Most people have an almost casual attitude toward life insurance.
That’s hardly surprising, given that so many have coverage through their employers, or that there are a multitude of online insurance aggregators promising you huge insurance policies for just a few dollars a month.
But reality can hit hard when you’re applying for a private policy, or even just a policy to supplement the one you have with your employer.
Premiums are never quite as low as the websites promise, and coverage can be difficult to get if you have any health-related conditions.
In the end, buying life insurance isn’t always that simple.
At least that’s true if you don’t know exactly where to get it. To do that, you’ll need to be familiar with the basics of life insurance.
Here at Huntley Wealth, we provide low-cost life insurance policies to many people. But, we prefer that our customers have at least a basic working knowledge of what’s involved in the life insurance buying process along with the life insurance underwriting process.
In this guide, we’ll provide a high-altitude view of the process, while trying to spare you the more technical stuff that might only confuse you.
The complications are what we handle so you won’t have to.
Why You Need Life Insurance
For the average person, there are four primary reasons why life insurance is needed:
To Cover Final Expenses
The most obvious are funeral expenses, but lingering, unpaid medical costs must also be factored in.
With the rising cost of health insurance in recent years – as well as the increase in copayments and deductibles – unpaid, out-of-pocket medical costs are becoming more significant every year.
Alone, they can run into tens of thousands of dollars, particularly if death is preceded by a prolonged illness.
Replacement Of Lost Income
In most cases, this is the most substantial reason to have life insurance. A single person with no dependents may not need to cover this contingency. But, for a married person (or maybe even an unmarried person), especially one with dependents, this will present the biggest need for insurance.
You may need sufficient coverage to provide for your children until they reach the age of majority, or even for life in the case of a non-working spouse.
If you have substantial debt, such as a home mortgage or student loans, you may want to have sufficient life insurance proceeds to pay those off upon your death. Paying them off will lower living expenses for your beneficiaries.
The possibilities here are practically unlimited. One of the most common is providing for a college education for your children.
For example, it can cost over $80,000 for four years at an in-state, public college or upwards of $200,000 at a private school.
Having sufficient life insurance to cover this need will be critical, given that you won’t be around to provide for your children’s educations.
Those are just four primary examples. Depending on your own personal circumstances, you may have others.
What’s the Right Amount of Life Insurance Coverage?
This is usually the toughest life insurance question to answer since it will be different for each person.
The rule of thumb in the life insurance industry is that you should have enough life insurance to cover 10 times your annual salary.
If you earn $50,000 per year, that means a policy for $500,000.
That’s just the baseline. Other factors can adjust that number higher or lower.
- Whether or not you have dependents.
- The length of time you’ll need to provide for those dependents.
- What alternative sources of income will be available in the event of your death.
- How much you have in financial assets (generally speaking, the more you have, the less life insurance you’ll need).
- How much debt you have that may need to be paid off upon your death.
- The type of education you want your children to have when they go to college.
- Preparing for any other contingencies your situation might involve (for example, business interests or business debt).
Each of these factors needs to be figured into determining the amount of life insurance you need.
Naturally, the cost will also figure into the mix. Balancing the need for coverage with cost is a tricky process.
On the one hand, you certainly don’t want to be under-insured. But on the other, you don’t want to overpay for coverage, either.
Striking the right balance is the key to the whole process, and that’s why it’s important to get professional help.
The Two Basic Types of Life Insurance
The two most basic types of life insurance are term and whole life. There are different variations of each, but nearly all life insurance policies fall into one of those two categories.
Which is the best for you? Let’s dig a little deeper to help you decide.
Term Life Insurance
Term life insurance is sometimes referred to as pure life insurance because it doesn’t have the bells and whistles of the whole life variety. It’s just a basic life insurance policy, in which the death benefit is the only benefit.
