Life Insurance FAQ
What is life insurance?
Life insurance coverage is a means of protection from financial loss that could occur due to the death of the insured individual. When you apply for your policy, you designate “beneficiaries” - individuals or entities (such as a trust or estate) to receive the payout of death benefit funds. In many cases, this money can be critical to assisting the beneficiaries with household expenses, debt and other financial obligations that your income previously supported.
Why should I buy life insurance?
The most important reason to buy life insurance is to help establish a foundation of financial security that could provide money to care for and support your dependents (such as young children, non-working spouses or elderly parents) should you die. Aside from dealing with grief in their loss, they also would have to manage through any financial impact from your passing.
Life insurance can be an important tool to:
- Replace income for dependents: If family members depend on your income, life insurance can replace that income or a portion of it to bridge a financial gap in the household
- Pay funeral expenses: Life insurance can help pay your funeral and burial costs as well as any associated costs.
- Fulfill debt obligations: Funds from life insurance can assist in paying outstanding debts including credit cards, loans, mortgage and other similar obligations.
- Pay federal "death" taxes and state "death" taxes: Death benefit funds can help cover potential estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance.
- Create a source of savings: Certain types of life insurance accumulate a cash value that can be borrowed or withdrawn by the policy owner while the policy is in force.
What are the principal types of life insurance?
There are two primary types of life insurance coverage - term life and permanent life.
Term Life Insurance
Term life insurance is often viewed as the simplest form of life insurance. It’s a coverage that has a consistent rate (level premium) for a defined period of time (“term”) ranging from 10 to 30 years - and with a face amount (generally from $10,000 to $500,000 or more) that should be paid to your beneficiaries upon your death. (A policy needs to be in good standing - with no pending challenges or contestability issues at that time - for the death benefit funds to be paid.)
In fact, based on your health and other lifestyle variables, term life insurance coverages usually have lower rates on higher face value amount than permanent life coverages. However, term life policies are only in place for a specified time period and do not offer a cash value portion like permanent life insurance does.
Permanent Life Insurance
Permanent life insurance can provide lifelong protection and the ability to accumulate cash value on a tax-deferred basis. The two main types of permanent life insurance are whole life and universal life insurance.
How should I choose what type of life insurance to buy?
You should consider term life insurance
- You need life insurance protection for a specific period of time. Term life coverage offers you the flexibility to align the amount of time you’ll need coverage to the length of the term policy. For example, if you have young children and want to ensure that - should you not be there to provide funds to pay for their education or their care until they are grown, you might buy a 20-year term life policy. Or if you need funds to repay a debt (such as a mortgage or school loans) within a specific period of time (20-year loan), a term policy may be a good option for you.
- You may have a limited budget but may need a higher amount of coverage to still provide for those you leave behind, then term life may offer that balance.
You should consider permanent life insurance if:
- You want life insurance protection for your lifetime (not a limited period) with a death benefit payout (for your beneficiaries) if you live to be 100. Plus, you like the option to have a policy that accumulates a cash value that offers the flexibility for potential withdrawals if needed.
- If you’ve built sufficient funds within your policy, you can initiate a policy loan with no need for a credit check. However, if the amount of the policy loan is not replenished at the time of your death, then the death benefit funds would be reduced by the amount outstanding on the loan before the remaining funds are paid to your beneficiaries.
Keep in mind that the premium payments for permanent life policies are generally higher than those for term life coverage. However, keep in mind that if you renew your term life policy after it ends (e.g. after 20 years), your premium rates can increase substantially for that same coverage since you are no longer locked into the prior level premium term rates. Why? Minimally because you are older than you were at the start of the previous term life policy.
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. This should offer you a rough estimate of the amount of life insurance you should have to provide adequately for your dependents and survivors.
However, to ensure you get the peace-of-mind you deserve, it's very important for you to receive thorough and complete information from a knowledgeable insurance professional before you select a coverage amount.
Will term life insurance rates increase as I age?
When you set up your term life insurance policy for a period of time (e.g. 10, 20 or 30 years), your premium rates should not increase for the duration of that term if you’ve made the scheduled payments and your face amount remains the same. However, if you choose to renew your policy at the end of that term coverage period (e.g. 10, 20 or 30 years), it’s quite likely your rates would increase even with the same amount of coverage.
Quite simply, it’s because you’ve aged since the start of your original policy. Talk with your agent, but if your policy is in good standing, you should be able to keep your policy, but your new term premium rates would be set up based on your current health status and age.
Will I find the same product for less through a quote service, agent or broker?
No. Since the policy prices are set by the insurance companies, you will receive the same rate (based on your age, health status, etc.] for that coverage and with that insurer regardless of how you purchase it. However, each life insurance company offers different types of coverages and options – and have their own approach for analyzing your health risk profile. Quote services can offer you comparisons of similar products, but an agent will likely be your best source for answering your questions and providing you with the most accurate coverage quote.
Is there a money-back guarantee or period of time in which I can return a policy?
A free look period is a designated time during which the policy owner can conduct a more in-depth review of his or her insurance policy. During this timeframe, you can ask your agent important questions that you may not have originally considered, get more clarity about the details of the terms and conditions - and better ensure it meets your needs.
At Fidelity Life Association, we want you to be satisfied with your policy.
The policy owner may, within 30 days after it is delivered, return the policy to our home office or to the agent who sold the policy and will receive a full refund of any premiums and fees that have been paid to us. Once returned, the policy will be void from its beginning. If a policy was destroyed or lost, the policy owner should send a letter of instruction requesting the free-look option.
Both methods require the signature of the policy owner along with a current date. If you’re the policyholder and reside in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA or WI) your spouse’s signature is required.
Is there any way I can check if an insurance company is reputable or is viewed as having sufficient funds to pay my beneficiaries on a death claim?
To better protect consumers, there are five independent agencies - A.M. Best, Fitch Ratings, Moody's Investor Service, Inc., Standard & Poor's and Weiss Ratings – that rate the financial strength and anticipated stability of insurance companies. Their rating scales are different, but they are great research resources to help address your concern. You should also look at the previous year's rating for your potential insurer and the number of years they’ve been in the industry.
In addition, you also may want to talk with a life insurance agent who can share some of their perspectives on the claim process they’ve experienced with these organizations. While there are never any guarantees on any company, these assessments can offer some insights relative to your decision.
Why do I need a life insurance medical exam?
Though it may not be required for all life insurance policies, the medical exam helps the insurer to understand certain aspects of your health status and better ensure you receive the most accurate rating and quote. Typically, a medical exam covers your medical history, height and weight. It usually includes a simple blood test and urine sample to measure cholesterol levels or screen for problems such as diabetes, liver or kidney disorders. 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 premiums you’ll pay.