Over the years, life insurance has changed in many ways but the concept remains exactly the same. Despite this, there are now many misconceptions that exist within the industry which is why we have compiled a complete guide to life insurance. From definitions of key terms to who should get life insurance, from where life insurance can be purchased to why life insurance is important, we will answer all of the important questions here today. Without further ado, let’s take a look and start with some definitions.
Life Insurance Definitions
The following are a few life insurance terms and definitions that are important to understand.
Life Insurance – Initially sought by the policyholder, life insurance is a legally-binding contract between two parties – the insured party and the life insurance company. When someone’s life financially benefits another, life insurance looks to protect this and have it officially noted in a contract. Ultimately, there are four parties involved in every life insurance policy;
- Insurer – As the name suggests, this is the company that the person in question has taken a policy with. Nowadays, there are many different companies within the industry all battling for clients and these are known as the ‘insurers’.
- Insured – By definition, the insured is the person that has been covered within the life insurance policy. In some cases, this will be the person who also owns the policy, which we will go through in just a moment, but not all of the time. If the insured is different to the owner of the policy, the ‘insurable interest’ will be discussed before the policy begins. For an insurable interest to be seen, the policyholder must prove that a financial loss would be experienced if the insured were to pass away. With this security step, it prevents one from purchasing life insurance on any individual.
- Owner – Therefore, the owner is the person who holds the policy and is in full control of the actions relating to said policy. With this in mind, it means that they can change ownership rights, cancel the policy, change some provisions within the policy, change the beneficiary, change the terms for each beneficiary, and even the right to borrow against the life insurance cash value.
- Beneficiary – Finally, we have the beneficiary and this is the person that would, upon the insured passing away, receive the death benefit. In most cases, this section of the policy requires two or more names because there is a primary beneficiary as well as a contingent beneficiary. As the primary, this person will receive the benefit upon death of the insured. However, the contingent is then in place just in case the primary passes before the insured.
History of Life Insurance
Although many believe that insuring one’s life is a new concept, it is actually extremely old and many think that it dates back to 100 BC in Ancient Rome. At the time, a Roman military leader set up a ‘burial club’ so that there were people to pay for the funeral expenses should one member pass away. During this era, the concept grew but eventually faded after the fall of the Roman Empire.
In the 17th century, a small shop in London would play host to ship captains and eventually became the home of marine insurance where the modern concept began. In the middle of the 18th century, New Lloyd’s Coffee House was established as its own professional underwriters and this went on to become the famous Lloyd’s of London. Over the years, other life insurance companies came and went and many even collapsed during the 19th century depression years. However, 1911 saw the introduction of Group Life Insurance when the old AXA Equitable covered every single employee of the Pantasote Leather Company.
By 1930, $117 billion of insurance was in force and the concept was nearly everywhere in the world. Over the next few centuries, the idea was becoming more popular on the whole even though evidence shows fluctuations in actual policies. In 2010, nearly everybody had now heard of life insurance and knew exactly what it was but, sadly, less than half of Americans had an individual life policy despite the damaging effects that this can have.
Different Types of Life Insurance
If you have done a little research into this topic, you would have seen a number of different terms being used for different types of life insurance policies which is why we will now take you through the five main options. After reading this, you will be able to make a well-informed decision between term life and permanent life insurance.
Depending on the type of life insurance you choose, either simplified issue or fully underwritten, you may or may not have to a life insurance medical exam. More on no exam life insurance below, but realize that at times avoiding an exam may be in your favor, especially if you need coverage but have not had a physical in some time. Rather than find out through the insurance exam that you have some sort of health problem, you can opt for the simplified issue route, put the policy in force, and then take the medical exam.
Term Life Insurance
When first obtaining life insurance, many people believe that they are locked into a contract for the rest of their lives but this simply isn’t the case. With the first option we have here – term life insurance – the contract lasts for a limited amount of time at a fixed rate of payments. When this term has then finished, you will have to find a new coverage plan which will have different terms to your previous agreement. Of all the types we will discuss, this is generally seen as the cheapest option. As per a regular life insurance policy, the beneficiary will receive the death benefit if the insured passes.
