Life Insurance 101
The Ultimate Guide to Understanding your Life Insurance
All these questions are valid. It can be very confusing and intimidating to understand them all. Even as an Agent, I still find myself having to keep up with the ever-changing industry, new provisions, and riders that are released. Don’t worry, we will cover what riders and provisions are.
Good Life Protection wanted to create the ultimate guide for life insurance to help consumers understand the different options you have available.
Additionally, the technical aspects of life insurance can seem daunting to grasp. We wanted to make sure we were here to help with that. Our goal is to provide this comprehensive guide detailing life insurance and helping you understand life insurance better. This ultimate guide to understanding your life insurance should help give you an understanding of your options. It should also help with understanding the insurance lingo often used within policies or regurgitated by agents over the phone. Think of this guide as your one stop shop to gaining an understanding on your life insurance policy.
And it begins- Life Insurance 101- How much Coverage do I need? What is Life Insurance?
Life insurance is designed to place a value on the human life, plain and simple. How much that life is worth is something to analyze carefully prior to picking a coverage amount. We are trying to value the human life for these purposes on a money standpoint. It sounds bad, but that is what it is designed to do. Human life, although we probably do not want to measure it in the form of dollar signs, it can be done. For the sake of life insurance, this is how we are going to pick coverage amounts.
- How much does the potential insured make per year?
- How much will the potential insured’s income rise in coming years?
- Also, How much debt are you carrying?
- How many dependents or children are involved in the coverage decision?
- How many children still live at home or are attending school?
If your heads not spinning calculating this, give it a few sections to sink in. We will get to the different forms of policies we can choose from with life insurance.
The first and biggest thing to understand is that life insurance is a “valued contract”. It is not a contract or indemnity or reimbursement so to speak. If you are the insured and die, the beneficiaries collect the face value of the policy. If you climb in net worth over the years, your life insurance policy does not follow suit. It is based on what you purchased from the starting gate.
Proper planning, a financial professional, or a life insurance agent is crucial. This helps to ensure you are placing adequate coverage on yourself.
Let’s give an example so you can get a sneak peek at a coverage scenario. Melissa is a 35-year-old female who earns $50,000.00 per year until she retires at age 65. Let’s assume for the sake of this example that half of her earnings support her children and husband who is a stay at home dad. This reduces her value in money terms to, $25,000.00 per year. We already covered the span of coverage needed which was 30 years. (Age 35-Age 65). Taking those numbers, we would need to ensure that Melissa has a minimum of $750,000.00 in life insurance coverage. This coverage being over at least a 30-year term policy.
Will you need that replacement income every year the entire time? Perhaps no, but maybe yes.
Maybe you are working and do not need the full coverage amount. For example purposes, it is not a perfect plan. Many even recommend only planning for 10 years after a potential death. The point being, people are typically underinsured. Often, some planning does need to take place in this process. A real risk approach should be used to protect your family for the long haul if something terrible arises or occurs.
So where do we go from here?
Term Life Insurance Vs. Cash Value Life Insurance
There are two basic approaches we can take after deciding we need life insurance.
Option 1- Term Insurance- Simply put- Temporary- You are not keeping this coverage forever.
Option 2- Cash Value Life Insurance- This will take you to the finish line (age 121).
Well, sometimes it will take you to the finish line, but we will cover that soon as well. Let’s first cover the basics of these two approaches.
Term Life Insurance Approach
Under the umbrella of term insurance, we are going to look at the various kinds of term insurance. For the sake of not putting everyone to sleep, we are going to touch on each form briefly and keep the train rolling along.
For more in-depth looks at each form of insurance, visit the specific pages related to each kind of life insurance.
- Yearly Renewable Term Life Insurance- This is about as clean and simple as it gets. You get one year of coverage. After the year is up……you either renew the life insurance policy at the new rates or you do not. This form of life insurance is designed for extremely temporary coverage needs. The biggest benefit of this life insurance is usually after the first year. You do not need a new medical exam to continue the life insurance coverage.
