The Ultimate Guide to Life Insurance
Savvy planning is key to assuring that an individual or family will remain comfortable if either are faced with the death of a loved one. The best tool to guard against a sudden lack of income or ongoing financial obligations is a life insurance policy, and there are a surprising number of choices available.
Types of Life Insurance
When it comes to assessing life insurance options, it becomes clear that the many different types of coverage available are all designed to serve vastly different policyholder needs and wants. However, the degree of variation means that individuals of all ages and backgrounds can find the right policy. For instance, term life policies are generally best for younger people who want inexpensive, steady rates and coverage with a defined expiration. On other hand, flexible permanent life plans that accrue cash value or enable the policyowner to adjust premiums and death benefits at will may be more appropriate for individuals who experience changing needs over time.
Term Life Insurance
Term life insurance is simple in practice and great for getting covered for a defined period, replacing an income, or protecting a financial obligation like a mortgage. Depending on the provider, term policies usually come in two different forms.
Level premium term life offers the customer coverage for 10, 15, 20, or sometimes 30 years at a fixed monthly rate. The fixed rate per month keeps customers insured for the value of their policy over the entire length of the term, until it expires. Its simplicity is one of the reasons why it is often cheaper than other plans.
Budgeting with a term life insurance policy is easy because the rate never changes, and customers can apply for a death benefit that is in the same amount as their mortgage. They pay a small premium each month to ensure that in the case of their untimely passing, the family will be able to continue making mortgage payments.
Yearly renewable life is another type of term policy that expires once a year and can be renewed with no break in coverage, though policyholders are subject to changing rates. This is ideal for those who believe their income will increase in the coming years and want more flexible protection.
There are some interesting features and add-on provisions available to term life solutions from many providers, one of which is the return of premiums rider, which refunds money paid as premiums to the policyowner when he or she outlives the term. Another is the convertible rider that exempts policyholders from taking a medical exam should they want to convert their term policy into a permanent life policy spontaneously. Riders are additional benefits that supplement the features of a normal life insurance policy, and some of the unique riders from competing insurance providers are what set them apart.
- Whole Life Insurance
Whole life insurance policies cover people for their entire lives. People who want to pay for all the expenses that appear during the end of a life, like funeral costs, estate planning, medical care and financial protection for the surviving spouse prefer whole life policies because of their robust benefits. Payment is guaranteed, provided policymakers meet the monthly premium obligations.
These policies cover customers for their entire life, so premiums are typically higher than those of term life plans. However, the flexibility that financially savvy customers enjoy with whole life plans make it worthwhile. Level premium plans determine a rate that stays static for life, based on the applicant’s current health. There are also plans that allow policyholders to adjust their premiums upwards to receive a bigger death benefit, or take advantage of the policy’s cash value in other useful ways. Dividends are paid on some whole life plans that can either add value to the death benefit or are received as cash. Additionally, other plans allow policyowners to withdraw money directly from the policy or take out loans against its value, and the death benefit is tax-free when it is paid out.
Whole life policies often come with an assortment of riders that provide additional special features, which vary by provider. A common rider is the ability to accelerate benefits when the policyowner falls ill, helping cover medical expenses and other long-term care needs.
- Supplemental Insurance
Besides term and whole life policies along with the many variations and customizations therein, there are also plans available through major coverage providers that are designed to complement other policies for extra coverage simultaneously. One great example is mortgage protection, which is a type of policy that covers those who want to ensure the payment of their mortgage should they prematurely pass.
Another common supplemental policy is to protect against accidental death. These policies can be stacked on other policies and pay out a portion of the death benefit on top of the initial coverage if death should occur on public transportation, if the policyholder is dismembered, or accidentally injured.
How to Apply for Life Insurance
The process of applying for life insurance always begins with determining the amount of coverage and monthly rate that is approved for each customer. For some providers, such as Haven Life, this is done via an easy quoting tool, which takes some basic customer information and runs it through an equation before listing a price and a way to apply for coverage. With other providers, such as AIG Direct, receiving a quote may not be quite as straightforward as quotes are only available via speaking with a representative. The application processes vary widely between providers.
After the online tool, agent or representative uses the financial, medical and other personal information provided to determine an appropriate amount of coverage, the applicant must then undergo a medical exam to prove their state of health. This medical exam, unless the provider offers an exemption, as Haven Life does, is mandatory and must be performed within a certain period after applying.
Companies like SoFi and Haven Life offer instant coverage through an online application, exempting many from the medical exam that is often necessary before receiving approval. This allows those who need a quick coverage solution to resolve the matter within a couple days rather than the weeks it takes with some providers. Regardless, once approval is finalized, policy coverage begins immediately alongside monthly premium payments.