No exam life insurance – With the advent of the internet we have seen a huge push towards life insurance without the need for a paramedical exam. Also called simplified issue life insurance, no exam life insurance provides all the benefits of regular fully underwritten coverage without the need for a blood draw or urine sample. This is a great option for anyone who has an aversion to needles or whose schedule is too full to squeeze in a 30-60 minute life insurance physical exam.
Permanent Life Insurance
There are 2 primary types of permanent life insurance: whole life and universal life. Universal life has 3 variations: Guaranteed, Indexed and Variable.
Whole Life – On the other hand, ordinary life insurance, better known as whole life insurance, is a policy which is set to last for the rest of one’s life assuming that all premiums are paid. Without having to find a new policy after a certain amount of time, this type of life insurance will last until the insured dies whereby the beneficiary will receive the death benefit.
Considering there is a much longer time frame with this option, the premiums are generally more expensive at first than those seen with ‘term life’ policies. Normally, the premium paid will remain fixed for an extended period of time and won’t increase with age. If you are happy in deciding that the policy is correct for your needs, whole life insurance policies can be a good decision to protect family members and your business.
Whole life insurance can be very beneficial for the following reasons:
- Guaranteed Death Benefit
- Guaranteed Fixed Premiums
- Guaranteed Cash Value Accumulation
- Dividend Payments
And for more advanced planning and financial success, using whole life insurance for infinite banking can be a great way to get out of the rat race and enter financial freedom.
Universal Life – Although these are the two main options, there are some different policies including universal life insurance which is commonly shortened to ‘UL’ insurance. Typically a cash value policy, all excess of premium payments will contribute to the cash value of the policy itself. Each month, interest will be put on top and a cost of insurance (COI) is debited even if no premium payment is made in that same month.
Guaranteed Universal Life (GUL) policies are chosen because they offer guaranteed level premiums for the duration of the policy which is normally cheaper than whole life insurance, although with less cash value accumulation. These policies are great for long term estate planning where the insured will no longer retain incidents of ownership and the policy will be maintained by a trustee, such as in an irrevocable life insurance trust designed to pay estate tax.
Indexed Universal Life – Essentially, this is a type of universal life insurance but it is different in that the earnings rate fluctuates with a stock index as opposed to money being credited to the cash account via a declared interest rate. For example, the S&P 500 stock index is one of the most popular ones that people tend to choose. If this selected index performs well, the returns can be very good. Furthermore, the death benefits will normally be free from income tax and there isn’t a limit in what can be contributed each and every year. Finally, mot IUL policies have a guaranteed minimum or floor of 0% or 1% so the owner of the policy does not experience down years in the market.
Variable Universal Life – Again, this is somewhat linked to universal life insurance but this time the money is linked with different accounts much like mutual funds. With the name ‘variable’, this comes from the fact that investment can be made into separate accounts where the value varies. While whole life insurance offers a guaranteed fixed premium, this policy will be a variable option which means that it can range from negative returns to experience huge returns depending on the investment option chosen.
Survivorship Universal Life – SUL or Second to Die life insurance covers the lives of two different people. It can be spouses or business owners. Nothing happens upon the death of the first decedent. When the surviving spouse dies, the beneficiaries receive the death benefit payout.
The advantage of Survivorship Life Insurance is the premium is typically lower than an individual policy because it is on the life of two individuals, which greatly increases the chance that the policy will remain inforce longer, thereby giving the insurance company greater profits.
Final Expense and Burial Insurance – Final expense policies are typically smaller whole life policies that provide enough insurance to cover the decedent’s final expenses, such as any bills, debts, a funeral, etc.
Burial insurance is similar but it focuses primarily on providing enough insurance payout to cover the cost of a funeral. In 2017, the average funeral is around $8,000. Adjusting for inflation, a burial in ten years will probably cost around $10,000 or more.
Best Life Insurance Companies
Determining who the best life insurance companies are will depend on several factors. One of the most important factors to consider is whether or not that specific company is best for you—that is, does it offer the type of coverage you need, does it cater to any existing health conditions you have, does it look favorably on any lifestyle choices you choose, and does it have the requisite financial strength to provide you with peace of mind that you are choosing the right company.
