Life Insurance for Dummies, a Laymen’s Terms Life Insurance Guide
Getting insured is one of the best things that you can do for your family. It ensures that they will be financially protected when you die. And knowing that they’ll be fine can bring you a sense of security and peace of mind.
But finding the best life insurance policy can be difficult if you’re doing it for the first time. So, the first thing that you need to know is that life insurance companies abound and life insurance products come in different types.
In other words, you don’t lack any options, but the difficulty that you’ll most likely face is choosing the best policy that matches your exact needs and financial capability.
To help you sift through the complex information, this article aims to give you a quick insight about life insurance and how it can financially protect you and your loved ones.
What is Life Insurance?
Life insurance is a type of financial product that you can buy so that your family can receive a lump sum of money (known as death benefit) in case you die. This explains why a life insurance is conversely called a death insurance.
The life insurance you purchase is called a life insurance policy. This functions as a type of contract between you and the insurance company. When you applied and get qualified for a policy, the contract you signed becomes legally effective and enforceable between you as the policyholder and the insurance carrier as the insurer.
A life insurance policy is both financial and legal in nature. And just like any type of contract, it contains terms that is legally binding between the two parties, which in this case, pertains to you and the insurance company.
Fundamentally, a life insurance policy is undertaken in such a way by which the insurer agrees to give your beneficiaries a specific and fixed lump sum of money in the event of your death. In exchange, you’ll be paying the insurer a fixed amount every month or annually (called premium) over a period of time or throughout the duration of the policy.
Who Needs a Life Insurance?
A life insurance can be good for anybody. And almost anyone can opt to get covered by a policy. But getting a life insurance depends on the unique needs and situation of individuals. Some people might not see it fit to get one, but others find it more necessary and essential.
So, who are the people who need a life insurance most? Generally, you need a life insurance if you fit any of the following profiles:
You’re the family’s breadwinner
If you have people in your life who relies on you financially—whether it’s your spouse, kids, siblings, or parents—then getting a life insurance should be imperative. If ever you die, your death benefits will help your loved ones cover the costs of immediate expenses and other needs.
You’re single (with no kids)
Most single people mistakenly think that they don’t really need an insurance because they live on their own and no one depends on them financially. In many ways, this could be true, but if someone or some people (your parents, for instance) will be affected financially in case you die, then you should consider getting a life insurance. Besides, getting covered by a policy as early now will benefit your family in the future if ever you decide to marry and have children. This is because you will be able to secure a rate while you are younger and healthier.
You’re a single parent
With no spouse on your side, getting a life insurance is one of the best ways to protect your kids. If you die, your death will not only be emotionally devastating for them, but it will also be financially ruinous to their future. But if you have a life insurance, they wouldn’t struggle as much because they have enough funds to sustain their needs.
You’re older and retired
If you’re an old retiree with enough source of funds to cover a monthly premium, then getting an insurance is still a good option. Remember that even if your family is already financially stable, your death will still be a big blow financially.
The case would be different if you have a life insurance. If you’re covered by a policy, your loved ones will have enough money to cover your burial costs and pay off any debts that you left behind. If the amount is a bit sizable, the leftover will still be a big help for your heirs.
If you have an illness and expecting a long-term medical care, a life insurance with living benefits might be a good option. This type of insurance allows you to use your death benefits or a portion of it even if you’re still alive.
If you get confined and have to undergo treatment and medical care, your family can use this amount to cover your medical costs.
At the least, a good burial policy should be in place.
You own a small business
If you’re a small business owner, the benefits from your insurance coverage can be used to protect your company financially and keep it stable.
There are many ways that a life insurance can help your business. In the event of your death, for instance, the money can be used to pay your existing business debts so it wouldn’t be a burden to your company or your family.
As another means to protect your business, you can also purchase a key person insurance, not only for you but also for some of the most indispensable people in your business. This policy entitles your company to receive the death benefit if ever you or one of your insured key employees died. This money will help mitigate the economic impact of the loss to your business.
