- by Journey Insurance January 27th, 2011
- Comments Off on Life Insurance Basics
Welcome to life insurance basics; everything you’ll ever need to know about life insurance. Life insurance is not the lightest topic, but one that must be addressed. Life insurance is one of the most misunderstood insurance types available. At its most basic level, life insurance is designed to help your family remain financially viable if something should happen to you. To put it bluntly, it replaces your income if you die.
Life insurance isn’t for everyone. But, if others are relying on your income for their survival, you should think seriously about buying it to protect them.
Keep reading to learn if this kind of protection is something you need, distinguish the differences between the various types of coverage, and more.
Chapter 1 Why you need life insurance
Chapter 2 The types and cost of life insurance
Chapter 3 Life insurance for you home, your kids, and for the hard to uninsurable.
Chapter 1 – Why you need life insurance
You need life insurance!
You need life insurance if other people depend on your income for their survival. If your income pays the bills and you die prematurely, what happens? Do your heirs have enough money to stay afloat without suffering hardship? If the answer is no, then you need life insurance.
Income replacement is the most common reason people buy life insurance, but there are other reasons why you may need or want a policy:
- To Pay Off Debts If You Die. If you have substantial debt, you may want life insurance so that your heirs won’t be saddled with that debt. Life insurance money can be used to pay off loans and mortgages.
- To Pay Funeral Expenses. Some people use life insurance money to pay for their funeral expenses. For some people this is the only life insurance they need. Others factor funeral expenses into a larger policy.
- If Your Survivors Will Have To Hire Services To Replace The Work You Do. For example, if you provide the childcare in your house or do all of the maintenance work around the house; your heirs will likely need to hire help to do those things if you die. Life insurance money can be used to pay for necessary services that the deceased used to provide.
- If You Want To Leave An Inheritance To Pay For College Or Other Expenses And Your Estate Cannot Provide This Alone. For example, you may want to leave an inheritance large enough to cover college for your kids, to buy their first cars, or to send your spouse to Europe. You know that the money in your estate will be insufficient, even if it’s enough to pay the daily bills. Life insurance funds can make these last requests possible.
- Life insurance replaces your income if you die
- There are other ways to use life insurance as well
- Many don’t include replacing your income
What does life insurance cover?
Life insurance covers one thing: You, the policy holder. It provides benefits under only one circumstance: Your death. It does not cover any damages or liabilities that you incur. From an insurance standpoint, life insurance is one of the simplest policies that you will ever buy. But if others need your income to survive, it is one of the most valuable.
If you die and benefits are paid to your beneficiaries, they can use the money for anything. They can pay off debt, bank the money, or travel around the world. There are no limits placed on what can be done with the money.
- Life insurance policies are simple
- Choose a coverage limit and name a beneficiary
- Beneficiaries can spend the money however they wish
How do you get life insurance?
Get life insurance. If you have children or other dependents, a significant other, own a home or have considerable debt, you need life insurance. (Here’s the test: If you died, would your partner be up a financial creek without a paddle?) Experts say you should both own a term life policy worth roughly five to ten times your annual salaries. Here’s how to get it done.
There are many different life insurance products on the market. But experts agree that if you’re just trying to provide enough coverage for your loved ones in the event that you get hit by a truck, term life insurance – a policy that covers you for a specific amount of time, say, 20 years – is the best choice.
This is for you: If there is someone who would be in dire financial straits if anything happened to you. Married? Own a home with someone? Got kids? We mean you.
How long it will take: If you are motivated to get a life insurance policy, and you should be, the process should take as little as three to four weeks. It takes less than five minutes to get a free quote, a few more minutes to complete an application (or go through it with an agent over the phone), the medical exam company will meet you at your home or office in a matter of days, and a couple of few weeks to process the paperwork.
Cost: A 20-year term policy worth $500,000 costs as little as $19 to $23 a month for a 30-year-old non-smoker in good health.
How much should you get? Anywhere from 5 to 10 times your annual salary, experts say. If you have young children or serious debt, aim toward the higher end of that range. A 20-year policy usually makes the most sense.
What you’ll need:
- Your name, date of birth, height, weight, and health history
- The health history of your immediate family members (parents and siblings)
- Your felony record (ever been convicted of one?)