- Level Premium Term Life Insurance- This by far is the most popular. It is also the most attractive option in my mind. Typically, all life insurance carriers will allow you to pick between the following…
10-year Level Premium Term Insurance Policies
15 Year Level Premium Term Insurance Policies
20 Year Level Premium Term Insurance Policies
25 Year Level Premium Term Insurance Policies
30 Year Level Premium Term Insurance Policies
These options are going to lock in your price for you for the duration of that term. That’s right, get it while you are young. It will save you a ton of money for the long run. They are also going to be renewable at certain intervals. You can even convert them to the permanent policies we will discuss here shortly. It is a win-win policy.
Especially for the un-decisive kind of life insurance buyers who are not ready to decide which direction to go. That’s perfectly fine. Plan your coverage amounts and get something started. Down the road, exercise one of your options to convert to permanent life insurance. Or, extend the term duration for your policy.
The rates for these policies will also be affordable depending on several factors.
How are your rates determined?
Simply put, the life insurance carrier wants to attempt to guess when you are likely to meet your maker. The life insurance carriers use mortality tables to determine the likelihood of when you may die. Then, rates are built into these tables and set accordingly. No, your agent does not set the rates or have any control of them.
Let’s look at some example rates of level premium term insurance.
10 Year Level Premium Term Life Insurance
Male Age- 40- Non- Smoker- Preferred Rates
15 Year Level Premium Term Life Insurance
Male Age- 40- Non- Smoker- Preferred Rates
20 Year Level Premium Term Life Insurance
Male Age- 40- Non- Smoker- Preferred Rates
25 Year Level Premium Term Life Insurance
Male Age- 40- Non- Smoker- Preferred Rates
30 Year Level Premium Term Life Insurance
Male Age- 40- Non- Smoker- Preferred Rates
As you can see, it is not all that expensive to lock up level premium term policies. Of course, it always depends greatly on your overall health and other factors such as…
- Medications currently being taken
- Reasons for medications
- Family history
- Dangerous activities or employment
- Working in Law Enforcement
- Motor Vehicle Report
Under the same umbrella of term insurance, we also have Return of Premium Term Life Insurance.
Return of premium term life insurance is going to act like level premium term life insurance except for one big thing. If you survive, you get a portion back. I personally do not sell this because I do not see value in return of premium life insurance. To point out one big factor- you are not getting all of your money back.
You are getting a portion back. People who drool over this form of life insurance are also not considering the time value of money. Premiums on regular level premium term insurance are already low. This is mainly because they are not carrying into the oldest age.
Which means what? You are not covered during the highest likelihood of death. This does not make the life insurance any less needed for pure protection. It seems silly to pay 25-50% more return of premium when you could have invested elsewhere at higher returns.
Let’s look at one example of Return of Premium 20 Year Level Premium Term-
This example is with Mutual of Omaha.
I’d say that is a bit costlier. But hey, it is your money, not mine.
Term insurance also offers other forms such as:
- Decreasing Term Insurance
- Increasing Term Insurance
- Re-entry Term Insurance
Now let’s meet the competitors against term life insurance.
Whole Life Insurance or Cash Value Life Insurance
Cash value life insurance works substantially different from whole life insurance. The biggest difference is………
THE CASH VALUE- TERM HAS NONE- WHOLE LIFE HAS SOME
AND WHEN I SAY SOME……I MEAN NOT A SUBSTANTIAL AMOUNT.
Your premiums paid into these policies are not only suffice to meet the life insurance carriers mortality cost (death claims) and expenses, but you are also diverting some money into a cash savings vehicle.
The funds are growing mostly by the premiums you are paying in the policy. Eventually, your cash value will be the exact same number as your face amount of your policy. Usually, between age 100 and 121. How many of you will still be worried about your whole life policy at age 110? Few takers or hands raised in the classroom on that question I’m assuming.
Whole life insurance is going to allow you to pull money against your policy if necessary. Virtually, it is a loan against your own money. Whole life insurance can also prove to be a great form of credit building or collateral toward future cash flow needs.
Whole life insurance also has a great purpose in certain situations. Situations such as business planning, young healthy adults, and children. After these options are exhausted, it is often tough to justify paying the premiums for a whole life policy.
This is because you could earn more elsewhere such as a strong performing mutual fund.