If you have business partners, you can also use the death benefit to fund a buy-sell agreement. Additionally, getting a life insurance is also important if you’re looking at venture capital financing. This assures the investors that there will be enough money to keep the business afloat even if you die.
Types of Life Insurance
There are two basic types of life insurance—term life insurance and permanent life insurance.
The term life insurance has two main types: level term and decreasing term. The permanent life insurance also has two major types: whole life insurance and the universal life insurance.
Take note that there are many other sub-types of insurance, but for the sake of simplicity, this article will only tackle the major policies.
Term Life Insurance
The term life insurance is a type of policy that provides you with a death benefit coverage for a specific period of time. Usually, these term periods are set at 10, 15, 20, 25, or 30 years. Whatever term you choose, you will have to pay a monthly premium until the end of the term. The amount of this premium remains the same throughout the period of the policy.
Once the term life insurance expires, either it ends definitely or you can renew it annually if the insurance company provides an option for policy renewal. Normally though, insurers allow their policyholders to renew their coverage up until they reach 95 years old. But take note that when you re-qualify for the coverage, your premium will most likely get higher because your age and health condition will be taken into consideration. In other words, your premium increases as you get older. Some insurers, however, permit their policyholders to pay the same amount of premium in exchange for lower coverage amount. Most of the time, you also won’t have to qualify for a new rate class, but instead be guaranteed to renew at the health class you were approved for initially, no matter if your health took a turn for the worse.
Basically, a term life insurance is the simplest and most affordable type of policy that you can get. It is called the “pure policy” because it is very straightforward. It has no cash value build-up, no other provisions, no extra charges, and no other frills whatsoever. As long as you pay the premium, the policy is in effect. And if you die during the period of the term of your coverage, your beneficiaries will immediately receive a death benefit.
It is also worth noting that term life insurance provides additional protection, such as a terminal illness rider or an accelerated death benefit which allows you to claim a percentage of the coverage in case you are diagnosed with a terminal illness. The money is intended to cover your medical expenses.
Now, there are two types of term life insurance—the level term life insurance and the decreasing term life insurance.
Level Term Life Insurance
The level term life insurance exemplifies everything that makes the term life insurance simple and affordable. The key is in the name itself: level term.
In this type of policy, the level term means everything is set and fixed, whether it’s the amount of the coverage, the amount of premium that you will pay, or the length or period of the policy. This means that nothing changes and there will be no adjustment to inflation either.
For example, let’s say you purchased a 20-year level term insurance with a face amount of $500,000 and a monthly premium of $23.81. This means that the term, the monthly premium, and the face amount will remain the same throughout the period of the policy which is 20 years. And it doesn’t matter whether the value of the dollar increases or decreases because nothing changes.
If you passed away anytime during the period of the coverage, your family will get a payout of $500,000. Now, if you died after the policy expired (which means after 20 years), your beneficiaries wouldn’t get any amount because your coverage already ended.
Decreasing Term Life Insurance
Unlike the level term life insurance with a fixed face amount, the decreasing term life insurance stipulates that the amount of your premium will remain the same but the coverage amount decreases over time until the end of the policy. The reason for this decrease is your age.
Indeed, in decreasing term life insurance, age is a big influencing factor. The amount of monthly premiums approved for applicants normally varies depending on their age. For the same period of coverage, for instance, a 50-year old individual may be given a higher monthly premium than a 26-year old applicant.
When you get approved for a decreasing term life insurance, the monthly premium that you agreed to pay every month will not increase or decrease, but the face amount that your beneficiaries will get decreases as you age.
The decreasing term life insurance is popular because it is usually used as a form of mortgage life insurance. If you have an existing mortgage and you don’t want your loved ones to get burdened by the debt in case you die, then you can purchase a decreasing term life insurance so that your family can use your death benefit to cover the remaining balance on the mortgage. This is the reason why this policy is also sometimes called the mortgage decreasing term insurance. In other words, it is an ideal policy to cover any type of debt that goes down over time, and a mortgage is just a prime example.
