Life Insurance Basics

Life is unpredictable and in many aspects uncontrollable. If you are the sole or significant breadwinner of your family and wish your loved-ones to be financially secured in the event of your passing, buying a life insurance policy is one of the most affordable and effective ways to ensure it.

Here are some life insurance basics:

What Is Life Insurance?
Simply put, life insurance is an insurance on the insured’s life. If the insured passes away during the term of the policy, the insurance company pays a set amount of money to his/her beneficiaries. For example, if John bought a $250,000, 25-year term life insurance policy on his life and named his wife and children as the beneficiaries, John’s wife and children will get $250,000 if John dies within 25 years.

How Does It Protect Your Family’s Financial Future?
Life insurance pays a set amount of money to the insured’s beneficiaries in the event of the insured’s passing. Some of the things your beneficiaries might be able do with the money they receive include:

  • Replace your income
  • Pay off major debts such as home mortgage, car loans, and credit cards
  • Fund your children’s education
  • Pay for your final medical and funeral expenses
  • Pay off any other outstanding debts

While income replacement and debt payoff are the primary reasons why most people buy life insurance, some of the other reasons for buying life insurance include:

  • Efficiently transferring your wealth to your beneficiaries
  • Creating an inheritance for your beneficiaries
  • Effectively making a large charitable contribution
  • Creating a disciplined saving habit
  • Buying your business partner’s shares

Type and Amount of Life Insurance
There are various types of life insurance, each designed to serve specific needs of the policyholders. The two most common life insurance types are Term Life Insurance and Whole Life Insurance. The type and the amount of life insurance you need, depends on your current personal situation and future financial needs. There are many different rules of thumb that people use to quickly ballpark the amount of life insurance they need. According to one such rule of thumb, it is 10X to 12X of the insured’s annual gross income.

Cost of Life Insurance
Your life insurance rate is calculated primarily based on your life expectancy, the face amount of the policy, and the length of the policy. Life insurance has never been more affordable, making coverage possible for almost any budget. The premiums on term life insurance policy, for instance, have gone down by as much as 40% on an average from 2007 to 2017. For example, a 40-year old healthy man can now buy a $250,000 term life insurance policy for as little as $40/month.

How to Buy a Life Insurance Policy?
Contact a life insurance agent to help you determine the type and the amount of life insurance policy appropriate for your situation. Your agent will explain various policy terms and coverage, and assist you in preparing the insurance application package. As a part of the insurance application, you may be required to provide your blood and urine tests, and fill out a detailed questionnaire regarding your lifestyle, your family health history, your personal health history, etc. Once your application is accepted by the insurance company, your coverage will become effective for the term of the policy. Within each pay period, you must timely pay your insurance premium to keep your life insurance coverage active.

“Why Should I Buy Life Insurance?”

Simply put, life insurance is an insurance on the insured’s life. A life insurance policy provides a lump sum payment to the insured’s intended beneficiary in the event of the insured’s passing. Life insurance is widely considered the cornerstone of sound financial planning. The main reasons for families to buy life insurance include:

  • Income replacement for survivors: If your loved ones depend on your income, life insurance can replace your income for them if you die. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.
  • Elimination of your mortgage and other debts: If you don’t want your loved ones to be left with any extra financial burden after you die, in addition to providing income to cover everyday living expenses, life insurance can pay off any outstanding balance of your mortgage, car loans, credit card, etc., providing your loved ones with complete financial security.
  • 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. Buying a cash-value type policy can create a kind of “forced” savings plan. The interest credited on this “forced” saving is tax-deferred (and tax-exempt if the money is paid as a death claim).
  • Funding for your children’s education: If you want your children to graduate debt-free from college, life insurance policies that carry a cash balance allow consumers to withdraw tax-free up to the amount paid in premiums, or to take out a policy loan to cover the costs of college education.
  • Wealth transfer: There are many benefits of using life insurance as a means to transfer your wealth to beneficiaries efficiently, including tax-free transfer, predictable value of death benefits, non-attachment to market performance, etc.
  • Create an inheritance for your heirs: Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.
  • Final 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.
  • Make significant charitable contributions: By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.

