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The 4 Basic Types of Life Insurance:

Term Life Insurance

Term life insurance is the most basic type of life insurance policy available.  A term life policy covers you for a specific time period and pays a death benefit to your beneficiary only if you die during the term.  Terms usually range from 1 year to 30 years or more, and can be renewed at the end of the term period.  However, as you age, these premiums may increase.

Unlike other types of life insurance policies, term life policies have no cash value or investment component.  Most term life insurance policies are convertible, meaning that they can be exchanged for a whole life or other type of policy without having to take another medical exam.

In terms of value, term life insurance typically offers you the most amount of coverage for the least amount of money.

Whole Life Insurance

Whole life insurance is a life insurance policy that covers you for your entire life and not just for a specific time period or term.  As long as you pay your premiums, your policy will remain active so there’s no need to renew whole life policies.  There is an investment aspect to whole life policies: a portion of your premiums will be invested by the insurer, increasing the policy’s value over time.

Whole life insurance policy premiums are based on your age and medical condition at the time you purchase the policy, and they generally remain the same throughout your life.  At first, the premium for a whole life policy may seem much higher than a that of a term life policy.  However, the premiums for term life policies typically increase as you age, while whole life policy rates remain the same.

Universal Life Insurance

Universal life insurance, also referred to as flexible premium life insurance, is a type of life insurance policy that allows you to vary the amount of premium payments you make for investment purposes.  You can choose to pay the insurance premium plus an additional amount that you would like invested.  Your investment and returns are placed into a cash value account, which builds the policy’s cash surrender value, which is the amount that you expect to receive back when you terminate the policy.

Variable Life Insurance

Variable life insurance is a type of life insurance policy that allows you to allocate a portion of your premium payments to a separate investment account, such as an equity fund or money market account.  The cash value of the policy fluctuates based on the market and the performance of the investment.  Because of its investment risks, variable life insurance may only be obtained from brokers who are licensed to sell securities like variable annuities and mutual funds.

Riders

Riders are additional benefits that can be purchased and added to your basic life insurance policy.  These extra features provide you with more coverage and benefits than you would receive from the basic policy,  however you will need to pay an additional premium for these coverages.

Some of the most popular life insurance riders:

Accelerated Death Benefits

Also known as “living benefits”, the accelerated death benefits rider may pay all or some of the death benefits to the insured if they are diagnosed with a terminal illness and need money right away to pay for medicine, treatment, and other medical expenses.  Typically, the accelerated death benefits are subtracted from the total death benefits that your beneficiary would receive upon your death.  Different insurance companies have different rules regarding living benefits, so be sure to check the specific details of this rider with your life insurance provider.

Accidental Death Benefits

Also referred to as “double indemnity”, this rider would pay out an additional death benefit if the insured’s death is considered to be an accident.  The additional amount paid to the beneficiary is typically double what the normal death benefit would be for non-accidental death, which is why it is called double indemnity.  This rider is especially important for people who are the only providers of income for their family.

Automatic Premium Loan Provision

If for whatever reason you do not pay your life insurance premium, this rider automatically authorizes the insurance company to take out a loan from the policy’s cash value to cover the cost of the premium.  This rider can only be used if your policy has sufficient cash value to cover the cost of the loan.  The benefits of having this rider would be if you accidentally forgot to pay your premium, you wouldn’t have a lapse in coverage.

Family Income Benefit

This rider provides monthly income payments to family members upon the insured’s death.  These payments are in addition to the death benefits of the policy, and will be paid out for a pre-determined number of years.  The advantage to purchasing this rider is that after death, your family will receive steady monthly income payments for the duration that you choose.  The beneficiary of the policy can usually choose between receiving monthly payments or one lump sum.

Guaranteed Insurability/Renewal Provision

This rider allows you to purchase additional life insurance at a  specified time or date in the future, without having to go through another medical examination.  The advantage to  having this rider would be if something significant changes in your life, such as your health, marital status, or income level, you will still be eligible to purchase coverage without having to answer any questions regarding your health.

Waiver of Premium

The waiver of premium rider is a policy provision that takes effect if you become disabled.  If you experience loss of income due to a disability or injury, you would be exempt from having to make future premium payments until you are able to go back to work.  This rider is valuable because it prevents your policy  from expiring if you are injured and unable to make premium payments.

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Calculating Life Insurance Cost

Insurers calculate life insurance quotes based on a mortality rate, which is a life expectancy estimate. These are 4 main factors insurance companies use to determine your life insurance premium:

1.) Age

2.) Gender 

3.) Nicotine use

4.) Overall health

Age

Age is a main factor insurance companies use to determine your life insurance premium. The younger you are, the greater the chances that your life expectancy will be longer.