Does it offer the type of coverage you need:
Not every company offers every type of coverage. Your preference might be for annual renewable term or for whole life insurance. Depending on the life insurance coverage type you need will determine who the best company is for you. And the best company for you will not necessarily be the same for your spouse, business partner, or neighbor.
Does it cater to any existing health conditions or lifestyle choices you have:
Certain carriers offer coverage for various health and lifestyle conditions. For example, some companies offer preferred plus rate classes to marijuana users. Likewise some companies will offer preferred best rates for people on high blood pressure medications. However, not all companies will offer these health rate categories. The key is knowing who to choose based on your unique health and lifestyle.
Does it have the requisite financial strength:
You should be aware of the financial strength of the company you are choosing for life insurance. Ideally you want a company with an A.M. Best rating of A- or higher. In some specific circumstances you might find that a company with a B+ rating fits your needs due to the type of coverage offered. However, it is best to know why that company has a B rating instead of at least an A- rating. It might be due to factors that are improving or it might be due to factors of deterioration within the company. Discovering the factors behind a company’s rating is very important.
What Additional Policy Riders are offered?
If you need a specific life insurance rider then the company you choose will need to offer that option. Otherwise you will need to continue to seek out the best company for your needs.
Who Should Get Life Insurance?
Primary Bread Winner – As the primary bread winner and the head of the household, you should definitely be covered so that those dependent on you can financially survive. Of course, this doesn’t mean that the beneficiary should be rich upon your death but it simply means that there is enough to replace the lost income and perhaps to pay for funeral expenses.
Earlier, we mentioned common misconceptions with life insurance and this is one of the biggest. When discussing life insurance, many believe that it has to be a ton of coverage or that it has to be extremely expensive so that their loved ones can be better off after death. Instead, it simply means that the lost income the insured would have created had they lived can be replaced.
Non-Working Spouse – Often, families will have the bread winner take insurance and then simply leave it there but this should never be the case. Even if a non-working partner doesn’t have a job, they may be looking after the children as opposed to pursuing a career and this means that they still have ‘economic value’. If this person were to pass away, there would still need to be adjustments in terms of taking the kids to school, shopping, cooking, running errands, etc. Over time, these are expenses that can add up.
Also, one partner may have to take time off work after their passing which results in a loss of earnings and decisions that wouldn’t normally have to be made. Even though we don’t like to think about these things, they are steps that need to be taken and the points raised here show the importance of both parties having life insurance – we also have another example.
Business Owner – As a business owner, you have to consider what would happen if the unthinkable were to happen. With so many things to do while running a business, life insurance can get thrown onto some imaginary ‘list’ of things that never get done but this can be crippling. When a partner in a business dies and no life insurance was ever set up, the future of the business would be in danger. With life insurance in place, the business can continue and there is a chance of the business seeing continued success despite the loss.
If you own a business you should consider key person insurance. Further, if you are in a partnership or have more than one business owner, funding a buy-sell agreement with life insurance is a great way to protect the future of your company.
On the whole, there is a famous saying within life insurance that says ‘if someone is relying on you, life insurance is necessary’. As you can see above, the term ‘relying’ doesn’t just apply financially either because one partner may rely on another to look after children or even a business.
When Should I Get Life Insurance?
For the most part, life insurance is used and required when people are dependent on you which is why many professionals hold off on getting life insurance until this moment. According to many experts, there is no reason seeking life insurance in your early 20s if you are still single and maybe even still living at home. While you are young it may be wise to consider locking into a good long term plan, either permanent life insurance or a 30 year term life policy. However, the moment you get into a serious relationship or have a child, this should change.
There is no denying it, thinking about death is somewhat morbid and it brings a downer on the day but not thinking about it is nothing short of criminal. When you have a partner and child who rely on your income, you are risking their future by not protecting them with life insurance. When you have large outstanding debts such as a mortgage thrown into the mix, this becomes even more magnified and really shows the need for insurance. If you were to pass away with no policy in place, regardless of your age, you would be leaving your partner and any children you may have with this headache.