Other common forms of Whole Life Insurance-
- Limited Payment Whole Life Insurance
- Single Premium Whole Life Insurance
- Custom Pay Whole Life Insurance
- Endowment Policies
- Current Assumption Whole Life Insurance
Universal Life Insurance
When used properly, this form of life insurance may potentially be the best product. It serves too many primary functions not be deemed a great product.
Universal Life Policies are well-known for….
- Flexible premiums (who doesn’t want this luxury of flexibility)
- Investment options and cash growth potential
- Increasing death benefit options
- Withdrawal powers and abilities from policy values
- Way more affordable than whole life insurance
- the best of all worlds
- It can still be permanent- It can still grow cash value
- It can also allow the flexibility when needed on premium payments to provide some breathing space.
Let’s look with the same age and health on the pricing for a Universal Life.
GUL- Guaranteed to Age 121-
Male Age- 40- Non- Smoker- Preferred Rates
For a 40-year-old male to be able to lock up a quarter of a million dollars for life and have all the perks listed above, $144.00 seems like a steal to me. This is not too far of a cry away from level premium term pricing and options. It is also going to compliment nicely in a financial portfolio.
Other forms of Universal Life include-
- Variable Universal Life
- Indexed Universal Life
Variable Universal Life (VUL)- A VUL is going to include the same premium flexibility as we discussed before. The biggest difference between the two is the ability to pick investment classes within a variable universal life. Your cash values will be affected accordingly with the investment performance inside of a variable universal life.
Indexed Universal Life- This is strikingly like a variable universal life insurance policy except for the performance and cash growth work differently.
They are directly affected by the external index of the market such as the Standard and Poor’s 500. Indexed Universal Life has become more popular over recent years. It serves as a great option for investments within the life insurance industry.
Other forms of Life Insurance
Joint-Life Insurance Policy
Typically, a life insurance policy is written on the life of only one person. Can you guess the difference in this kind of life insurance policy? It covers TWO lives. It is payable upon the death of the first individual to die. They are no longer very common, but often can be used for properly structured buy-sell agreements in the life insurance industry.
Survivorship Life Insurance Policy
This is the exact opposite of the joint life policy. In this kind of life insurance, the survivor wins. These are growing rapidly in popularity with estate planning techniques. They serve well for spouses with unique needs and estate planning scenarios.
Group Life Insurance
Everyone is probably familiar with Group Life Insurance. It is typically provided through your employer. Most people make the mistake of only having group life insurance. This can be a big mistake for many reasons.
Currently, 37% of US households are only carrying group life insurance. Why?
People do not like spending money. Let me take that back. People love spending money, just not on intangible items such as life insurance. Often people prefer the flashy new watch because they can touch, see it, and show it off as opposed to proper financial planning.
Term insurance still makes up a majority of group life insurance. To be eligible, you usually must be within a group of at least 10 people. The following groups are typically eligible:
- Individual Employer Groups
- Negotiated Trusteeships
- Trade Associations
- Creditor-Debtor Groups
- Labor Union Groups
Typically, you must also be a full-time employee to qualify for group life insurance. The reason it is a pitfall for financial planning is simple. You are not in charge of the policy. It is typically not portable. If your employment ends or your employer wants to stop the coverage, they are free to do so.
As you age, you run the risk of developing health conditions that will affect your ability to gain private life insurance. Imagine if the employment ended and now you cannot get any insurance at all. You should always consider having a private plan in addition to your group life insurance plan.
No Exam Life Insurance
We saved the best for last. The easy application set up. No medical exam insurance has become increasingly popular for several reasons. Primarily…..
- People are busy and do not want the hassle of full underwriting
- Less invasive- no nurse or needles coming to your home
- Easy to issue- Great for divorce decrees and fast insurance needs
These are a few and really, few downfalls come from these policies. They typically even have more benefits built into them. Sure, they cost a little bit more, but it is well worth it in the grand scheme of the entire process. If you are in the open market for life insurance and do not have the time commitment…. contact Good Life Protection to hear your no medical exam life insurance options today.
