Life Insurance 101

What is life insurance?

A life insurance policy is a legal contract between you and an insurance company that provides certain monetary benefits to your policy beneficiary in the event of your death. Subject to certain limited exceptions, your insurance company will pay your beneficiary (or beneficiaries) a specific amount of money (the death benefit) if the life insurance policy is in-force when you die.

A life insurance policy provides financial support that your policy beneficiaries can use for supplemental income or to pay for expenses such as a mortgage, consumer debt, educational fund, or funeral expenses. Your beneficiaries can use the policy benefits whichever way they deem appropriate.

Life insurance policy features and benefits vary greatly among different insurance providers. You should review the policy type, underwriting, benefits, premiums, and rules before enrolling in a new life insurance policy.

Who needs life insurance coverage?

The simplest way to determine if you need life insurance is to ask yourself if anyone relies on you for financial support. If anyone relies on you, it may be a good idea to purchase a life insurance policy that will help support your dependents after you are gone. Potential dependents can include a spouse, children, or other family members. In some instances, businesses and charities can be beneficiaries of life insurance policies.

If any of the following apply to you, you may want to consider purchasing a life insurance policy:

  • You’re married.
  • You have a family to support.
  • You’re a caregiver for another person.
  • You have significant consumer debts.
  • You want to invest in your children’s education fund.
  • You purchased or remodeled a home.
  • You switched jobs and/or want to expand your employer coverage.
  • You started, expanded, or want to secure a business.
  • You want to diversify your investment options.
  • You want to plan your personal estate.

If you are unsure about your life insurance needs, call a licensed agent at 888-350-4651.

Types of life insurance

There are 3 main types of life insurance:

  1. Term
  2. Permanent/cash value
  3. Accidental death

Term life insurance policies provide coverage for a specific period of time.

Permanent life insurance policies provide coverage for a lifetime and accumulate a cash value as long as the required premiums are paid.

Accidental death life insurance is a limited form of life insurance that pays benefits only if your death is deemed a qualified accident.

Term life insurance

Term life insurance provides coverage for a specific period of time (or “term”) that can span anywhere from 1 year to 30 years and sometimes more. The policy pays a death benefit only if you die during that term and the policy is in force.

Individual policies have different benefits, requirements, and exclusions. Some term life policies require a medical exam and health history before the policy is approved. Others do not require a medical exam. Some term life insurance policies can also be converted to permanent life insurance policies.

Term life insurance is typically less expensive than permanent life insurance if you only need life insurance for a temporary period of time (e.g.: 20 years).

There are 3 main types of term life insurance policies:

  1. Yearly renewable term
  2. Level term
  3. Step rate term

Yearly renewable term

With a yearly renewable term life policy, premiums start low but increase each year. The premiums can grow considerably as you age. This may be a good option if you want life insurance coverage for a short period of time, such as a few years.

Level term

With a level term life policy, premiums stay the same over a specified time period — such as 5, 10, 15, 20, 25, or 30 years — and then start increasing. Once the level term expires, the premium increases each year. Level term life insurance policies are popular, and they may be a good option if you want life insurance coverage for a longer term.

Step rate term

With a step rate term policy, premiums stay flat for increments of time, such as 5 years and then they jump to higher rates. When the policy jumps to a higher rate, the annual premium will usually stay at the new rate for another specified period of time (e.g.: 5 years) before jumping again. Step rate term is less common than level term and yearly renewable term.

Permanent life insurance

Permanent life insurance (also called cash value life insurance) builds cash value over time and remains in force for your entire life as long as the premiums are paid. A permanent policy can be used for savings and financial planning purposes because the tax-deferred cash value will increase each year. You may be able to take a loan from the policy or cash it out entirely while you are still alive.

Individual policies have different benefits, requirements, and exclusions. Most permanent life insurance providers require a medical exam and health history to qualify for a policy.

Permanent life insurance premiums tend to be higher than term life insurance options, which remain in place only for a specified period of time and pay out only if you die during that period.

A permanent life insurance policy may be suitable for you if you need lifetime coverage, want additional investment options, or are concerned about your future health.

There are 3 main types of permanent life insurance policies:

  1. Whole life insurance
  2. Universal life insurance
  3. Variable life insurance

Whole life

Whole life insurance has guaranteed benefits, premiums, and cash values that are established when you buy the policy and do not change. The policy benefits are guaranteed for the life of the insurance policy and will be available after your death as long as there are no loans against the policy. The policy’s cash value will increase each year as you make premium payments, and you can take a loan from the policy.

Universal life

Universal life insurance offers more flexibility than other life insurance options. The premiums and death benefits are adjustable. You can change them throughout the life of your policy. The policy’s cash value is interest sensitive, and will grow as interest rates increase. You will have access to the cash value and can take a loan from the policy.

Variable life

Variable life insurance is riskier than whole and universal life insurance policies because the policy’s cash reserve is linked to investment options such as stocks, bonds, and money market funds. The specific investment options are established when you enroll in the policy. The cash reserve accumulates over the duration of your policy and fluctuates depending on the policy’s investment option growth or decline. Policy premiums remain level.

Accidental death life insurance

Accidental death life insurance is a limited form of life insurance that only pays benefits if your death is deemed a qualified accident while coverage is in force. Accidental death coverage is available as a standalone policy and may also be available as a rider on some life insurance policies. Accidental death life insurance coverage does not provide the same level of protection as other life insurance policies.

The policy pays a death benefit only if you die from a qualified accident during the policy term. Qualified accidents can include car crashes, homicide, and equipment malfunctions; however, each insurance provider will have different standards for events and circumstances that qualify as accidental.

How life insurance policies are priced

When an insurance company issues a life insurance policy, it takes on a financial risk of having to pay a death benefit in the event of your death. The insurance company evaluates your current health and lifestyle and makes an educated guess about your life expectancy. This process is known as “underwriting.” Depending upon the results, your policy will receive a rate classification or could even be declined.

Some life insurance policies require minimal medical underwriting, while others require detailed underwriting that can take weeks to process. Policies with less underwriting are issued quickly but may come with higher premiums.

There are 3 types of life insurance underwriting methods:

  • Guaranteed issue
  • Simplified issue
  • Fully underwritten

Guaranteed issue

Guaranteed issue life insurance policies are approved quickly, and usually without regard to your health status. Most people who apply get accepted. Policies are issued without a medical history, exam, or lab work. Guaranteed issue life insurance policies are typically more expensive than simplified issue and fully underwritten policies.

Simplified issue

Simplified issue life insurance policies are issued without a medical exam or lab work, but the insurance company will ask you several health-related questions and may obtain additional information about you by obtaining a MIB (Medical Information Bureau) report, motor vehicle report, credit report, and prescription drug records. Simplified issue life insurance policies are usually less expensive than guaranteed issue policies but more expensive than fully underwritten life insurance policies. This is because the insurance carrier is working with limited information about you.

Fully underwritten

Fully underwritten life insurance policies require a lengthy application process but usually offer lower premiums if you’re relatively healthy. The application process usually requires a health evaluation at the insurance company’s expense, which can include a medical exam, blood test, and review of medical records. The full application process can take several weeks to complete.

Fully underwritten life insurance policies usually have the lowest premiums for relatively healthy people. If you are healthy, you are likely to pay significantly lower premiums than with a guaranteed issue policy or simplified issue policy.