promises to pay money to the persons you name, the "beneficiaries," as your death.
- Some types of life insurance also give the policyowner the right to "borrow" a portion of the "cash value" within a policy, or to receive an "accelerated death benefit" if you become terminally ill or require confinement in a long term care facility.
Why should I buy life insurance?
The most important reason to buy life insurance is to have enough money to provide for dependents such as young children, non-working spouses or elderly parents, should you die and be no longer able to provide for them.
Many financial experts also consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:
- To replace income for dependents: If family members depend on your income, life insurance can replace that income for them if you die.
- Pay funeral expenses: Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.
- Pay federal "death" taxes and state "death" taxes: Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance.
- Create a source of savings: Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner's request. Since most people make paying their life insurance premiums a high priority, buying a cash-value type policy can create a kind of "forced" savings plan.
What are the principal types of life insurance?
There are two major types of life insurance coverage - term life and permanent life.
Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy - which could range from 5 to 30 years. If the insured's death occurs after the policy term ends and the policy is not renewed, then no payments will be made to the elapsed policy's designated beneficiaries.
Permanent life insurance is usually coverage with a defined payment amount (premiums) and time period during which the insured (possibly you) would pay. However, once the premiums are confirmed as paid in full, the policy usually remains in place until the death of the insured - even if you live to 100! There are three common types of permanent life insurance - whole life, universal life and variable universal life insurance. There are also variations within each type of coverage.
How should I choose what type of life insurance to buy?
You should consider term life insurance if:
You should consider permanent life insurance if:
- You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want the insurance to repay a debt that will be paid off in a specific time period, buy a term policy for that period.
- You need a large amount of life insurance but have a limited budget. Many individuals can secure a higher amount (face value) of coverage at usually rates lower than permanent life insurance (due to the investment/cash value component in that permanent life policies). In general, term life insurance pays beneficiaries if the insured (possibly you) dies during the term of the policy. If you are still alive at the end of the term, coverage stops unless the policy is renewed. Unlike permanent insurance, term life insurance does not have an investment or cash savings component that builds equity during the term of the policy.
- You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be 100.
- You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can't pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it's repaid, the insurance company collects what is due the company before determining what goes to your beneficiary.
Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.
How much life insurance do I need?
The best approach is to consider your own personal needs so that your survivors have adequate life insurance proceeds to meet their financial needs in the event of your death.
To estimate how much money may be needed, you should make a list and estimate the expenses that need to be covered. This could include the cost of paying funeral expenses and the amounts that your spouse and young children need for mortgage payments, household expenses, education, etc. The end result of this process is to estimate the amount of life insurance you should have in order to provide adequately for your dependents and survivors.
However, to ensure you get the peace-of-mind you deserve, it's very important to you receive thorough and complete information from a knowledgeable insurance professional before you select a coverage amount.
Will term insurance rates increase as I age?
Once you have coverage set for a fixed term, your term insurance rates will not increase for the duration of the term. The premium - and benefit amount - remains the same. Only at the end of the term period you have chosen - 10, 20, 30 years - will your life insurance rate potentially increase.
However, as you age the likelihood of mortality increases. Applying for coverage at an older age may result in higher term insurance rates. You may also encounter a lower likelihood of approval. The reason is simple - a 23-year-old is considered less likely to die than a 65-year-old. That's why older individuals pay more for life insurance. It is therefore advisable that you try to get the policy at a younger age.
Term life insurance premium rates are usually locked in for the entire time that the policy is in effect. This way younger people can often get a significant amount of coverage for up to 20 or 30 years at an affordable rate. The low rate stays the same for the duration of the term, even if their health declines.
Will I find the same product for less through a quote service, agent or broker?
- No. Since the policy prices are set by companies and not agents. However, different life insurance companies analyze risk, such as health and lifestyles differently. To receive an accurate quote, you should work with a licensed agent who will gather information on your health and lifestyle before determining your risk class. That's why it's important that you answer all questions honestly.
Is there a money-back guarantee?
- Yes. This is also known as a free-look period. If you change your mind about your policy during the designated free-look period, you'll receive a full refund for funds paid into your policy before that end date. While this guarantee varies by state, it is usually available for up to 30 full days after your policy is delivered to you.
How can I be confident that the insurance company will be in good health financially to pay my claim?
- To protect consumers, five independent agencies - A.M. Best, Fitch, Moody's, Standard & Poor's, and Weiss - rate the financial strength of insurance companies. Their rating scales are different - some might use AAA to indicate strength, while another uses A++. When checking life insurance company ratings, it's a good idea to also look at the previous year's rating and consult a life insurance agent who can give you details on the various insurance companies and ratings.
Why do I need a life insurance medical exam?
- The life insurance medical exam helps pinpoint certain aspects of your health situation to determine your exact rate class. By getting a clear picture of your health from your life insurance medical exam, the insurance company can place you in the most accurate rate class, which determines what you pay. This can mean lower whole or term insurance rates. Typically, a simple blood test and urine sample are used to measure cholesterol levels or screen for problems such as diabetes, liver or kidney disorders.
What does the medical exam cover?
- The life insurance physical exam, arranged and paid for by the insurance carrier, covers your medical history, height and weight, urinalysis, blood pressure, blood test, pulse and ECG/EKG if necessary. This routine exam usually takes less than 30 minutes. A benefit of the medical exam is that a professional medical technician comes to you. The life insurance physical exam can be done at the location of your choice to make things convenient.
How do I prepare for the medical exam?
Life insurance medical exam preparation is easy. Here are a few pointers about the types of recommendations or direction they could provide to you in anticipation of the exam and testing.
The day before your exam:
Avoid strenuous exercise for 24 hours. Get a good night's rest.
12 hours before:
Avoid alcoholic beverages, nasal decongestants, decongestants, and pain medication, such as aspirin, acetaminophen and ibuprofen. Medications can give a skewed reading. You might also want to avoid high-cholesterol foods, such as eggs, red meat, shrimp and fried foods as you prepare for the medical exam.
8 hours before:
Avoid caffeine, including coffee, tea and soda. If possible, we recommend that you fast for best results (drinking water is okay).
1 hour before:
Drink a glass of water to facilitate obtaining a urine sample.
Can I get life insurance coverage without taking a medical exam?
While a medical exam is usually part of the process in securing a term or whole life policy, some policies may not have this requirement.
There are advantages and disadvantages to both types of coverage. The advantage in having a medical exam is that it often saves you money on your policy. With an accurate health profile, the insurance company can place you in the appropriate rate class, and charge you according to your actual health situation. Life insurance with no exam is a convenient choice for many, but might cost more because the mortality risk must be shared across all of the policies. Simply talk with a licensed life insurance agent about your options.