Gender

Gender is a main factor used to determine your life insurance premium because life expectancy statistics vary between men and women.

Nicotine Use

Nicotine use increases the chances of many medical problems which increase the likelihood of death. This is why insurance premiums for smokers is higher. If you do smoke, do make sure to let your insurer know – otherwise they may refuse to pay your death benefits.

Overall Health

Your overall health including your personal medical background, current health condition, and your family’s healthy history is a main factor in determing your life insurance premium.

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Life Insurance Shopping made easy

Just follow these 7 Easy Tips

1. Chose a policy that closely matches your own circumstance and insurance needs.
2. Double-check you can afford the monthly premium payments and the initial premium.
3. Review all application answers before you sign the life insurance application.
4. Buy a life insurance policy you intend to maintain – replacing could be costly.
5. If you want to switch life insurance policies, do an extensive comparison of coverage, costs and benefits. Remember, replacing could be costly.
6. Do read your policy and make sure to ask your company or agent to clarify if you have any questions.
7. Do review your policy every year to account for changes in your needs and circumstances, including income.

Determining If You Need Life Insurance Coverage

If anyone depends on your income and would struggle financially after your death, you most likely need to purchase life insurance.  A life insurance policy would provide your family or dependents with money after you’re gone to make sure they are able to take care of your funeral costs, living expenses, and other financial responsibilities that they relied on you for.

If you provide the majority of your family’s income, ask yourself this question: if something were to happen to me, how would my family afford to pay for such things like daily living expenses, monthly mortgage or rent,  and education?  Basically, would they be able to afford to continue living the way they have, or would they suffer without the income you contribute?

If You’re Single:

If you’re young, single and have no independents, it may not seem like you need life insurance because no one relies on your income or would suffer financially without you.  However, there are a few factors to consider if you are single.  For example, you may be providing financial support to a friend, aging parent, sibling, or  significant other – and you wouldn’t want these people to have to pay for your funeral expenses or be responsible for student loan payments, car payments, and other debts.  Plus, when you are young and healthy, you will receive the best rates possible because the likelihood that you will die is much less when you are younger.  Purchase a policy at a younger age to lock in low rates and eliminate having to qualify for coverage when you’re older and possibly not as healthy.

If You’re Married:

Married couples share many financial responsibilities together, including rent or mortgage, car loans, and credit card payments.  Even if you aren’t planning on having children anytime soon, if you’re married, a life insurance policy is important because it would make sure that your spouse is taken care of after you’re gone.  You wouldn’t want to leave your spouse with the burden of paying off all of your debts plus future expenses, especially if they are used to living off your combined income.

If You’re Married & Have Children:

If you are married with children and you died unexpectedly, would your spouse’s income be enough to cover your funeral and all of your family’s basic living expenses?  What about future costs such as your children’s health care  or college education?  Life insurance protection allows you to take the necessary steps to make sure your family maintains their financial stability now and in the future.

If You’re a Single Parent:

As a single parent, you are the sole provider of income for your children and without you, they would not be able to support themselves financially.  Purchasing a life insurance policy is essential to making sure they maintain their quality of life after you are gone.

If You’re Retired or with Grown Children:

As you become older and your children grow up and start families of their own, you  may not think that having life insurance is as necessary as it was when you and your family were younger.  However, your retirement savings, pension plan, or social security may not be enough to sustain your spouse, especially if they outlive you by many years.  With life insurance, you can take action now to preserve your spouse’s financial future.

If You’re a Small Business Owner:

When most people think of life insurance, they think of a product that protects your family’s financial future, but life insurance can be used to protect your business’s future as well.  If you are the owner of a small business, you must consider what would happen to your business if you or one of your business partners or key employees suddenly died.  How would your business keep moving forward?  Would someone else take over the business for you, or would you leave your share of the business to a co-owner or partner?  Life insurance policies can be structured to safeguard your business’s future too.

How much life insurance do I need?

Determining how much life insurance coverage you need means trying to determine how much money your family will need for the future.  As a general rule, you will want to carry coverage of at least 10 times your current annual salary, but 15 to 20 times is recommended.  However your family may require more or less, depending on your specific situation and financial needs.

After your death, your family will have to deal with immediate expenses such as funeral and burial costs, medical bills, estate-related costs, and many other financial obligations.  Consider these immediate expenses when determining how much coverage you should buy.  Life insurance will help your loved ones take care of these expenses right away, but their long term needs are more difficult to calculate.

When trying to figure out how much life insurance you should buy, you need to determine how much money your family needs to maintain their standard of life for years to come.  To do this, first take inventory of all of your current financial commitments and any possible future obligations your family will have to deal with.  These items may include mortgage, car payments, health care and college tuition.