Final Expense Life Insurance
Final expense life insurance is primarily reserved to serve the market of 50-85-year-old male and females. Its primary purpose is to cover funeral arrangements and end of life expenses.
These costs can add up fast. These are also affordable plans that serve in the form of whole life insurance (good until age 121).
They are a quick and easy way for you to relieve a burden on your family in the event you meet your maker. Some final expense life insurance policies come in the form of no exam needed and some do require medical exams. Speak to an agent with a large list of options for these carriers to make sure they find the perfect fit for you.
Guaranteed Issue Whole Life Insurance
I am a big fan of guaranteed issue whole life insurance as well. Not enough good things can be said about AIG’s product for Guaranteed Issue Whole Life. Why do I like it so much?
It provides hope and a form of coverage you cannot get otherwise. Pre-existing medical conditions or not, you will be approved. The only question is, how upset you will be in a two-year waiting period on coverage being in force? Once you apply for these policies, you are approved typically within 48 hours. Once the policy is in force, a two-year waiting period begins. If you are not terminally ill, these policies pose no downfalls. Again, as we covered before, this stops adverse selection in the insurance process.
Added bonus- these are whole life policies- make it out of the two-year window before meeting your maker and you have approval on a whole life policy regardless of your current health status.
Life Insurance Riders
Riders are additions to life insurance policies that all policy owners should consider. They can add some nice added benefits to the policy for a low cost. Also, they can take a run of the mill life insurance policy, to a complete comprehensive plan. Simply put, a rider is an extra benefit or perk within the life insurance policy. Some of the most common riders include…
- Accidental Death Benefit Rider
- Waiver of Premium Rider
- Child Riders
- Long-Term Care Riders
- Guaranteed Purchase Option Riders
- Disability Income Rider
- Term Life Insurance Rider
- Increasing Term Life Insurance Rider
- Decreasing Term Life Insurance Rider
Accidental Death Benefit Rider- This rider is typically referred to as the double indemnity rider. If the insured dies by means of accident, the death benefit will typically double the payout.
- Early in life mortality is more common by accident!
Waiver of Premium Rider- If the insured becomes totally disabled or as defined in the contract for the rider in the life insurance policy, the insurance company will waive payments of premiums while keeping the coverage active and in force.
Child Rider- Child rider is going to allow you to place coverage on your children. These amounts are either $5,000.00, $10,000.00, or $25,000.00. It is going to add them for next to nothing in cost and allow coverage as well.
Guaranteed Purchase Option Rider- This rider is going to protect against the possibility that the insured might become uninsurable. It will allow the insured to add additional life insurance coverage without proof of a medical exam or insurability. Another MUST HAVE.
Disability Income Rider- This rider is going to work like the waiver of premium rider. Except it is not going to pay the premiums. It is going to pay you. In the event the insured cannot work for a set amount of time, the life insurance carrier will pay the claims from the rider to help you and your family get by during the financial struggle.
Term Life Insurance Rider- This is often going to be built into a whole life or permanent life insurance policy. It is going to allow you a set duration of time to carry additional coverage in the form of term life insurance. For example, if you have a $250,000.00 whole life and this rider, you may also be carrying $250,000.00 of ten-year term insurance in the same policy. This helps and allows people to increase coverage during temporary needs.
Critical Illness Rider- This rider is going to make sure you get a large cut of the policy in a lump sum if you are diagnosed with a critical illness. It needs to be specified in the policy. Typically, will pay out for items such as cancer, heart attack, stroke, kidney failure and others.
Accelerated Death Benefit Rider- This can sometimes be referred to as living benefits. The reason? You are alive when you receive the benefits. The rider lets you cash in on some of the policy depending on the life insurance carrier. It is going to help with short life expectancy or illnesses that are deemed terminal or that may result in death in the next 12 months.
Term Conversion Rider- This is another huge benefit for life insurance policies. Most policies come standard with this rider but that doe not mean you should not double check. This is going to allow you to convert from term to permanent insurance without evidence of new insurability. No new medical exams.
