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What Is life insurance?
Life insurance is a contract between an individual and an insurance company whereby a lump sum of cash, known as the death benefit, is paid to a named individual (or individuals), known as the beneficiary in the event that the insured dies.
How does it work?
Life coverage works using a very simple concept. In return for the payment of a premium, a set amount of proceeds will be paid out to a named beneficiary (or beneficiaries) if the insured dies while the insurance contract is in force.
The funds that are paid from a life insurance policy are received by the beneficiary free of income tax. That way, loved ones, and survivors are able to make use of the full amount that is provided by the policy.
Today, there are some life policies that also provide “living benefits.” These living benefits can be added as a rider on an insurance policy.
Living benefit riders offer access to some or all of the death benefit proceeds if the insured becomes diagnosed with a chronic illness, a critical illness, or a terminal illness, and must reside in a skilled nursing home facility
Types of life insurance
There is a wide range of insurance coverage to choose from in today’s market. Knowing more about the various types of life coverage available, as well as what each offers, can help you to narrow down the type that is right for you.
Term life consists of death benefit protection only, without any type of cash value or savings component. Because of that, term insurance is usually cost-effective in terms of securing a large benefit for a little premium. With term insurance, coverage is purchased for a set amount of time, or “term,” such as 10-years, 20-years, or even 30-years.
Whole life, as its name implies, is designed to cover an insured for the “whole” of their lifetime. This type of policy offers death benefit protection, as well as a cash value component that grows on a tax-deferred basis. As long as the premium is paid, whole life insurance will remain in force, and the cash value can continue to compound.
Universal life is a form of permanent insurance protection. Offering both death benefit coverage and cash value build up, universal insurance can be flexible by allowing the policyholder to alter the timing and/or the amount of the premium (within certain guidelines) to better fit changing needs over time.
Because some people who need coverage may have certain health-related issues known as pre-existing conditions, it can make it difficult to qualify for coverage. In this case, a guaranteed acceptance policy could be beneficial. Anyone can secure this type of coverage – even if they have an adverse health condition. While the premium for this type of coverage is typically more than that of a fully underwritten option, guaranteed acceptance insurance can offer the protection that is needed.
Cost of life insurance
Just like with most other products and services, there are a number of factors that go into the cost of and how the best life insurance quotes are determined. In this case, the key components that determine the premiums include:
- Tobacco Use
- Product Type
- Height & Weight
- Coverage Amount
- Health History
- Family History
- Financial History
- Criminal History
- Medication History
- Insurance Company
- Length of coverage
Example of monthly life insurance cost
*Female, Preferred Best, Non-Tobacco Rates Shown. 10 Year Term Effective 02/18/2020.
All life policies have some type of underwriting guidelines that must be met in order to qualify for coverage.
Underwriting is used by insurance companies to assessing the risk of the applicant, as well as to better ensure that the life insurance quote that is charged for the coverage is in proportion to the risk that the insurance carrier is taking on.
There are two types of underwriting on life insurance policies. Full underwriting and simplified underwriting.
A policy that is fully underwritten will require the applicant to take a medical exam in order to better determine his or her health condition. This exam includes providing a blood and urine sample for testing. The applicant does not have to pay for this medical exam.
In addition, the applicant will also have to fill out an application for coverage, which requires answering health and medical questions, as well as provide information about any medications that they are taking.
Approval is then based upon the answers to these questions, the medical exam results, and various other information, such as an RX report (that provides more detail on prescription medications), a report from the Medical Information Bureau (MIB), and a motor vehicle report.
Depending on the insurance company and underwriting requirements, it can often take between 4 and 6 weeks to evaluate an applicant for a fully underwritten life policy.
Simplified Issue Underwriting
A policy with simplified underwriting (no medical exam) will still require the applicant to answer medical questions. However, no medical exam will be required.
The underwriting decision is determined by the answers to the questions on the application, as well as by the information that is on the RX report, MIB report, and motor vehicle report.