Permanent Life Insurance
The permanent life insurance has no expiration. Your coverage remains as long as you’re paying the premium. This is unlike the term life policy that is set for a specific period of time. Because this type of policy has no limit, you don’t need to renew. It will last throughout your life and your family will immediately get the death benefit after you passed away.
The cash value that is included in the permanent life policy refers to a savings amount that accumulates over time (on a tax-deferred basis) as long as you’re paying the premium. You can tap and access this money anytime you need to, especially during a situation when you need money to cover an emergency expense.
When you use a cash value money, you are essentially taking a loan from the policy. Because you are borrowing, you are obligated to pay it back with a small interest. If you died and the money you borrowed is not yet paid, the amount will be deducted from the death benefits that your family will receive.
If you decide to cancel your life insurance policy, you will get the accumulated cash value. Normally, this money will be deducted with the amount of the cancellation charge.
Now, there are two main types of permanent life insurance—the whole life insurance and the universal life insurance.
Whole Life Insurance
Whole life insurance is the most basic type of permanent life insurance. In most cases, these two terms are almost synonymous.
A whole life insurance has fixed death benefits, a level premium, and a cash value that grows with interest. Unlike the term life insurance, a whole life policy is a bit more expensive because you are practically assured of a death benefit and a type of accessible savings which provide a guaranteed rate of return. And you can get all of these by paying a fixed amount of monthly premium. If you’re older and prefers predictability, then this is an attractive option.
Take note there are many variants of whole life insurance and each one presents a different type of option in terms of premium payment for the policyholders. Some of these include the level premium whole life insurance, single premium whole life insurance, limited payment whole life insurance, indeterminate premium whole life insurance, interest-sensitive whole life insurance, and economic whole life insurance.
Universal Life Insurance
The universal whole life insurance provides a flexible premium and death benefits. This feature makes it unique because it gives you a chance to adjust the death benefit that you want to get and the amount of premium that you’re going to pay based on your needs and situation.
The premium that you pay for the policy covers the cost of insurance (COI) and the cash value. The COI is the minimum amount that you have to pay to keep the insurance active. The excess amount goes into savings, which is the cash value.
Take note that the premium typically increases as you age, but because the cash value accumulates over time, it is capable of covering any increase in the cost of insurance. If your cash value is large enough, you can even use it to cover the premium payments.
Just like the whole life insurance, a universal life policy has different types. These include the indexed universal life insurance, variable universal life insurance, and guaranteed universal life insurance.
How to Know the Life Insurance That’s Right for You
Finding the right insurance might be difficult if you don’t know exactly what you need. There’s no specific rule of thumb, but to ensure that you’ll get the best type of insurance that suits your situation, the best way to start is to look at your own personal situation and weigh this based on your financial capability.
Remember that different types of insurance have the different amount of premiums and requirements. Take this into consideration because it would be a waste of money if you get a policy that you can’t sustain in the end.
Also, don’t forget that a life insurance is meant to provide financial protection for your loved ones just in case you die prematurely. So, when you make a decision, try hard to determine which type of insurance product can help your family more given your current situation.
If you’re married with young kids and you’re the only one who provides for your family, then a long-term life insurance might be the most ideal. If you don’t have an insurance protection and have very little assets, just imagine what would happen to your family if you suddenly die.
If your spouse is not working and everyone relies on your income, then they might struggle financially when you’re gone. If you’re still paying a mortgage, they might even lose the house.
We’re not saying that a death benefit can cover everything that your family is going to need when you die, but the money is certainly substantial enough to pay off some debts. Any remaining amount will help them start financially without having to go through an abrupt change in their standard of living.
In this situation, it is fair to ask what type of insurance a person needs. Truth be told, it depends on your financial goals and ability to pay.
If you need coverage but don’t have enough money to pay a very high premium, a level term life insurance would be a good option. It’s a good start while you’re building up your savings and assets. Once you’re financially established, you can always renew it when it expires or convert your policy into a permanent life insurance. If you’re worried about your mortgage, then a decreasing life insurance is also ideal.