Return of Premium Rider- We have been over my feelings on this setup. I don’t think it’s a big saving or something that’s needed in a life insurance policy but still worth explaining. Basically, if you outlive the term duration of your life insurance policy, you get your money back. In most scenarios, it’s all the money returned. Not always, so speak to an agent in depth if you are considering this rider for your life insurance policy.
Long-Term Care Rider- I personally love this rider. It can add some cost but let’s think about it for a second. What are two things you most likely will encounter in life? Long-Term Care and………Death.
Having a life insurance policy with both will help in both situations. The rider virtually allows another pool of funds to be distributed to you while still alive in the event of needing long-term care. This one can save you from depleting your assets in a tough burdening time of financial crisis.
LIFE INSURANCE POLICY PROVISIONS
Policy provisions are something to make sure you understand. It is the fine print of your life insurance policy. Typically, they are contained within your life insurance contract. Therefore, are always readily viewable to read over. We will cover a few of them.
Entire Contract Clause- This provision states that the contract and the life insurance make up your entire contract. When you receive your life insurance policy, your original application will be bound inside the contract.
Suicide Clause– This clause limits payouts within the policy for either one or two years. Most often, it is two years. It will allow the life insurance carrier to only have to reimburse the premiums paid and not pay the death benefit. Long story short, do not buy life insurance with that mindset because it typically will not work.
Free Look Provision- This is your chance for an easy return with no strings attached. 10-14 days is the common period for the free look provision. Once you receive your life insurance policy, look it over thoroughly and make sure it is what you asked for! After, you have those days to decide to keep it or return it and get your premium returned to you.
Grace Period- This will grant the policy owner an additional amount of time to pay up. If you cannot make your premiums on time, do not worry. By law, all life insurance policies contain this provision. Typically, 30 days!
Incontestable Clause– I get asked about this provision daily. The consumer states something like, “I don’t want a policy if it’s not going to pay for two years”.
The incontestable clause protects the consumer- It states that after the life insurance policy has been in force for two years, there is few permitted exceptions where the life insurance carrier cannot pay death claims. Do not commit fraud and you will be fine!
Reinstatement- This allows the owner of the policy to regain coverage that has lapsed. The only downside to this is that you will have to catch up the premiums. You may have to undergo a new medical exam to reinstate the life insurance policy.
Policy Loans- The life insurance carrier cannot stop you from borrowing against your policy. This provision is for, “automatic policy loans”. If you miss premiums, the policy will borrow against your cash value to pay the premiums. The easiest way to think of this is, your cash value acts like overdraft protection.
War Clause- This clause will not be included in all policies, but most of them. Typically, deaths caused by war or in combat zones are not covered. If you are active duty or service member, read your policy carefully. Speak to your agent about this provision in the policy.
Misstatement of age provision- This allows the life insurance carrier to change premiums and amounts due to show the correct amounts based on the real age. This provision only really matters if an error occurs on the application that is later discovered.
Life Insurance Underwriting Process
Unfortunately, nothing ties the life insurance carrier’s hands to allowing your coverage. It is based on your health and many other factors. Not much you can do about this except work with a well-rounded agent who has plenty of carriers to work with.
The life insurance carrier needs to remain solvent. This makes them selective about who they offer coverage to.
Underwriting is essentially the process and selection and pricing of insurance applications that are offered to an insurer by individual consumers. Most insurance rates are based on an average rate for an entire class or group. An example of this would be rated for 35-year-old males who smoke. The initial ratings are set by the insurance carrier and approved by state laws and the insurance commissioners.
That’s correct people. No wheeling and dealing on life insurance. The prices are the prices and it is a take it or leave it scenario.
Adverse selection is what the life insurance carriers are trying to avoid. Adverse selection is found all over the insurance industry. It is the natural tendency for those who know they are highly vulnerable to lose to seek out insurance. You see an attempt to stop this process with Guaranteed Issue Whole Life insurance. They avoid this by placing two-year waiting periods on the coverage being in force for individuals not in the best of the health at the time of application.
This is where the underwriting process is so critical for the insurance carriers and the consumers. Not being careful in the selection process would virtually make all insurance carriers become insolvent or no longer exist.
This would not be desirable for you or me.
It all begins with due diligence from you and your life insurance agent. Working with a life insurance agent with many carriers and one having a vast knowledge of the industry will go further than you think.