Your reason to purchase life insurance determines the type of insurance policy and the coverage you need. While the above are the most common reasons why most people buy life insurance, they are not the only reasons why you may need life insurance. You should consult a knowledgeable life insurance agent who will analyze your personal situation to determine whether you need life insurance, and if so, the type and the amount of life insurance ideal for your situation.

Common Excuses for Not Buying Life Insurance

Life insurance is one of those things people don’t appreciate having until there is a need for it. Sadly, it is too late to buy a life insurance policy when you wish you had it. While most people understand the importance of life insurance in ensuring the financial security of their loved ones, many people put off buying life insurance by using excuses like:

  • “I have too many other things to worry about right now. I will buy it eventually”: You never know when something unfortunate or unexpected might happen to you. Don’t play Russian roulette with your family’s financial future. If your situation warrants life insurance, buy it today. Moreover, the longer you wait, the more expensive the policy may get, mainly due to an increase in your age and possible health issues.
  • “My other financial obligations are more important than life insurance”: Ensuring financial security of your loved ones is just as important as, if not more than, any other financial obligations. It’s all about priorities and care for the people who depend on you. One way to make room for a life insurance policy in your finances is to spend a bit less on some of your non-essential discretionary expenses, and use the savings to fund a life insurance policy instead.
  • “I’m healthy”: Actually, that is one of the reasons why you should buy a life insurance policy now, rather than later. You are more likely to lock in a longer term policy for a lower premium now when you are healthy than when you may not be later. None of us know for sure how long in the future we will remain healthy. In some situations, a policy may not even be available for you if your health deteriorates to a certain degree.
  • “My employer’s life insurance will cover my family”: Coverage through your employer is a good start, but unfortunately, it is typically only one to two times your salary. This is hardly enough to provide any adequate income for your spouse and dependents. Also, insurance coverage from an employer is not portable – meaning the employee doesn’t own it and can’t take it with them if they lose their job.
  • “Social Security survivor benefits will be enough”: Survivor benefits are typically a modest amount, rarely sufficient for the needed financial security of the survivors. Survivor benefits are based on the earnings of the deceased, and the amount given each month to a survivor is only a percentage of the deceased’s basic Social Security benefit, which varies based on the survivor’s status.
  • “It’s too expensive”: Life insurance has never been more affordable, making coverage possible for virtually any budget. There are plenty of inexpensive policies available in today’s market. Besides, not carrying life insurance can prove to be far more costly to you and/or your family in the future.
  • “I don’t understand it well enough to buy it”: The concept is simple – you pay a set premium each month (for example, $100) in exchange for a promise that your loved ones will get a lump sum amount (for example, $250,000) in the event of your death within a set term (for example, the next 20 years). To learn more, you should contact a local life insurance agent who can answer all your questions and guide you through the process of buying a life insurance policy.
  • “It makes me think about death”: Don’t you think the thought of leaving your spouse, children, or other loved ones, in dire financial straits is equally, if not more, unpleasant as thinking about passing away? Buying a life insurance policy is a great way to express to your loved ones that you care more about their financial security than any unpleasant thought for the time being.

No matter what your excuse(s), there is absolutely no excuse that can justify jeopardizing the financial well-being of your loved ones. If your situation warrants buying life insurance, stop procrastinating and buy it today. Fortunately, life insurance has never been more affordable, making coverage possible for virtually any budget.