For some reason, we only think about death as we get older but often this is far too late because life insurance coverage will be more expensive and there isn’t enough time to build up a good amount for your partner and kids to use. Whilst you are still young, life insurance will be affordable and you will hardly notice it missing from your earnings which is impressive considering the good it will do should something bad happen.
In summary, there isn’t any need for life insurance while you are young, single, with no major debts, no business, and no-one really relying on your income or support. However, this changes as soon as you get into a serious relationship, have children, or even open a business with a friend – regardless of your age.
Where Can I Get Life Insurance?
Nowadays, there are many different life insurance companies that claim to offer the best deal while all offering different terms and conditions for each policy. With this in mind, it can be hard to know exactly where to go for the best deal. If you were to ask older generations, they would probably answer that they have been with the same company for decades which is great news for them but doesn’t necessarily help you so much. Therefore, what should you do if you’re looking for an insurance company to open a policy?
In truth, the best option would be to contact an online agency that works with numerous different companies. Price comparison sites, such as a good online life insurance agency, allow you to see where you can get the best deal.
Of course, life insurance is more than just money so you need to find a company that will allow the policy you require. Although many do choose to go for the best price, it is also wise to assess all of the available options to see what each policy offers.
When considering quotes, you also need to pay attention to the timeframes of each policy as well as the smaller details such as whether the death benefit will increase with inflation.
Once you narrow your list down to a few companies, then you can do some research and find out how good their service really is. For example, you could look at reviews from professional companies as well as reading the reviews from previous customers. If you take the company’s word for everything that they say, you could be missing out on reading some valuable reviews from previous customers who say that the company couldn’t live up to their promises. Therefore, you need various reviews to gain a well-rounded opinion.
How Do I Find the Best Life Insurance Quotes?
Finding the best term life insurance quotes comes down to having choices. While many companies claim to shop your coverage, you need to find an agency that works with at least 20 companies or more so that you can be sure the agency you are going with can truly “shop” life insurance quotes. Further, choosing an agency that has its finger on the pulse of the latest technological advancements and products is a real plus.
Why Should I Get Life Insurance?
When discussing life insurance, there are often the same questions that come up time and time again. Hopefully, we have addressed many of them so far but we want to go into detail for one of the biggest questions of all – ‘why should I get life insurance?’. As well as the concerns we have already raised, we have three main reasons here today.
Pay Off Debt – For most people, life insurance will be a source of finance so that those left behind can pay off any debts and continue living without the burden. If you were to pass away without any life insurance coverage whatsoever, your debts would then be passed on to loved ones who would have to find the money themselves. With life insurance, these debts can be covered and removed. As you can see, having no life insurance really can be a selfish move because it can leave loved ones in a rather poor state of affairs while also trying to cope with the fact that they have lost someone close.
Replace Income – Normally, this is the main reason why people choose to get life insurance because it ensures that your income will be replaced for a certain amount of time. Of course, this funding won’t last forever but it should last long enough for your family to get the affairs in order and arrange new housing or maybe even finding a job to cover the income that has now disappeared. With no life insurance, your family will have lost your income while also worrying about your debt which has a double effect.
Fund a Charity – When donating money to charity, there are certain taxes that are attached and many people are left wishing that they could do more. Therefore, there is an opportunity to do just this by using a life insurance policy. Nowadays, there are many ways of doing this and it ensures that your chosen charity receives a substantial sum of money after you pass away.
Business Succession – Life insurance is a great way to pass your business on to the next generation. When a business owner dies different things may occur. Creditors may demand payment of any outstanding loans, business relationships may end, sales may stop, and new owners may need to be found. When a business owner has life insurance, the funds from the death benefit can provide the needed cash liquidity to keep the business solvent while any changes are made, including the sale of the company.
Life Insurance Summary
There you have it, a complete guide to life insurance. Now, you should know where to get it, what different policies mean, why life insurance is vital for the bread winner as well as business owners and non-working spouses, when life insurance should be set up, and even who the different parties are in a single policy. With this, you should be able to make solid decisions regarding the future of yourself and your family.
If you have read this but aren’t too sure what policy would be best for you and your family, be sure to contact a professional who will be able to give you personal advice based on your circumstances. Other than that, go out there and get life insurance to protect those around you – it is now easier than ever before!