But if right now you already have good income and can support other financial needs even if you’re the sole breadwinner, then getting a policy with a substantial coverage might be the smart choice. You’d be better off with this option as long as the monthly payment of premium wouldn’t seriously affect your family budget. If you can, you can even go with any type of permanent insurance with a savings component. You can also talk to a good financial advisor and find a way to buy term and invest what you would save on the premium.
If you’re a young couple and just recently married, it’s easy to dismiss the need for a life insurance. It is advisable, however, that you start getting a policy as early as you can. Because you’re still young and healthy, you would most likely be approved for a policy immediately. And because of your age, you will certainly be given a very low premium. You wouldn’t have any problem in terms of the type of policy because everything will be beneficial.
If you’re a bit cautious, you can start with a term life insurance, but if you’re financially ready and capable, then a permanent life insurance would not hurt either. The good thing about starting early is you can buy a policy now and pay the same amount of premium for a long time even if you age or start to develop some medical condition.
The point is, always choose the type of insurance that’s tailored-fit to your own specific needs and life situation. And when it’s time decide, always pick a policy that wouldn’t pose any immediate financial burden to your family. It would be counterproductive if it does.
How Much Coverage Do I Need?
The amount of coverage that you need always depends on your situation and financial capability. To determine this amount, it’s best to assess first the total amount that you spend every month.
Consider the monthly family expenses, mortgage payments, car payments, and other debts that your loved ones might shoulder when you die. Also, add estimated monthly expenses on your children’s education and other costs that are specific to each member of your family. For good measure, throw in an extra amount to cover unforeseen expenses.
When you have the complete figure, this will be the total amount that your family needs to survive for one month.
Let’s say this total amount is $45,000. But your goal is to have a sustainable fund for your family for years until they can stand on their own. So, what you need to do is to multiply the overall monthly expenses by 12 (months), so you can get a figure for annual family expenses.
Here’s how it goes: $45,000 multiplied by 12 (months) gives you $540,000. This the total amount that your family needs for a year.
If you’re looking at 3 years of sustainability for your family until they can get back on their feet, then multiply $540,000 by 3 (years). The total amount is $1,620,000. This is the estimated amount of coverage that you must get. Normally the rule of thumb is to get at least 10 years of sustainable living for your family if you can afford it.
Of course, this is a theoretical amount. As long as you do the calculation right and figure out a ballpark figure, then it will be easier for you to know the exact amount of life insurance coverage that you need. To be on the safe side, get a coverage with a face amount that is at least ten times worth of your annual income.
How to Find the Best Insurance Company
There are thousands of insurance companies in the United States, and most of these insurers operate almost everywhere around the globe. Some are old industry giants while the others are new and small carriers. And so, no matter where you live, there’s a good chance that you’ll have plenty of options. This means that the pressing question is not about how to find one but how to get the best one.
When you’re looking for an insurer, always look for financial stability, track record, reputation, a portfolio of life insurance products, and competitive rates. While you can find all of these through research, you might still encounter a little difficulty in finding out which one offers the best products and rates.
One of the main reasons is because insurance companies nowadays offer almost the same thing. And these include even those carriers that are previously known for their specialty policies. Although research may be helpful, your best recourse is to seek help from an insurance broker.
How to Get a Life Insurance
Getting a life insurance might confuse you if you don’t know where to start and what to look for. But there are several steps that you can do to make your life insurance policy purchase simple and successful.
Get a basic understanding of life insurance
This step is very helpful before you buy a policy. Knowing about life insurance basically means understanding what you’re going to pay for.
You can research online and read a few articles about life insurance, the processes, and the pros and cons of different products.
Learn as much as you can about the various life insurance policies. Know about the different terms used, such as term period, premium, death benefits, coverage, beneficiaries, riders, and the likes.
By doing all of these, you’re practically equipping yourself with sufficient knowledge about the deal that you’re going into.
When you’ve finally got the basics down about life insurance, it’s time for you to shop around.