7 Steps to Buying Life Insurance

Buying life insurance is a once or twice in a lifetime event. If you have never purchased a life insurance policy before, you may not be familiar with the steps involved in doing so. While there is no set process to follow, the following are the seven steps most consumers typically go through to purchase a life insurance policy:

  1. Find an Insurance Agent
    An insurance agent is like, for example, a customer assistant at a technology store like BestBuy – they both help you understand the product you are looking to buy, and select the right one for your needs without any additional cost to you for their service. Whether you buy your insurance policy directly from the insurance company or use the knowledge and expertise of an insurance agent for the same, your cost for that insurance policy will be the same.
  1. Determine Your Needs
    Work with your insurance agent to determine whether life insurance is warranted for your situation. If warranted, your agent will help you decide the type and the amount of insurance ideal for your situation. Your agent will help you customize your coverage with policy options and riders to meet your needs, and assist you in preparing your insurance application.
  1. Get Quotes
    Your insurance agent will need your basic information to get preliminary quotes from multiple insurance companies without disclosing your identity to them. When comparing quotes from various companies, remember that the cheapest coverage isn’t always the best option. Focus on the quotes that are in your price range, and let your insurance agent explain the pros and cons of each choice. Once you select an insurance company, fill out their insurance application to apply for the insurance coverage.
  1. Fill Out the Application
    You will need to complete an insurance application to purchase life insurance. An application can be a paper application or electronic application using secure websites, email, and phone calls. The application will ask about your age, height, weight, lifestyle habits (i.e., smoking, drinking, exercise), driving record, hobbies, health-related questions, financial information including your annual income and net worth, etc. Normally, your medical exam is also scheduled as part of submitting your application.
  1. Get a Medical Exam
    Most companies require an in-person medical exam. Your insurance agent will arrange your medical exam, at no cost to you, at your home, office, or a clinic selected by the insurance company. During the exam, the paramedical will likely take your blood and urine samples, blood pressure, height/weight measurement, and medical history. The paramedical will likely ask about lifestyle habits that could affect your health (exercise, smoking, drinking, high-risk hobbies, etc.) and to sign request forms for your medical records. Life insurance medical exams normally take no longer than 30 minutes.
  2. Get Approval
    An underwriter at the insurance company will review your application and medical exam results to determine what financial risk you represent to the company, and whether to approve your request for the coverage. If approved, you will get the final quote from the insurance company, which may be different than the original quote, if the facts collected during the underwriting process are different than the information you originally provided to get the quote. You may adjust your policy amount, term, and/or riders, to finalize the quote. The approval process usually takes between 2 to 6 weeks. 
  1. Pay Your Life Insurance Premium
    Once your insurance application is approved and premium is finalized, the insurance company will send you your life insurance policy and information to make payment. At this point you will also sign off on a few other documents such as delivery receipt, amendments, and health statement. It’s important that you immediately and carefully review the policy and discuss any questions you have with your agent. Once you make your first payment, you are insured.

By law, every life insurance policy includes a 30 day “free look period”. This gives you the right to deny the insurance coverage within 30 days after you receive the policy. If you decide to turn down the coverage during the free look period, the insurance company is required to refund you the full amount of any payments you have already made.

Term Life Insurance vs. Whole Life Insurance

At its core, life insurance provides a set amount of money, called death benefit, to your intended beneficiaries (your loved ones, charity, lender, business partner, etc.) in the event of your passing. There are various types of life insurance – each designed to serve specific needs of the policyholders. The two most common life insurance types are Term Life Insurance and Whole Life Insurance.

  • Term Life Insurance: Term life insurance provides a death benefit for a fixed number of years – usually 5, 10, 15, 20, 25, or 30 – that you choose when you buy the policy. You pay premiums for each year of the term. When the term is up, you stop paying premiums and you no longer have coverage. If you die at any point during the term, your beneficiaries receive a death benefit. If you die after the term ends, your beneficiaries get nothing. You may be able to renew your insurance policy depending on your age and health condition when the original term is up, but usually at a sizably higher premium. Term life insurance is the simplest and least expensive type of life insurance. It is designed for temporary coverage needs and has no cash value. There are three major types of term life insurance – level term, decreasing term, and increasing term.
  • Whole Life Insurance: Whole life insurance provides a death benefit for your entire life no matter how old you get. As long as you regularly pay your insurance premium, whole life insurance pays a death benefit whenever you die—even if you live to 100! You may choose to spread your total whole life insurance premiums out over just 10, 15, or 20 years, instead of over a lifetime, to eliminate the ongoing expense of life insurance premiums before retirement. Whole life insurance is significantly more expensive than term life insurance primarily because it not only provides you the coverage for your entire life, but also allocates a portion of your insurance premium towards building up cash value for you. Think of building cash value as building equity in your home. This cash value is guaranteed to grow at a certain amount each year and you can borrow against it for various needs. Whole life insurance is designed for permanent coverage needs. There are three major types of whole life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.