Then, compile a list of all the financial resources your surviving family members will have access to, such as their own salary, savings, investments, property, and any life insurance that you already own.  Next, subtract these resources from your total current and future financial duties to help determine how much money your family may need.  Also ask yourself: for how long will my family need to receive benefits?  For 10, 15, or 30 years?

Formula: current & future financial obligations minus existing resources (savings, assets, investments, life insurance you already own) equals the amount of life insurance you probably need

Some expenses to consider:

Immediate expenses:

Funeral and burial costs
Medical expenses
Estate-settlement costs
Taxes

Outstanding debts:

Mortgage
Car payments
Unpaid student loans
Credit card balances
Any other outstanding debts

Family-related future expenses:

Surviving spouse’s annual living expenses & years needed
Children’s annual living expenses & years needed
Childcare & years needed
Annual education expenses & years needed

How are life insurance quotes calculated?

Life insurers calculate quotes by determining your mortality rate, or the likelihood that you will die within a specific period of time.  Mortality rates are based on mortality tables that use probability and statistics to create a life expectancy estimate.  There are 4 main factors that help insurers calculate your mortality rate: age, gender, nicotine use, and overall health condition.

•    1.) Age
•    2.) Gender
•    3.) Nicotine use
•    4.) Overall health condition

Age

Age is used to help determine your life insurance premium because the older you are, the chances that you will die become greater.  Remember, your life insurance rate will never be as low as it is today, since you can never predict what will happen to your health in the future.

Gender

Because mortality statistics vary between men and women, gender is one of the primary factors used to determine life insurance rates.

Nicotine Use

Sorry smokers, but if you use nicotine products, you increase your chances of many medical problems such as cancer or heart disease, which increase the likelihood of death.  That’s why rates for nicotine users are higher than for those who do not smoke.  If you do use nicotine products, it is important that you let your life insurer know because they may refuse to pay your death benefits if you fail to disclose that you do smoke.

Overall Health Condition

Finally, the last of the four primary factors that determine your rates is your overall health condition.  This includes your family’s health history, your own personal medical background, and your current health conditions at the time the policy is issued, based on your required medical exam.

What kind of life insurance should I buy?

Not all life insurance policies are the same.  There are four basic types of life insurance available: Term Life Insurance, Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance.  These products generally fall into two different categories: protection policies and investment policies.

Protection Policies

Protection policies offer pure income protection to replace the income you would have made during your working years should you die unexpectedly.  An example of a protection policy is term life insurance.  Term life policies expire at the end of the agreed upon term and are not permanent, however almost all term life policies can be converted to a permanent policy such as whole life, without being required to participate in another medical exam.

Investment Policies

Investment policies build cash value over time by allowing your premium payments to accumulate interest through investment performance.  An example of investment policies are whole life, universal life, and variable life insurance policies.  As you pay your monthly or annual premiums, the insurer invests a portion of these payments which is what allows them to build cash value.

“Here & Now” Needs vs. Long Term Needs

When choosing the right policy to match your specific needs, determine if your goal is to protect the “here and now” or if you are focused more on long term needs.  If you’re looking to protect your current income and cover all of your current debts, a term life (protection) policy is best.  If you are looking further down the road and are concerned with your long term needs, a whole life or universal life (investment) policy would be best.

Below are a few specific examples of common needs for life insurance:

Leaving Inheritance

If you want a life insurance policy to assure you’ll be able to leave your loved ones an inheritance regardless of how long you live, a permanent investment policy would be best.  A permanent policy such as whole life or universal life will build cash value over time.  The amount of money that you accumulate through premium payments can then be paid out to your beneficiaries after your death, along with the death benefits.

Making Sure Your Children Are Cared For

If you are worried about providing guaranteed income for your children in your absence, a term life policy would be your best option.  Term life policies are designed to make up for the income that you would have made during your working years.  After your children grow up, your needs may change.  At that point, you can consider converting your term life policy to a whole life or choose a number of other policy options.

Building a Savings

If you are looking to purchase a life insurance policy in order to build savings, a permanent investment type policy that builds cash value is best.  Whole life and universal life policies can be a part of your investment portfolio, since a portion of your premiums will be invested by the insurer, increasing the policy’s value over time.  Although these types of insurance policies do not perform as well as other investment tools such as an IRA, if you need to purchase life insurance coverage they at least build some value.

Covering Your Debt (Mortgage, Student Loans, Medical Payments, etc.)

If you are looking to purchase a life insurance policy to cover the debts you have now, such as a mortgage, student loans or car payments, a term life policy may be your best option. Debt is often temporary and after a number of years the need to cover those debts may no longer be there.  At that point, a variety of other policy options are available.