Life Insurance 101
How does life insurance work? Many consumers are left without the information they need to make an informed purchase decision.
Between the endless solicitations on TV, online, direct mail and sales calls they just give up!
Buying life insurance doesn’t have to be confusing. Once you understand the basics, you’ll feel confident you made the right decision.
Who needs life insurance
Do you need life insurance coverage? The easiest way to figure it out is to consider the people in your life who depend on you. If your loved ones will have a tough time financially if you were to die, you need a policy.
It may surprise you to know that everyone needs at least a little life insurance. Even single people!
A few examples of people who have the greatest need for life insurance are:
- Couples with children
- Single parents
- Married couples
- Stay at home parents
- Business owners
Work Life Insurance
Don’t most people have life insurance through their job?
Yes. Most employers offer voluntary life insurance benefits. Many employees are not aware that there are downsides to this type of coverage. At least as their single plan!
The most prominent objection that agent hear is “I have coverage at my job!” It’s tough to assist consumers who are under the impression they have no further need for coverage.
Why discuss something you believe is irrelevant?
The problem is that work-life insurance doesn’t cut it for most families. A massive percentage of people don’t have the right life insurance portfolio.
They don’t have enough and will have coverage issues leaving their job.
When to Buy Life Insurance
By this point, you realize most people need an extra life insurance policy.
While there is no perfect time to buy a plan the sooner, the better.
Lots of people delay getting a policy in place. Usually, because they are busy. Other times they are avoiding it. Thinking about death is hard.
Even though it is hard, taking steps to get insured is an act of love for your beneficiary.
Don’t leave them in a financially devastating situation by procrastinating on buying life insurance!
People commonly buy coverage during these life events:
- Getting married
- Buying a home
- Having children
- Going through a divorce
- After a raise or promotion
- Approaching retirement
- Starting a business
Life Insurance Needs Analysis
How much life insurance should you buy?
It’s easy to get overwhelmed with all the financial priorities your household has and wonder if you are buying too much coverage.
My advice is to not worry about this.
Sure, your budget will be a factor in determining how much you can afford. You must first learn how much your beneficiary will need. Also, the insurance company has to approve your request. It has to make sense. You can’t buy any amount you want.
Be sure you don’t go cheap and buy too little for your family. That negates the point of having the plan in the first place. The policy is for their financial protection when you die!
A rule of thumb offered by many experts is 7-10 times your gross, annual income.
An easy example, if you make $50,000 a year, you should buy between $350,000 and $500,000.
What if you don’t earn an income? Perhaps you are a stay at home parent. Don’t worry there are ways of calculating how much is needed to replace your efforts in the household.
There are several life insurance needs analysis methods(also known as calculators) available today. You can even do some online. If you get stuck at any point, consult with a professional. Life insurance agents and financial advisers are perfect for this.
A life insurance needs analysis covers:
- Income replacement
- Debt payoff
- Funeral costs
- Inflation rate
- Growth rate
- Social security
- Asset deduction
- And more!
How much does life insurance cost?
Life insurance rates are based on each person’s age, health, and lifestyle. In general, the younger and healthier you are the lower the price will be. This is why it makes sense to buy life insurance sooner rather than later.
The cost is also dependent upon the type of policy and how much coverage you buy.
Consumers have overestimated the actual cost of life insurance by 3-5 times.
Chances are it is a lot more affordable than you think. If you work with an independent broker they can shop around to find you the best price.
Different kinds of life insurance
There are two types of life insurance plans. Temporary and permanent.
Temporary coverage is purchased with term life.
Permanent(also known as lifetime) is purchased with whole life, universal life, variable life, and annuities.
Life insurance policy types vary by company. You should pick the plan that best matches your budget and needs. Not what your family or friends recommend. You can request brochures and proposals that will provide policy features.
Permanent life insurance is noticeably more expensive than term life. Many companies offer permanent plans as a tool for investing. Before you consider a permanent policy for investing, I recommend getting an opinion from a fee-only financial planner.
Family life insurance plans
Consumers often ask for a package life insurance policy that covers the whole family. While life insurance riders can cover a spouse or child this is not an ideal way to buy coverage.
Additionally, couples can buy a second to die policy that will cover them both.
These options provide a low cost means to insure many members of the family. However, it is best for each person to get their own policy. This way they can continue affordable life insurance coverage should the main policyholder die.
Life Insurance Riders
Life insurance policies offer riders, also known as add-ons. You can buy them all or just one. Check with the company for availability and details.
The common types of riders for life insurance are:
- Spouse or child life coverage
- Waiver of disability
- Accidental death benefit
- Guaranteed purchase option
- Payor protection option
- Long-term care coverage
Life insurance Conversion
When you a buy term life insurance you usually have a conversion benefit inside the policy. Term coverage is locked in for the period selected at the time of application.
The choices can be 1, 4, 5, 10, 15, 20, 25 or 30 years. At the end of the term, you can renew the policy but the rates will be based on your new age.
This is why some people decide to execute their conversion option. If during a term policy you decide that you would like the coverage to last your lifetime you can convert it. You can convert some or all of your plan.
Let’s say you buy a $500,000 30 year term plan at the age of 35. By the time you turn 48, you decide you’d like $100,000 in lifetime coverage. If your policy offers a conversion option you can make $100,000 permanent coverage and the remaining will expire at the end of the term.
Life insurance conversions do not require medical reviews for approval.
Life Insurance Beneficiary Rules
Can you name anyone on your life insurance policy?
Not quite. In order for a person to be named, they have to have an insurable interest. The clearest example is when someone would suffer a financial loss if you were to die.
Insurance companies will verify this when reviewing your application. Unmarried couples cannot always name each other on their policies. Be sure to ask your agent if you are unsure.
Life Insurance Application
Once you have made a decision on your life insurance plan, it’s time to apply! Your insurance company will have to review it and decide whether to offer you an approval.
When you work with an agent, they will give you a close idea of what price you will get approved at. They will also place you with the company that has the best chances of approval for your specific situation. This comes in handy when you have a challenge getting coverage such a health issue or occupation.
The first step in the application process is to connect with an agent and complete a phone interview. They’ll notate your personal information and go through the application questions.
This is the time to be as accurate as possible. Otherwise, making corrections after your application is submitted can be time-consuming.
After you review and sign your application, the agent will track it’s progress with the company and keep it moving forward. If there is extra information needed, they will reach out to you.
Your agent will be the one to let you know the outcome of company’s decision.
Top Life Insurance Companies
The best companies for life insurance have excellent customer service and financial ratings.
Financial ratings are graded by third-party companies such as AM Best, Moodys, Standard & Poor. They offer several tiers of the companies financial stability based on their totals assets.
You don’t want to buy life insurance from a company who doesn’t manage their money well.
Customer service is important too! There may be times you need to contact them . This is what makes having an agent nice. Agents can help you pick a good company as well as assist you with service needs in the future.