Customers who do not want multiple applications for life insurance showing up in their public record will enjoy the prequalification services offered by many providers. This process enables would-be purchasers to receive an accurate quote for their rate and coverage based on existing circumstances plus the ability to capture that rate while not appearing as an application in their personal history. Considering that past insurance applications may impact the coverage or rates that apply to current applicants, this may be a smart decision in certain cases.
Determining Factors Behind Rates and Coverage
The rate that a life insurance policyholder pays is based on several factors, the first of which is the risk of mortality taken on by the provider. Insurance providers are taking a chance that their policyholder will die before the total premiums he or she paid cover the death benefit. Each life insurance company uses a different underwriting methodology to arrive at the rate that will adequately cover any individual. This underwriting likely considers all current policyholders, the estimated amount of death benefits that the provider will need to pay during the upcoming year, health status, age, smoking habits, income, and a wealth of other personal and financial details.
Interest on investments is another factor that helps determining coverage rates. Providers offer policies to millions of people, and for many of them, it is their sole investment. One way that providers ensure they have the financial strength to handle such responsibility is by intelligently investing policyholder premiums. The premiums of many customers represent a significant amount of money, and the gains that companies earn on such capital affects the premiums they charge to new customers.
Investments are not the only thing on the balance sheet that affects policyholder rates because operating costs are also considered. This makes sense, considering that costs of operation would naturally be a component to determine the rate that any company charges customers.
Marital Status and Covering a Family
Life insurance needs differ greatly depending on age. As a single person becomes a couple that gets married and grows a family, it becomes important to protect everyone. While a couple might be comfortable with a typical term life policy to cover a mortgage, if they get married their combined incomes will increase their coverage needs as well. A baby brings a whole new element into the equation, and thankfully there are policies provided by several companies that cover families well.
While there are many individual life insurance plans that have coverage big enough to provide for a family’s financial needs, sometimes covering a child or spouse is a good idea too. The child whole life policies from companies like Globe Life accrue cash value over time, a financial benefit as the little boy or girl grows up. As a head of the family, policyholders can also add a rider to their policy that covers children who are born during the term, or buy separate policies for children at relatively inexpensive rates.
Covering a spouse is important as well. Stay-at-home husbands or wives perform a service that would exponentially increase the costs incurred by their family should they be suddenly absent. Taking out a separate policy is recommended even if the policyholder provides no income, and there are also riders for some whole life policies that provide additional benefits for a stay-at-home spouse.
Family plans are available that cover all members as a unit, with only one premium paid each month to cover a spouse and children as well. These plans start at the policyholder, usually the head of a household, and add premiums per month for spouses and children.
How Payout Happens: Fixed vs Variable
When the policyholder dies within the term, whether a 1-year renewable, a 20-year term or a whole life policy, the death benefits specified in the agreement are paid to a beneficiary. The beneficiary is mentioned by name in the policy, with most policyholders choosing to list their spouse or immediate family members.
The beneficiary needs to file a death claim with the life insurance company and provide proof of death in the form of an official death certificate. The way payout occurs is stipulated within the policy, with many policyholders choosing the standard fixed lump sum option, which provides the death benefit in a single cash payment to the beneficiary.
There are also life income options that pay a fixed rate per month until the beneficiary dies, which is ideal for elderly people who need a stable stream of cash. Often, these cannot be passed to another beneficiary, but there are exceptions in certain cases. The opposite end of the spectrum is the variable payout method, which rewards a percentage of the policy’s investments, which the policyholder made over time while assuming the risk for these choices. These can pay much more depending on how successfully the investments performed. If these are not variable enough, one can find specific income policies that let the beneficiary choose how much money they want and on what type of schedule it will be disbursed.
Life Insurance Industry Trends
Modern trends in life insurance are focused on doing away with the downsides of traditional coverage methods while offering extra features. One of the issues facing the older providers, some of which have been in business for over 100 years, is the slow process of getting coverage. While many insurance companies have modernized their systems and now rely on a combination of online tools and agent intervention, some newer companies like Sofi and Haven Life let applicants complete the required forms and receive coverage online.
Besides the coverage and application process, significant progress has been made in the kinds of policies and riders that are available. A term policy with no riders and the same policy with one or more will be drastically different, because after years in business, providers are now more aware of the changing needs of their customer base. Provisions for extra benefits should one fall ill or be injured, the ability to use the cash value of a policy, converting to a different type of policy, switching coverage to a different person, or giving guaranteed coverage to the elderly are now increasingly common additions.
The life insurance options available are more varied than ever, meaning that people in all stages of life can find the perfect policy option. A bit of patience is necessary during the search, as the plethora of plans offered can easily confuse those who are not familiar with their exact needs. There are useful insurance calculator tools online that can help anyone figure out how much coverage they require, and talking to an agent can also be very helpful in determining the right choice.
Be sure to thoroughly research the plans, rates, riders and customer support reviews that are found online before making any decisions. Life insurance is a smart, but significant investment to make, and it is always best to take the first step from a place of knowledge.