Because whole life insurance is more costly and difficult to understand than term life insurance, many people believe that investing the money they save by purchasing term life insurance instead of whole life insurance will be a better use of that money. While that may be true in some situations, it is not always the most efficient way to address your coverage needs. There are many situations in which whole life insurance is warranted even though it is more expensive than term life insurance.

So which one is better – term life insurance or whole life insurance? Well, while there are situations in which one is usually more appropriate than the other, generally the answer depends on your personal situation. For example, term life insurance is usually more appropriate when you need life insurance only to replace your income over a certain period, such as the years you are raising children or paying off your mortgage. On the other hand, whole life insurance is generally more suitable when you want to provide money for your heirs to pay estate taxes, leave an inheritance or money for final expenses, equitize inheritances, or if you have a lifelong dependent such as a child with special needs. However, every policyholder has a unique situation and coverage needs, and there are several factors that need to be considered to determine whether term life insurance or whole life insurance is more appropriate for their situation. Usually your insurance agent considers factors such as your age, health, family situation, coverage needs, and financial goals, to determine which policy type is better suited for your situation.


Life Insurance for Small Business Owners

Just as financial security of a family is tied with the life of its breadwinner, financial viability of a business is tied with the life of its owners and employees. Life insurance can play an essential role in the financial strength and stability of the business. Buying life insurance on the life of owners and employees can help address some of the business issues such as:

  • Planning for succession– One of the main purposes of life insurance for business owners and the key employee is to protect the future of the business in the event of the death of one of the owners or the key employee. Buy/sell agreement and the key person life insurance are the tools to address such situations. 
  • Buy/sell agreement– This is a contract created between two or more business owners so that the deceased business owner’s share of business can be bought at a predetermined price through the proceed from the life insurance policy. Deceased owner’s family gets the life insurance proceed in exchange for relieving the deceased owner’s ownership interest in business to the surviving owner(s).
  • Key person life insurance– A key person is someone who is responsible for the majority of profits, or has a unique and hard-to-replace skill set that is vital to the business (for example, the head chef in a restaurant or a key sales person). The business buys a life insurance policy on its key employee to get compensated for the financial losses that would arise from the death or extended incapacity of the key employee.
  • Maintaining cash flow– Buying the type of life insurance policy on business owners and employees that builds cash value can create an asset on the balance sheet of the business. During lean times and emergencies, this asset on the balance sheet gives the business owners the ability to borrow against it, helping them manage their cash flows.
  • Funding capital expenditure– Life insurance enhances the credit worthiness of the business. The policy’s cash value can be used to borrow and obtain loans at preferred rates from a bank. These funds can be used for developing the business or making additional improvements to the existing business, like purchase of additional machinery or a bigger space for business, etc.
  • Attracting and retaining key employees– Attracting and retaining talented employees is one of the key challenges most businesses face, especially the small ones.  In such cases, offering employee benefits can help. A group life insurance is one of the relatively inexpensive employee benefits a small business can offer to attract new employees and retain the current ones. Small businesses that do not feel they can afford to provide an employer-paid life insurance, can still deliver a valuable service to their employees by offering life insurance as a voluntary benefit. So employees can get coverage more easily than if they buy their own life insurance as an individual, and the premium can be less expensive.

Every business is different and each has individual challenges and obstacles. The only way to smoothly handle difficult situations is to be prepared. Business life insurance may be a strategic and cost-effective solution to help protect your business, and can be an important part of your overall business plan. Choose a policy or plan that best suits your needs and requirements.