Sorry to all the State Farm fans out there. It just does not work having only one egg in the basket. People are different and have different needs and health conditions and guess what?
Different life insurance carriers view you different as well.
For almost all life insurance carriers and lines of insurance, the underwriting begins on the initial meeting or phone call with the licensed agent.
This is referred to as, field underwriting.
A well-qualified agent is going to ensure you get accurate and at the cheapest rates. I cannot tell you how many times I must compete against agents quoting prior heart attack victims at preferred plus to gain business.
In my mind, this is a way to lose business and not the way field underwriting works. You should be honest with your agent about all questions asked and your health condition. If you are not, he or she cannot effectively help you get coverage or it will be at rates neither of you are expecting.
Myth- Just because you have issues or have difficult conditions to insure, does not mean you are getting turned away or declined. It is all part of the process. The insurance carriers set the underwriting guidelines at which they want to ensure individuals based on their risk profile and financial strength.
After being detailed with your agent you will move into the actual medical exam.
Do not fear this. It is easy. A blood pressure reading, some medical questions, a urine sample, and one blood draw.
If you hate needles, pay the money and get a NON-Medical required life insurance policy. Completing this is just a form of verification by the life insurance carrier that you are in good health.
If you have several health concerns, it is often advised to complete a medical exam. It will result in more favorable rates and allow for more explanation than a non-medical life insurance policy will allow.
A few quick tips for performing well on your medical exam.
- Avoid alcohol nights before the exam
- Follow the examiners’ instructions regarding fasting
- Do not consume large amounts of caffeine before the exam
- Relax and answer the examiner honestly about questions asked
Other Source of Medical Underwriting for Life Insurance
There are still a few more hoops to jump through before achieving those preferred plus rates you are hoping for. The life insurance carrier will often check the following sources of information:
- MVR– Motor Vehicle Report
- RX Report– This is a report detailing the prescriptions you have had filled or used
- MIB File- Contains your medical information within a shared database
- Credit Report– Checking for bankruptcy or delinquent accounts
If some of these scare you, do not worry. It is all insurable. It all goes back to being transparent with your agent about your situation. He or she will know which carrier will see you in the best light to give you the best chance at approval.
What else is part of the life insurance contracts or process?
I get asked a few questions about these terms daily so wanted to address them.
Some of the following terms will resemble the fancy lingo you see on your life insurance policy upon delivery.
If you are transparent with your life insurance agent and the carrier, none of these will ever pose a concern. But, it is frequently asked. Here is the meaning of the terms in the eyes of the insurance industry.
Concealment- Misrepresentations and concealment often get intertwined and mixed up. Concealment is the failure to affirmatively disclose relevant information on your life insurance application.
For instance, failing to tell your life insurance agent that you are skydiving in two weeks while applying for coverage could pose some serious issues in a death claim being paid.
Do not get carried away detailing every aspect of your life to your agent. If it seems relevant, it probably is…. let your agent and the life insurance carrier know about it.
Misrepresentation- This is the other confusing counterpart of concealment. This is making a false statement of a material fact on the life insurance application. Misrepresentation is stating something knowingly that is not accurate. Concealment is just not mentioning it at all. That is the easiest way to separate the two definitions.
What will happen if I make a misrepresentation on my life insurance application?
Well, it could be voidable or known as a voidable contract. A voidable contract may be because the life insurance carrier not to honor your life insurance contract. Be honest on the application.
And now for the bad one.
Fraud– Most of the time the previous examples are intertwined with fraud. Most likely if this occurs on the life application you are going to have your contract voided or not honored. Fraud is deliberate and knowingly making these misrepresentations to achieve the desired benefit.
At Good Life Protection we know these options and items can become confusing and tough to navigate. We want to make the process as easy as possible for you to fully understand your life insurance policy or options. Good Life Protection do not represent one company or have any direct ties to anyone’s life insurance company. We work solely for you and represent the consumers and clients only. Call us today- 309-262-7520 for your free consultation for your life insurance needs.
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Article Written 6/20/2018 by Joshua Martin– Founder- Good Life Protection.