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.