For this reason, term life insurance is less expensive than whole life. And not just by a little – a term policy can cost just 10% of the premium of a whole life policy for the same death benefit. This is why term life insurance has become so much more popular in recent years.
The fact that term life is cheaper isn’t just about saving money, though. Because it’s so much cheaper it enables consumers to purchase a larger amount of coverage for the same premium.
For example, you might only be able to afford $100,000 in coverage with a whole life policy. But, you can purchase a term policy for $500,000 and still save money on the premium.
Yet another reason why term insurance is less expensive is that the policies are of limited duration (which is why they’re referred to as “term”).
A typical policy will run anywhere from five years to as long as 30 years. Since it’s less likely you’ll die within the term, insurance companies can charge lower premiums.
Another advantage of limited term is that you can better match a policy with your actual need. For example, if you have two children, ages six and four, your greatest need for life insurance will be over the next 20 years. By then, your children will be grown and out of college. You’ll no longer need a large policy and can replace your life insurance with a smaller one if neccesary.
Term Life Insurance Policy Variations
One of the biggest concerns people have with term life insurance is what happens at the end of the term? That’s a perfectly valid question. In fact, it’s so valid the insurance industry has responded by adding riders to enable consumers to retain coverage even after the term expires.
With this rider added to a term policy, you’ll be able to renew the policy for an extended term without restriction. That means you won’t need to reapply, nor will you need to pass a medical examination. The rider even guarantees coverage will continue if you’ve developed a health condition since originally taking the policy.
You can add a rider enabling you to convert a term policy to a whole life policy before the original term expires. You will then have the benefit of permanent life insurance, once again without the need to pass a medical exam.
There are two points to be aware of with these two specific riders, though. First, each will increase your premium slightly. After all, the insurance company is taking on greater risk in offering you these options and will need to adjust the premium accordingly.
The second is that your premium will be determined based on your age at the time the policy is either renewed or converted. Since you’ll be older, the premiums will naturally be higher.
But despite the higher life insurance costs, either provision can be well worth adding to your policy to protect yourself in the future.
Whole Life Insurance
The two biggest features distinguishing a whole life policy from a term policy are:
- Whole life is permanent coverage, and
- Whole life insurance offers an investment provision, in addition to the death benefit.
We’ve already covered that whole life insurance is much more expensive than term, and these are two of the basic reasons why.
When you purchase a whole life insurance policy, it can’t be canceled by the insurance company for any reason other than nonpayment of the premiums. There is no expiration date on this type of policy.
The investment provision within a whole life insurance policy is generally referred to as the cash value. A big part of the reason why the premium on whole life is higher than on term is because a large share of the premium payment goes into your cash value.
The cash value accumulates very slowly in the early years of the policy. This is because much of what would go to cash value actually pays fees for the policy. But several years into the policy, the cash value begins the build. It typically includes a minimum investment return, and also a loan provision.
A whole life insurance policy is an excellent way to create a forced savings plan through your life insurance policy. It’s certainly not the best type of investment. In fact, it’s often recommended you should “buy term and invest the difference.”
That’s good advice, because the investment return on cash value life insurance is usually limited to a certain percent, like 4%. If you purchase a term policy and invest the difference in an exchange traded fund based on the S&P 500, you’re more likely to get the long-term average return of 10% such investment provides.
Whole Life Insurance Policy Variations
So far we’ve been discussing basic whole life insurance. But, there are actually two primary variations:
Sometimes referred to as adjustable life, these policies include more flexible provisions. For example, it may allow you to increase your death benefit as a result of passing a new medical exam, or it may let you pay your premiums out of the cash value of the policy.
This type of policy gives you greater investment flexibility with the cash value. For example, you can choose to invest your cash value in stocks and other investments. Variable life has the potential for greater future investment value, but also comes with greater risk.
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Finding the Right Life Insurance Company
This is where the life insurance process starts to get complicated. Unknown to many consumers, there’s no FDIC equivalent in the insurance industry. Though it’s certainly a rare event, it is possible for a life insurance company to go out of business.