- Your bankruptcy record (ever filed?)
- Information on any hazardous activities you pursue (scuba diving, skydiving, private piloting, etc.) Be honest-if you aren’t honest about it and then die doing it, the company could reduce the payout or refuse to pay at all.
- The amount of life insurance you want ($100,000, $500,000, $1 million, etc.)
- The term of the life insurance you want (10, 15, 20, 25, 30 years)
What to do:
1. Get a quote from an independent agent that represents multiple insurance companies. Because insurance rates are filed with the Department of Insurance, the cost of your policy will be the same no matter who you get it through. So make sure you are working with some who has access to multiple carriers to ensure you are getting the best possible deal.
2. If you like one of the quotes you receive, you can complete the formal application for life insurance with that company.
3. Once you’ve submitted your application, the company will schedule a medical exam at a location of your choice. The exam isn’t optional. (Although it might not be necessary if you’re applying for a small amount of coverage – $50,000, say.)
4. For up to three days before your medical exam minimize your salt, caffeine, alcohol, over the counter medications, and tobacco products.
5. Generally, a medical examiner will come to your home or office, ask a series of health questions, and take some basic measurements (weight, blood pressure, heart rate). He’ll also take a blood, urine, and possibly a saliva sample. If you can’t find a good time to meet with the examiner, you may be able to go to an insurer-approved clinic for the workup. (Insurance carriers’ examiner will test for several things that your personal doctor probably didn’t test for, like nicotine or HIV.)
6. If you’re over 50 and applying for a large amount of coverage ($1 million or more), you may have to submit to additional tests, such as an EKG (to monitor your heart), a treadmill test, or an exam by an actual M.D.
7. You can request that a copy of the health test results be sent to you, for your records. Just ask your examiner what you need to do to make that happen.
8. If you’re approved, the insurance company will then set the official price of your policy. So long as your test results mesh with the information you gave the company originally, the price should be the same as your original quote. (If you smoke, don’t lie about it, they’ll find out.)
9. If something pops up in your tests, like high blood pressure or cholesterol, the company could decline to cover you or raise the rate it offers you. If you think someone made a mistake, talk to your agent about what you should do. If the results were accurate and you can’t afford the new quoted rate, you may have to start over with your “new” health history.
10. If the test goes well and you can afford the premiums, you’ll make your first (monthly or annual) payment, and your policy will go into effect.
11. Congratulations, you’re insured!
Chapter 2 – The types and cost of life insurance
The first decision to make after you have decided that you need life insurance is how much life insurance to get.
The general rule is to buy an amount equal to five to ten times your annual income. However, if you have small children or family members who require special care, buy more. Ten times your annual income or more is not unheard of. Given that life insurance is fairly inexpensive relative to the coverage it provides, always err on the side of buying too much. Every penny you leave your loved ones buys them more time to settle into life without you. Life insurance often costs as low as less than a hundred dollars to several thousand dollars per year, varying per person and the type of insurance, as well as a variety of other factors such as:
- If You Want To Leave An Inheritance To Pay For College Or Some Other Special Expense. Figure out the cost of that expense and then add in an extra amount to account for inflation.
- If You Want To Cover Funeral Expenses. Speak to a funeral director about the sort of service you’d like to have. They can give you an estimate of the costs and you can add extra to cover inflation.
- If You Don’t Earn An Income But You Want To Be Certain Child Care Or Maintenance Expenses Are Covered. You’ll need to figure out the value of those activities on the retail market and add in extra to cover inflation. You’ll also need to estimate how many years you’ll need to pay those expenses. If you want childcare until age sixteen and your child is ten, you need enough for six years.
For help determining how much to get, check out this Life Insurance Calculator from Bankrate.com.
You can’t have too much life insurance. Anything extra can be banked and used at a later date, or passed on from the surviving spouse to the kids when the time comes.