Most insurance carriers now offer some form of simplified underwriting. In most cases, an individual can purchase up to $500,000 in coverage, and there are a few carriers that offer coverage of up to $1 million using simplified underwriting.
Unlike a fully underwritten policy which can take 4-6 weeks to issue, those using simplified underwriting may only take 15 minutes to 36 hours for the underwriting process to be completed.
This shorter time frame is due in large part to the fact that there are no medical exam results to wait for. It could be, though, that simplified issue life insurance quotes are higher than those of fully underwritten policies.
Polices with no underwriting
With a guaranteed acceptance insurance policy, the applicant will be approved for coverage, regardless of his or her health condition. These policies do not require going through a medical examination, nor a list of health questions to be answered on the application.
It is important to note here, though, that the amount of coverage that can be secured with this type of insurance policy is usually limited to $25,000 – $50,000 in coverage.
In addition, some guaranteed acceptance plans will only pay the beneficiary a return of the paid-in premium (plus interest) if the insured dies within the first two years of securing this coverage.
Pros and cons
As with any other financial tool, there can be both pros and cons to purchasing life insurance. One Con “drawback” is the premium. But, when considered against all of the pros that this life insurance can provide, you’ll find that this coverage is well worth it.
Just some of the pros of life insurance coverage offers include:
- Income Replacement – the proceeds can replace lost earnings, both for young couples and families and for retirees.
- Debt Payoff – The proceeds from a life insurance policy can pay off debt so that survivors won’t be saddled with added financial responsibility. This includes the payoff of a mortgage balance, credit cards, auto loans, and business-related debt.
- Payment of Funeral and Final Expenses – With the average cost of a funeral today being over $8,500, having funds available to immediately pay this expense can be beneficial. Oftentimes, having life insurance coverage this need can prevent families from having to dip into savings or sell other assets.
- Living Benefits – Contrary to popular belief, someone does not have to die in order to benefit from life insurance. Some policies may also be tapped for “living benefit” needs, such as when diagnosed with a chronic or a terminal illness, and for payment of skilled nursing home expenses.
- College Funding – Permanent policies that build up cash value in a tax-deferred manner may also be used for needs such as college funding. Here, the money inside of the cash component of the policy can compound exponentially – and, should the insured pass away, the self-completing nature means that the death benefit funds will still ensure that the beneficiary will have money when it is needed.
When to buy life insurance
Although everyone’s needs are different, the best time to get coverage is sooner rather than later. This is because some of the key factors in qualifying for this type of coverage are age and health.
With that in mind, applying for a policy now can better assure you that financial protection may be locked in, and that loved ones will have the peace of mind in knowing that they can count on this financial safety net. Younger and healthier applicants will also typically be rewarded with more affordable life insurance quotes.
Who should get life insurance
There is any number of people who should get life insurance. Just some of these include: Learn more
- Parents who have young children
- Spouses who are counting on each other’s income
- Business owners and key executives
- Retirees who don’t want to burden loved ones with final expenses
- Parents and grandparents who want to help fund a child’s future college costs
Reasons to purchase life insurance
Because everyone’s needs and situations are different, there is a wide range of reasons for purchase life insurance, such as:
- Protecting your family from debts like a mortgage and student loans
- Ensuring that ongoing living expenses will be paid – even if the unexpected occurs
- Creating a way to supplement and replace retirement income
- Covering short-term debts
- Paying for a child’s or a grandchild’s future education expenses
What life insurance won’t provide*
While insurance is a flexible and dependable financial tool, there are some things that it will not provide. For example, policy exclusions are situations where the insurance company will not pay out benefits.
One of the most common exclusions found in life insurance is the suicide clause. Although there are some life insurance policies that will allow for the payment of benefits – even in the event of suicide by the insured – this is not the case with all plans.
There are other situations that could also preclude the payout of benefits. These can oftentimes include:
- Critical Illness
- Reckless Endangerment
- Long Term Care
Having a good understanding of what life insurance will and won’t provide can be extremely helpful in narrowing down the type and the amount of coverage that is right for you.
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