What is Disability Income Insurance?

Your income is the foundation that supports your expenses, lifestyle, and future plans. What would happen if your paychecks stopped due to an accident or illness? If you’re unable to work due to a sickness or injury, disability income insurance can help you meet your expenses and maintain your standard of living.

Disability income insurance can help you pay bills like your mortgage, tuition, and car payments, and help cover the expenses for food, clothing, and utilities. By replacing a portion of your income, disability income insurance can help provide financial security until you get back on your feet and return to work. 

Some statistics explaining the need for disability income insurance include:

  • Just over 1 in 4 of today’s 20-year-olds will become disabled before they retire. ( Social Security Administration, Fact Sheet February 7, 2013)
  • Over 37 million Americans are classified as disabled. More than 50% of them are in their working years, age 18-64. ( Census Bureau, American Community Survey, 2011)
  • In December of 2012, 8.8 million disabled wage earners were receiving Social Security Disability (SSDI) benefits, and 2.5 million of them were in their 20s, 30s, and 40s. ( Social Security Administration, Disabled Worker Beneficiary Data, December 2012)
  • 65% of initial SSDI claim applications were denied in 2012. ( Social Security Administration, Disabled Worker Beneficiary Data, December 2012)
  • Less than 5% of disabling accidents and illnesses are work-related. The other 95% are not, meaning Workers’ Compensation doesn’t cover them. (Council for Disability Awareness, Long-Term Disability Claims Review, 2012)
  • Approximately 90% of disabilities are caused by illnesses rather than accidents. According to the Council for Disability Awareness (CDA), the leading causes of new disability claims in 2012 include musculoskeletal/connective tissue disorders, cardiovascular/circulatory disorders, cancer, mental disorders, and injuries and poisoning.

Disability income insurance is designed to replace anywhere from 45% to 65% of your gross income on a tax-free basis, should illness keep you from earning an income in your occupation. The premium on your individual disability income insurance policy is determined based on the factors like your age, occupation, medical history, lifestyle habits, policy riders you choose, monthly benefits you intend to receive, and waiting period and coverage period for disability income.

Every disability income insurance policy is different and should be assessed based on the quality of plan created for your needs, and not by the cheapest disability income insurance policy on the market. Many consumers do not plan for the possibility that they will be faced with a debilitating accident or illness during their working years. A professional with a family, for example, should consider disability income insurance as a necessity. Individuals believe they may have disability coverage through their employer. This at times may be true, but the quality of coverage often leaves the disabled employee short of the protection he/she thought they had.

Think of disability income insurance as insurance for your paycheck. It ensures that if you are unable to work because of illness or injury, you will continue to receive an income and make ends meet until you’re able to return to work. You don’t hesitate to insure your home, car, and other valuable possessions. So why wouldn’t you also protect what pays for all those things – your paycheck.

What is Long-Term Care Insurance?

Long-term care refers to the variety of services and supports people with a chronic illness, disability, or other condition need on a daily basis over an extended period of time. Most long-term care is non-skilled personal care assistance, such as help with everyday activities like dressing, bathing, preparing meals, eating, transferring to or from bed or chair, caring for incontinence, etc. Long-term care insurance is a type of health care insurance that covers nursing home, skilled nursing, assisted living facility, Alzheimer’s disease care, custodial care, or in-home care costs for people over 65.

Some statistics explaining the need for long-term care insurance include:

  • According to the U.S. Department of Health and Human Services, 70% of people turning age 65 can expect to use some form of long-term care during their lives.
  • 20% of today’s 65 year-olds will need long-term care for longer than 5 years.
  • 97% of people over the age of 85 require assistance in the last year of their lives. (The LTC Report)
  • Over 50% of all people entering a care situation are penniless within one year. (Harvard University)
  • Singles are at risk because they’re usually not with someone who can properly care for them. The same is true for wives who tend to outlast their husbands by seven years on average.
  • Less than 1/3 of Americans aged 50+ have begun saving for long-term care. It can be expensive and may endanger your retirement and other savings. (

The average cost of staying in a nursing home for a year is between $55,000 and $100,000, depending upon where you live. Either you plan and save for it, ask your children to pay for it, live abroad where healthcare is cheaper, buy life insurance with long-term care riders, or buy long-term care insurance.