- When figuring out how much insurance you need, don’t guess
- Do some research about the expenses you need to cover
- If in doubt, buy more than you think you need
Types of life insurance
There are two primary types of life insurance term and permanent (whole life and universal life) life insurance:
- Term Insurance. Term life insurance literally covers a specified term. It may be five, ten, twenty, twenty five, or thirty years. If you’re assuming that by the time you reach retirement age you will have enough saved and that your surviving spouse can live comfortably without you, then you might choose to buy a term policy that ends at your retirement age. By then you won’t be earning an income anyway, so you won’t need life insurance to replace it. There may be no sense in continuing to pay for life insurance at this point. A term policy is ideal for this situation.
The price for a term policy usually changes at set intervals as you age because the risk of your needing it goes up. For example, you may buy a policy for $200 per year when you’re twenty-five. When you turn thirty-five, that premium may increase to $300 per year. And on it goes until the term expires. At the end of the term, the policy simply expires and no benefits can be recovered.
- Permanent Insurance (whole life and universal life). Permanent life insurance, better known as whole life or universal life, covers you for your whole life and it has a cash benefit. Permanent policies are for those who want to pay for their burial costs, pay estate taxes, or leave a large inheritance for their loved ones. It’s also for those who fear that they won’t have enough saved to support a surviving spouse in retirement.
Unlike term policies, the premium on permanent policies remains level for the length of the policy. Rather than increasing the premium as you age as a term policy does, a permanent policy makes you pay the same amount when you are young and healthy as when you are old and sick. You pay more in the first years of the policy, but it is this overpayment that gives permanent life insurance its cash benefit. You can cash out the policy at any time and get paid back the amount that you have overpaid.
Within the two types, term and permanent, there are many kinds of creative policy differences that you may need to consider. A good life insurance agent can walk you though all the policy types to find the best one for you.
- Permanent and term life insurance both pay upon your death
- They differ in pricing structure and coverage duration
Which type of life insurance is right for you?
When it comes time to buy life insurance, you’ll need to decide between term and permanent insurance. Which should you get? This is generally a much simpler choice than financial gurus make it out to be. For many the decision boils down to affordability. Term life is considerably cheaper, but the coverage isn’t forever, but only during the term of your policy. When the policy is done, so is your insurance. Permanent insurance is more expensive, but will continue for as long as you make your payments.
Term Insurance Covers Your Short -Term Needs. If you only need life insurance to cover you until your kids are grown, until the mortgage is paid, or until you’ve saved enough to let your surviving spouse live comfortably in retirement and pay for your funeral, then choose term insurance. There is no point in paying for life insurance for longer than you need to.
Permanent Covers Your Permanent Needs. This includes leaving an inheritance for your loved ones, securing the comfort of a surviving spouse who has special needs or no other assets, or paying for your final expenses. If these are concerns for you, then opt for permanent insurance. But don’t let the cash option sway you toward permanent insurance if your need is really a term need. You pay so much more for a permanent policy in the early years that the cash option isn’t worth it for the first ten years or so compared to the smaller premiums of a term policy.
- Term insurance is for needs that have an end
- These needs include mortgages and child care
- Permanent insurance is for needs that never go away
- These needs include funeral costs and spousal support
- Don’t pay permanent prices for needs that are term
- Don’t choose permanent for the cash option, if not needed
Understanding how life insurance is priced.
Life insurance prices are based on several factors:
- Your Age. The younger you are, the less your policy costs because you are at less risk of dying. As you age, it costs more to acquire and retain a policy.
- Your Gender. Women typically get better rates than men because they tend to live longer and engage in fewer risky behaviors.
- Your Health. If you are healthy, life insurance is cheap. If your health declines, life insurance gets more expensive. If you have pre-existing conditions or a strong family history of disease, expect to pay more. If your health is very poor, you may be deemed uninsurable and denied coverage at any price.
- Your Behaviors. Smokers pay more than non-smokers. Skydivers pay more than bookworms. Drinkers pay more than teetotalers. If you engage in risky behavior, expect to pay more for life insurance.
Insurers feel better about insuring those who are less likely to die any time soon. If your profile puts you at a greater risk of death, you will have to pay more for insurance. The good news is that, except for age and gender, you can take positive steps to improve your insurance picture by taking care of yourself and not engaging in risky behaviors.
