Life Insurance 101 - The Basics
Life insurance can be one of the most important purchases you ever make. After all, it can protect your families future, help you build wealth over your lifetime, and ensure financial security to name a few. But for many people it seems like such a confusing, convoluted topic to tackle, leaving them confused about where to start. Sound familiar? And let's be honest, if you've ever read a policy, it can feel like it's written in another language. But it can be a great solution for insomnia!
Getting life insurance doesn't have to be hard, confusing, or boring! You just need to work with an agent who will simplify the process for you, and take the time to get to know what your needs are. Then they are your biggest ally, utilizing their knowledge, experience, and abilities to get the best solution in place for you.
In the meantime, if you've ever wanted to get a basic understanding about life insurance, and how it works, then this is the right article for you!
The Need for Life Insurance
If you have anyone who depends on you financially, whether it's your children, a business and it's employees, elderly parents, or maybe a special needs family member, then life insurance is a must. Some of the things it can do include:
Pay for funeral costs
Help pay the bills and cover ongoing living expenses
Pay off outstanding debts, including a mortgage and credit cards
Ensure the continuation of a family business
Finance future needs like children's education
Protect a surviving spouse's retirement
And much more . . .
There are different types of life insurance policies out there on the market. The type of policy that you need depends on many factors. There is no one type fits all. Everyone has different needs, and is in different stages of life with varying factors, goals, and priorities which will all determine what type of product and how much coverage is needed.
Don't have anyone who is financially dependent on you? There's still ways that you can benefit from life insurance. From protecting your estate, to building wealth, there is a lot it can do.
Main Types of Life Insurance
Life insurance can either be temporary or permanent, and these are the general categories that you can immediately separate policies into.
Term insurance is insurance that covers you for a specified period of time. This can be for as short as 5 years, and as long as 30 years and everything in between. So let's say you have a 20 year term that you purchase when you are 30 years old. This means that for the next 20 years you will have life insurance coverage until you reach age 50. At that point the coverage will end. You might have a few options at that point such as rolling your policy over to a permanent one (within a specified period of time), or buying an entirely new policy all together. But the rates you'll pay for the new policy will be based on the age you are when you purchase it.
Term insurance is the cheapest type of insurance that you can buy so if your budget is small it's a great place to start, as you can buy a large amount for a small premium. It's also a great way to boost your overall insurance coverage when you have large things like a mortgage that you'd like to cover.
Permanent insurance policies are just that. They offer insurance coverage that you have until the day you die, whether that happens at age 80, or age 100. The only way you can lose your coverage with a permanent policy is if you stop paying the premiums, and let it lapse to the point that the policy is cancelled.
The most popular types of permanent policies are called "whole life" and "universal life." Although these policies are more expensive as compared to term insurance, when you look at what you get for that additional premium, it's well worth it. When you get into the permanent policies, this is where you can really start to utilize the power and abilities that these policies have to build them to do whatever you need them to do. Want to build cash value fast? It can do that. Is a large death benefit more important? It can do that. Want to be able to leverage it for long term care costs if needed? Or lower your tax liability in retirement? It can do all of that and much more.
Main Differences in Types
Some of the basics that you need to know are the main differences between the two categories (term and permanent). See our chart below:
Within each main category type are sub-categories where you can further separate them according to their differences and characteristics, but in this blog post we are just going over a basic, high level overview of life insurance and how it works, and the above chart shows the basic differences between the categories. But you can have policies where your premiums stay the same throughout the life of the policy, and there are policies where the premium amounts go up every year, or at set times during the policy. Different "riders" are also available from company to company which enables you to more fully customize a policy to fit your needs.
Factors That Determine Your Premium Rate
There are four main factors that determine what your premiums will be on a life insurance policy. They are:
Your age - With life insurance, age rules. Simply put, the younger you are, the cheaper it is. So it is always a good idea to take advantage of your age and lock in your premium savings for life. After all, you'll never be younger than you are today.
Your health - just because you have a health condition doesn't necessarily mean you can't get life insurance coverage. Different companies are lenient with different conditions. In some cases it means that you could still get coverage but you might have to pay more in premiums for it. Even more reason to get coverage in place as soon as possible before your health changes and it drives your premiums up or takes the option away entirely.
Your sex - With life insurance premiums, women pay less than men for the same coverage. This is because they tend to live longer. So the ladies get a nice little break here on the premiums.
Whether or not you're a smoker - this factor alone can double your premiums right off the bat. So it's a great incentive to commit to quitting and help your pocket book, as well as your health.
There are additional factors that are taken into consideration when determining the premiums that you pay, but these are the four main drivers.
How They're Issued
Policies are considered either "simplified issue" or "fully underwritten". Simplified issue policies do not require a medical exam, or answering questions about your health during the application process. Because they do not need to request medical records, etc. the entire process is faster. The trade off with this is that you are going to pay significantly more for these policies because you are asking the insurance company to look the other way and take on an unknown risk.
Fully underwritten policies on the other hand require that you answer health questions, and complete a basic medical exam and lab work, depending on the amount of coverage you're applying for. Because the insurance company is doing their homework on you, they know what type of "risk" they're taking on and your premiums will be lower with a fully underwritten policy vs. a simplified issue.
Your Biggest Asset
When you're looking to purchase life insurance, your biggest asset is the agent that you work with. They're like your best friend who you talk to about what you want to accomplish, what you need, and what your concerns are. Then they become your biggest advocate who takes all of this information and they go to bat for you, lining up all the moving pieces, positioning you in the best way possible, so that you have the largest chance of successfully getting the policy that you need in place and at the best rate possible. You want to be able to leverage the experience, knowledge, and relationships that a good agent has, because in the end it benefits YOU. If an agent isn't taking the time to get to know your needs, and answer your questions, move on to someone who will.
When the process isn't done correctly, you run the risk of being declined or paying more for coverage than you have to. If Company A declines you, now that's on your record, and Company B and Company C can see that you were declined over here with company A (yes, they have access to that information!) So now they'll want to know what you were declined for. Being declined with one company doesn't mean that you can't get coverage with another one. Different insurance companies have different underwriting processes (how they process your application and determine whether or not they'll grant you coverage), and are lenient with different health conditions. But having a decline on your record does make it harder, and it means that even more work needs to go into making it happen.
Another reason to work with a good agent? Because when the time comes that you need to utilize the policy, they'll be the familiar person that you know and trust to be there to guide you or your family through the next steps. The alternative is digging through your files to find the policy, trying to make sense of the jargon, and spending time on the phone with people you've never talked to at the insurance company to try to figure out what you need to do. All while going through a very difficult, stressful time in your life. Let your agent do their job.
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