For that reason, you’ll need to be aware of the financial integrity of the company you’re purchasing a policy from. Fortunately, there are several third-party sources you can use to make that determination:
- A.M. Best. This company has been rating insurance companies for decades, and is considered the gold standard in evaluating their financial integrity.
- Fitch. This is a business credit rating agency that also rates insurance companies.
- Standard & Poor’s. Provides a similar service to Fitch.
- Moody’s. Another credit evaluating agency.
The information provided by these companies can be a bit confusing. But, as a general rule, a rating of “A” through “AAA” indicates the most financially stable companies.
Beyond the financial integrity of each company, though, you can check certain online sources, like the Better Business Bureau or the Department of Insurance in your state to determine the experience of other consumers with that particular company. A company may be strong financially, but there may be issues with customer service or even with paying claims.
How Life Insurance Premiums are Determined
Several factors determine the premium you’ll pay for a policy:
As your age increases, so do premiums. The longer an insurance company can collect premiums on your policy before paying a claim, the more profitable the policy will be. For that reason, a policy purchased in your 20s will be much cheaper than one taken in your 40s.
The condition of your health is one of the biggest factors in determining your premium. While an accident or a routine surgery in the past usually won’t affect your premium, chronic conditions will. These include hypertension, obesity, diabetes, heart disease, depression, or a previous bout of cancer. If you’ve had these conditions in the past, but got them under control, they’ll have less of an impact as the years pass.
Behavioral issues also figure into the mix. If you participate in dangerous pastimes, like deep-sea diving or skydiving, your premiums will be higher. You can also figure your premiums will about double if you’re a smoker.
The same thing goes for people who use drugs. They are going to impact your rates.
If your risk is too high, you could be declined.
If you are able to get a policy, but you pass within the first couple years, the insurance company can also deny the claim if you didn’t tell them the full story.
The Amount Of The Policy
The higher the death benefit, the larger the premium will be.
Whole Life VS. Term Life
As discussed earlier, a term life policy is much less expensive than whole life.
Earlier we mentioned guaranteed renewability and convertibility riders, but there are many more you can use to customize your policy. Most will require at least a small increase in your premium, but they’ll be well worth having, nonetheless.
The Insurance Company You Use
Many consumers, unfamiliar with the industry, assume all insurance companies charge similar premiums. Nothing could be further from the truth. The differences in premium from one company to another are even more pronounced if you have health conditions. This is an area requiring extreme caution.
Where to Buy the Life Insurance Policy You Need
There are two sources you probably don’t want to buy a life insurance policy from. The first is a single company agent. Since the agent represents just one company, he or she will only be able to sell you what the company has, which may not be the best policy for you.
The second is an online insurance aggregator. They aren’t actually insurance agencies, but websites where multiple companies provide quotes for shoppers. The shopper completes an online application and is then solicited by email or phone from several different carriers.
In theory, this is a solid way to find cheap insurance. But, these websites specialize in getting your information to agents and companies who are most interested in providing you with a lowball quote. Understand the rates you get from these companies are designed for those who are young and healthy. They’re not well suited to anyone with a health condition. You’ll also have no idea as to the integrity of the companies giving you the quotes.
The best source for life insurance is always an independent life insurance agent.
That’s because the agent represents several companies and will work with you to place your application with the company most likely to approve your policy, and at the most reasonable premium rate.
Here at Huntley Wealth, we’re an independent agency working with dozens of top life insurance companies. We’ll be glad to work with you to find an affordable life insurance policy.
If you’re like many people who have a health condition, that’s our specialty! We work specifically with high-risk life insurance and can get you the most coverage at the lowest possible premium. Perhaps even more important, we’ll place your application with companies that are the most likely to approve it.*While we make every effort to keep our site updated, please be aware that "timely" information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Huntley Wealth & Insurance Services and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.