- Prices are based on risk of death in the near future
- The older, sicker, and riskier you are, the more you’ll pay
- Buy a policy when you’re young and healthy
- This will get you the best price and guarantee coverage
- Once you have a policy no one can take it away if you get sick
- You can be refused a policy if you’re already sick
Is a life insurance policy designed to pay off just your mortgage wise?
If you have a mortgage, chances are that you’ve gotten those offers for “life insurance” that will pay off your mortgage if you die. At first glance, these offers seem appealing. After all, who wouldn’t want to have their mortgage paid if they die?
The problem is that this type of policy only pays for the mortgage. What if you die and your spouse wants to keep the mortgage, but pay off some other high-interest debt? Or send Junior to college? With a mortgage-only policy, that can’t happen. The money goes straight to the mortgage company. All choices are taken away from the survivors. These policies are also more expensive than coverage you can buy on your own.
The only reason to buy mortgage-only life insurance is if you are uninsurable from any other source. Most mortgage policies waive the physical, so you can probably qualify for such a policy even if you can’t qualify for any other life insurance. In this case, having some insurance may be better than having none.
- Not only is it expensive, but the benefit can also only be used for mortgage
- Your survivors have no choice on how to spend the money
- If you’re uninsurable, this might be better than nothing
Do your kids need life insurance?
People often buy life insurance for their kids. This is generally not a good idea. The purpose behind life insurance is to replace an income in the event of a death, or to cover other expenses for the survivors. It may sound callous, but the death of a child rarely has an adverse effect on the economic health of the family. Children don’t usually have an income that needs to be replaced for the family to soldier on. They don’t usually have estate taxes or debt to be paid off.
You may want to take out a small term policy to cover funeral expenses if burying your child would create financial hardship for the family. However, chances are that if you simply bank what you would pay in insurance premiums, you will have more than enough to pay for burial.
When you have a child, the first person who needs life insurance is you. Your child will need your life insurance money to survive if you die, not vice versa.
- Life insurance for children is generally not necessary
- They usually have no income to replace
- As a parent you need to protect your children
- Not the other way around
What if you’re uninsurable?
No one wants to hear that they are uninsurable for life insurance. It means that you’ve been judged as being at such high risk of dying soon that no insurer wants to take the risk of giving you a policy. Not exactly comforting news.
If you cannot get a conventional policy, you may be able to cobble together some protection, but it will likely cost you far more, and piecemeal protection may leave you unprotected in some areas. Some protection may be better than none, however, so here are some ideas for obtaining insurance that don’t typically require you to pass a physical:
- Mortgage “Life” Insurance: You may be able to qualify for life insurance that will pay your mortgage if you die, as many of these policies don’t require physicals. However, it will only pay your mortgage and nothing else. Your Employer: Getting life insurance through your job often does not require a physical. If you leave that job, however, you lose the insurance.
- Your Credit Card: Your card may offer life insurance that will pay off your credit card bill if you die. However, it can only be used for the credit card balance.
- Car Loans and Other Personal Loans: You may buy some insurance that will pay those off if you die.
- Flight And Other Travel Death-Related Insurance: There are policies sold in airport vending machines (literally) that offer coverage if the plane goes down. If this is a real fear of yours and you have no other life insurance, it may be worth it. Also, if you buy your airline or train ticket with a credit card, note that some cards offer limited life insurance. When the trip’s over, that protection is gone. Sometimes a card will cover death in a rental car, too, as long as the wreck’s not your fault. But not all cards offer this type of protection. And no cards that we could find offer “general” life insurance that is good all the time.
- Guaranteed Life Insurance With No Physical: Typically you can’t get a lot of coverage, just enough to cover final expenses. But it may be better than nothing.
If you can qualify for a traditional policy, get one. It will be less expensive and offer more protection than other sources. If you are uninsurable and worried about your survivors, you can try to put together at least a minimal level of protection from alternative sources.
- Being uninsurable doesn’t mean no protection
- You can get some protection from unconventional sources
- This isn’t as complete or valuable as a regular policy
Contact us to see if you can save money on your insurance by speaking to a professional independent insurance agent at Journey Insurance.
Let us sift through the hundreds of insurance programs to find you the most competitive rates available. Let us do the paperwork while you spend your time doing something you actually enjoy!
Journey Insurance Agency * Irvine, California * 888.323.7480
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