Life insurance explained from A to Z
Life insurance is all about getting protection against uncertainty. The wise consumer knows that no one can predict the future. They want to be sure that certain "what ifs" are answered in the event something happens to them.
- Reasons for getting life insurance
- Main types of life insurance
- Individual vs. Group policies
- The life insurance beneficiary
- Determining the level of insurance
- Deciding what type to purchase
- Tips for selecting a provider
- Tips for choosing an agent
- How to save money
Reasons for getting life insurance
- To take care of the financial needs of those who depend on the policyholder in the event of his death.
- To cover funeral, burial and other related expenses.
- To provide heirs with an inheritance.
- To take care of estate taxes so that the heirs will not have to pay for them.
- To make donations to a charitable institution.
- To serve as a savings plan.
Main types of life insurance
The following are the general types that apply to individual consumers:
- Term life insurance
- Whole life insurance
Term life insurance represents the simplest type. Payment is made upon death of the policyholder within the covered time period.
Whole life insurance involves a level amount in premium payments and it has two parts: there is the insurance part and the investment part. The insurance component makes a payout when the one insured dies, the investment part acts like a fund that accumulates which the policyholder can draw upon or borrow against.
Different types of term life insurance
Term insurance is further broken down into two basic types:
- Decreasing term life
- Level term life
A decreasing policy means the payout goes down each time a year is taken off the policy's time coverage.
A level term policy provides the same payout at any period during the covered time period.
Term insurance is generally offered in the following configurations: annual, five year, ten year, fifteen year, twenty year, twenty five year and thirty year terms. There is also a type where the term is tied to an age specified in the policy (usually sixty five). Of these types, the twenty-year policy is considered the most popular.
Premium payments for term policies are determined on the basis of an individual's age and his health at the onset of the policy.
Premium payments remain constant throughout the policy's term. When the policyholder renews for a new term, the premium is recalculated based on the individual's new age. Getting longer terms would mean for a longer period of time the premium amounts remain fixed.
However, there are companies that do not offer that guarantee and thus allowing them to raise the amount during the policy's term.
There are also policies that can be converted to a permanent life insurance policy where the provider will not require any other evidence of the individual's insurability. There are, likewise, providers that offer the benefit of "return of premium." To avail of this feature, one will have to pay a higher premium.
Different types of permanent policies
Whole or ordinary life - the most popular, provides for a payout in the event of the death of the policyholder and also a savings account.
Adjustable or universal - more flexible than the whole type of policy. Here, the policyholder can change the features of their policies based on their changing needs. It could be a change of the period of protection, the face amount, the premium and length of the payment period.
Variable - this type offers a combination of death benefits and savings account that can be invested in bonds, money market and stocks. The policy's value may increase faster, however, it also faces certain risks. For instance, bad performance of the investments can decrease your policies value and lower the death benefits.
Variable-universal - this is a combo type that offers a mix of variable and adjustable features. The policyholder gets the rewards and risks of a variable plan while maintaining the ability to change certain features of the policy as is provided in an adjustable plan.
Individual vs. Group policies
Individual policies are purchased by consumers on their own. They select a policy based on features and benefits and also the insurance provider. Usually, a consumer can buy a policy through an agent or broker who also sells to him car or home insurance for a commission. The consumer can also go directly to an insurance company to make the purchase.
Group policies are purchased through an employer or an organization of which the consumer is a member. Group policies usually involve lower premiums because of subsidy provided by the employer or the group and premiums are paid via payroll deduction
The life insurance beneficiary
The life insurance beneficiary is the individual or the entity named in a policy as the recipient of a death benefit payoff. This can be a single individual, two or more individuals, the one designated as the trustee of a trust set up by the policyholder, a charity, or the policyholder's estate.
In case no beneficiary is named, the benefits will be paid toward the estate.
Beneficiaries can either be primary or contingent. Death benefit payouts are made to the primary beneficiary. However, if that person is not found, the benefits go to the contingent beneficiary. In case either one is not found, the benefits will be paid out to the policyholder's estate.
Determining the level of insurance you need
The general guidelines are as follows:
- Individuals with no dependents and have sufficient funds for funeral, burial and related expenses have no need for life insurance.
- Purchase life insurance if your aim is to contribute to a charity or leave behind an inheritance.
- If there are individuals who depend on you financially, purchase insurance so that a financial replacement is in place to take care of them in case you die.
- Life insurance can also serve as a replacement for hidden income - or income that is not part of the policyholder's gross salary.
- Purchase insurance if there is no fund to cover funeral, burial and other expenses. The minimum recommended coverage for this matter is $15,000.
If you have already decided that you need life insurance but you don’t know how much go to the How much life insurance do I need? Q&A, where we have answered this question in details. Or you can also try our life insurance calculator – simply imput the required values (for your assets and expenses) and the calculator will estimate the right amount of life insurance for your needs.
Deciding what type to purchase
Get a term life policy if:
- You need coverage over a specific time period. For instance, if you have young kids and you want assurance that money will be available once they get to college, you purchase a twenty-year term policy.
- You have to pay off a debt within a term period.
- You feel the need for large coverage but have limited funds for premium payments.
Get a permanent policy if:
- There is a need for insurance throughout your life.
- You prefer to have a source of money, which can be utilized for a number of purposes.
Tips to consider when selecting an insurance provider
When choosing your insurance provider look for the following:
- Look at what a company offers - select one that offers a product with features that can satisfy your needs.
- Choose a company that has a well-established identity - meaning it has a name, an address, and has affiliations with other established entities or organizations.
- Look for a provider with firm financial standing - do this by referring to ratings or reviews done by reputable rating agencies.
- Select a provider that abides to the codes and principles laid down by the Insurance Marketplace Standards Association, the industry watchdog for ethical business practices.
- Opt for a company that gives sound advice and quality service.
- Do business with a company with a good record of handling claims and or complaints.
Tips to consider when choosing a life insurance agent
Look for the following:
- The agent has to be properly licensed by the state.
- Look for one who can get a good idea of the situation you are in financially. He has to be one who strives to know your appetite for risks, the assets and liabilities, your personal affairs that will impact your financial life, etc.
- He should be good at explaining the details of a policy, related issues, the options available to you, etc.
- The agent should keep a record of your situation and be able to find a fitting policy.
- The right agent should not pressure you into making a decision.
- Should be available to review any changes in your situation from time to time.
How brokers and agents get compensated
Brokers and agents get their compensation either as a fee or as a commission. Usually, they get their pay at the time the policy is purchased.
How to save money when purchasing life insurance
- Do initial shopping online to get an idea of the premium payments.
- Look for a good and trusted agent to find you a premium quote and also get you an idea as which rate category you are likely to be classified by providers.
- Many providers classify their customers as either "preferred" or "standard" and quote a rate to them accordingly.
- Consider getting group insurance. The office you work for may have a life insurance program for its employees, which can get you lower premium payments. Also, you pay via salary deduction.
- Maintain a healthy lifestyle. If the provider sees you as a health risk, they are not likely to offer you a good rate.
- Make comparisons with the use of the net cost index. This tool allows you to see which policy will give you the best deal with the use of an index. An agent or broker should provide index ratings per policy to you.
- Be wary of those so-called premium discounts and also fractional premiums. Look at what the catch is in these offers.
- For term policy buyers, get renewal guarantee from the provider. This means no need for you to undergo health examination upon renewal or provide additional documents that certify you as being insurable.