Look at the many different options. Take as many information as you can about the different insurance companies, their life insurance policies, their rates, and other helpful data. Determine their advantages and disadvantages in the context of your own needs and situation. Work with a broker that has no bias to a company, and have them do this for you, at no extra cost to you.
Afterward, narrow down your choices and begin another extensive research about them. After you do all of these, you’ll most likely have your own personal pick.
Submit an application
Once you’re done with the quotes and you’re already decided on the type of policy that you want, you can begin submitting an application to your preferred insurance company.
When you apply for a policy, you will have to provide some basic information about yourself and your beneficiaries. These may include your name, date of birth, address, social security number, license number, and other relevant data. You can usually do this process online and it might not even take you more than 30 minutes.
Be prepared for a phone interview
Although you’ve already submitted some information online, most insurers still require a phone interview to gather more detailed information. Once you’ve submitted an application, you might be scheduled for this phone interview. In this process, you will be asked for some additional basic information. The interviewer might also inquire about your income, lifestyle, previous and existing illnesses, and other pertinent information related to your medical history. This rarely happens, but can be the case if you are looking for a no exam policy.
Undergo a medical exam
Some life insurance products are no exam policies. No exam means you don’t have to undergo a medical exam. But if your chosen policy requires a medical exam, you might be scheduled for one.
Normally, a medical will be set on a given date and time. You can do this anywhere and a nurse or a medical professional that represents the insurer will visit you to conduct the exam. In this procedure, you will be measured and your vitals will be taken. You might also be requested to provide blood and urine samples and be asked a few more questions related to your medical history.
Take note that the result of your medical exam will largely influence the rate of the premium that you’re going to pay. Your overall health condition and associated health risks might even become a factor for the approval or rejection of your application.
Wait for the underwriting process
After you’re done with the preliminaries that are required in the application, the insurance company will begin their underwriting process. This includes a complete check of your medical history, driving record, prescription record, and other information that the insurer might deem relevant.
Sometimes, you might even be requested to provide additional medical records from your physician. Generally, you no longer have involvement in the underwriting process and all you need to do is just wait for the decision.
Get a decision (approval or rejection)
The decision time varies depending on the company. Sometimes it takes just a few days or a few weeks. But when you get a decision, it’s either you’re found qualified to get a coverage or you get rejected.
If you’re approved for a coverage, you will immediately get a policy. When the policy is offered, take time to review the terms that are stipulated in the document.
After you get the policy, you will need to handle a few paperwork requirements, sign some documents, and set up your payment.
Once you’ve made your first premium payment, it means that your coverage is already in effect.
Why It’s Better to Work with an Insurance Broker
Researching different insurance companies and their respective products and rates might be a little difficult and it can take time. Sometimes, it might even frustrate you when you start to realize that you don’t actually understand the differences except for the glaring data. You can avoid all of these hassles by working with a professional life insurance broker who can do all the work for you including getting quotes from different companies.
Take note that an insurance broker is different from an insurance agent. While most agents solely work for a single insurance company, an insurance broker is an independent agent that represents many insurance carriers. This is a person who is more capable of presenting you with more policy options.
An insurance broker can help you shop around for the best policies that you need from the many insurance carriers that he or she is connected with. Remember that when you hire an insurance broker, that person will be working for you. Although they can represent many companies, they do not have actual ties with any specific company. This ensures you that your best interests will be protected.
Another advantage of working with an insurance broker is when you need a high-risk life insurance. When you work with an insurance agent of a particular insurer, there’s no assurance that you would qualify for a coverage, especially if you have an existing medical condition. But if you work with an insurance broker, you’ll have someone who has the ability to look around for the best company that offers the most competitive rate that you need.
Another great thing about insurance brokers is they are particularly transparent and they’re not inclined to force options on you because their goal is to help you get the best deal. Unlike insurance agents, brokers would also consult with you rather than sell.
Work with us!
Looking for a life insurance? We can help you find the best carrier, policy, and rates that match your exact needs at no extra costs. By working with us, you can save as much as 58% on any type of policy that you’ll choose.
To get our services, you can call us at 212-573-5563 or complete our quote request form so we can get back to you immediately.