If you did not buy long-term care insurance, you will need to pay for your nursing home and long-term care expenses out of your pocket, or qualify for some long-term care coverage through Medicaid. To qualify for Medicaid, your income must be below a certain level and you must meet minimum state eligibility requirements. Also, you qualify for Medicaid only after you and your spouse have “spent down” almost all your assets. Other federal programs such as the Older Americans Act and the Department of Veterans Affairs pay for long-term care services, but only for specific populations and in certain circumstances. Medicare does not pay for non-skilled personal care assistance.

If you have long-term care insurance, you will receive a maximum daily benefit of $100-$500 for your expenses, depending upon the type of coverage you selected. Your coverage is guaranteed as long as you continue to pay your insurance premiums. You don’t necessarily lose the money you paid for long-term care insurance if you don’t require long-term care during your life. Different insurance plans will have different terms for the return of premiums. Some long-term care programs include a program called “return of premium on death”. If you have this type of long-term care insurance and die without using your entire benefit, your premiums (minus the amount you used) will be returned to your estate.

Buying long-term care insurance is notoriously complicated. There are coverages, inflation protection, benefit periods, daily benefit, triggers, and elimination periods, that all need to be taken into consideration. Work with an insurance agent you can trust, to select the best long-term care insurance for your needs.

Most Common Types of Insurance for Small Businesses

While you are busy running and growing your small business, it is important you take some time to protect your small business from unforeseen events that may jeopardize its financial well-being. Buying insurance is the most efficient and effective way to do so. While the exact type(s) of insurance needed depends on the type of small business and the risks it faces, it is advisable for all small businesses to buy at least the following types of insurance at the minimum:

  1. General Liability Insurance: It provides both defense and damages if you, your employees, or your products or services cause, or are alleged to have caused, bodily injury or property damage to a third party.
  2. Property Insurance: It offers protection for damages to your business property structures (business premise – whether you own or lease) and contents (office furniture & equipment, computers, inventory, etc.) due to a fire, vandalism, theft, smoke damage, etc. It also covers certain exterior features such as signage, fencing, and landscaping against loss or damage due to covered risks.
  3. Business Auto Insurance: It offers the same types of coverage as offered by a personal auto insurance policy – liability, collision, comprehensive, personal injury protection, and uninsured/under-insured motorist. In most cases, you will not need this separate coverage if your car is used for both personal and business purposes. However, if the vehicle is exclusively for business use or it is titled to your business, you will need a separate policy.
  4. Workers’ Compensation: It pays for the medical expenses and a portion of lost wages of covered employees, for injuries and illnesses arising out of and in the course of employment. Workers’ Compensation is mandatory in most states.
  5. Business Owner’s Policy (BOP): This is the most common policy for small businesses. It bundles all required coverage a business owner would need (liability insurance, property insurance, business auto insurance, business interruption insurance, crime insurance, etc.) into a single policy, which typically costs less than the total cost of all of them individually. Based on your business’s specific needs, you can alter what is included in a BOP. A small business must meet certain criteria to be eligible for a BOP.

Whether or not you need other types of insurance in addition to the ones mentioned above depends on the type of small business you own, and the risks it faces. Some of the other types of insurance include Professional Liability Insurance (aka E&O Insurance), Product Liability Insurance, Employment Practices Liability Insurance, Directors’ and Officers’ Liability Insurance, Data Breach/Cyber Liability Insurance, Key Employee Insurance, Umbrella Policies, and Business Interruption Insurance.

Contact an insurance agent specialized in small business insurance, who can help you identify various risks your small business faces, and recommend insurance types and specific coverage you need, to protect your small business against those risks.