By Kayla Irvin
How do you know which life insurance policy is the best for you? Are life insurance policies actually worth it? And what are some terminologies used in the insurance industry?
When it comes to selecting the right type of life insurance policy, it can be quite a daunting task for many of us.
How much life insurance should I purchase?” and “How much will the right life insurance policy cost me?” are the main questions most people ask. While those are really important questions, it is also wise to consider what your goals are for the end-game.
Are you wanting to leave a financial legacy behind for your family, or are looking to have just enough for your final expenses? Or, will your insurance policy simply leave a lump sum for your loved ones, or will it benefit you during your lifetime in any way?
There are lots of different policies out there to choose from. Here are some key things to factor into your decision when looking for the best life insurance policy.
Let’s start by breaking down some insurance terminology:
● Beneficiary- Family or friend who inherits money from your policy
● Death Benefit- The coverage amount or payout left to the beneficiary
● Premium- The rate you pay for your policy. Can be in monthly, quarterly, semi-annual or annual installments
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The purpose of a life insurance policy is to leave a sum of money to family and/or friends after your passing. The amount of money left can range anywhere from five thousand, to millions of dollars.
The larger the death benefit, the higher your insurance premium will be. Factors such as your age and health history play a major role in the rate as well.
The life insurance company uses mortality statistics to determine how long people similar to you in heath and age will live. So if they predict you’ll live longer, they can charge a lower premium because they expect to collect money from your policy over a longer period of time.
While some policies provide lifetime coverage, others expire after a certain number of years. After you select a policy, you have to apply for the coverage you want, and then the company’s underwriters will conduct a health investigation to determine if you are eligible for the intended policy.
Sometimes it can be as simple as accepting the health information from the application, or they may want to have a phone interview or even request that you complete a medical exam.
Because there are lots of things to consider, meeting with an insurance professional can be helpful, as they can provide you the best life insurance quotes and advice on which options might work best for you.
Types of Life Insurance Policies:
1. Whole Life Insurance Policy
Purchasing a whole life insurance policy, means that you are choosing a plan that will provide coverage for the entirety of your life, or the policy’s maturity date (which is usually beyond 100 years old).
This of course, is based upon you continuing to pay your premium. These criteria mean that it is a permanent policy because it has no expiration date.
One of the great things about a whole life policy is that whatever rate you pay at the start of the
policy, it will never increase as long as the policy is in force. For example, if you purchase a policy at age 27 with a monthly rate of $30, then you will be paying that same $30 a month at age 77!
So ideally, you should not wait long before starting a life insurance policy, as the older you get, the higher the rate gets.
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Here are the different types of whole life insurance policies:
● Traditional Whole Life
Traditional whole life insurance also known as straight life or ordinary life works in a way that as long as you pay the premiums to keep the policy active, your beneficiary will receive your death benefit after your passing, or the policy matures and you receive the benefit to keep to yourself. Most companies set maturity dates to be your 100th- 102nd birthday. It’s a pretty straightforward policy.
● Universal Life/ Variable Universal Life
A universal life insurance policy works the same way as a traditional whole life, except this one also accrues cash value. This built-in investment tool grows your money at a fixed rate set by the insurance company.
The money in the cash account can be withdrawn or borrowed from your policy, and if there is any money left in the cash account at your time of death, it will roll into the death benefit that goes to your beneficiary.
A universal life policy also offers flexible premiums and death benefits that you can change throughout the life of the policy.
This type of permanent policy is set up as a traditional whole life, except that it insures two people (usually spouses) and leaves the death benefit to whichever partner outlives the other.
At that time, the surviving person can cash out the benefit and end the policy, or choose to convert to a traditional or universal life policy instead to keep continued coverage.
● Final Expense
Usually providing no more than $15,000 in coverage, this permanent policy is expected to cover burial costs and funeral arrangements.
While the other policies are written for higher amounts of coverage, a final expense whole life insurance policy has a lower premium due to the low coverage amount. These policies are typically only available to those over age 50. As long as the insured does not have certain major health issues, they are provided coverage without having to undergo the underwriting process.
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2. Term Life Insurance Policy
Next up, is the term life insurance policy. Instead of it being permanent like whole life insurance, these policies only offer coverage for a set number of years. A term can be as short as 5 years, or as long at 30 years.
You are locked in at the same rate during the full term, but once the expiration date comes, the policy ends and you no longer have coverage. However, a lot of insurance companies will make several offers before the policy ends, and again a final offer at expiration.
The most ideal situation is if the insurer offers to convert your term policy to a whole life before it ends. This is advisable because the longer you wait, the older you will be. And the older you are at starting a new policy, the higher your premium will be.
Also, converting to a whole life policy means you’ll then have coverage in place to keep for the rest of your life, and you won’t have to worry about starting a new policy with higher rates down the line. You must be mentally ready to navigate all the challenges you are likely to face in the insurance industry.
Term policies can also be ideal to supplement a whole life policy. During a certain period of your life, having a larger sum of coverage may be a bigger priority for you. For example, it may be important for you to have more coverage while your children are young to make sure the family is taken care of if something were to happen to you.
But after they grow older, move out and become stable themselves, hundreds of thousands of coverage may not be a goal anymore. So a 20 year term of $100,000 expiring when your children become adults may be okay.
There is another specific type of term policy known as a Return of Premium Policy. It works the same as a regular term, except that once the policy expires, you receive 100% of the premium you paid into the policy back as a lump sum.
You can look at the return of premium as a savings account in which you will withdraw the entire balance from down the line. This alone is enough to make return of premium policy as the best life insurance for first time buyers.
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Do you want to have enough money for a down payment on a new home in 10 years? Start a 10 year return of premium policy!
The bottom line on term life is that if you are young and healthy, it’s a great way to at least get some life insurance established, or you can use it for a certain period of time when it seems necessary for your goals.
So which will it be? Whole life or term life insurance policy?
As you can see, there are lots of policies to choose from. While it’s important to get a policy started as soon as possible, you still should take some time to research companies, rates, and most importantly assess your needs.
Figure out your goals, who you are leaving money for, and what you feel comfortable leaving for them.
Everyday hundreds of people pass away without so much as a dime to leave behind. You want to make sure your loved ones won’t have to deal with money troubles on top of grieving your loss. Prioritize purchasing life insurance policy as one of the most important decisions for your family.
Life insurance is the one thing that you purchase for yourself, but it’s actually for someone else. You may never get to see the benefit of your policy, but at the end of the day what you are actually purchasing for yourself is peace of mind.
It’s always important that you learn how to choose the best life insurance company so that you don’t get ripped off. In fact, you can even compare life insurance quotes online or on phone before taking a stand.
How long life insurance lasts depends on the type of policy you bought. Term life lasts for a period of time while the whole life lasts for as long as you live and you are able to pay the monthly or annual premium.
About the Author
Kayla Irvin is a licensed insurance agent for 7 years counting and with over 10 years of sales experience. She’s based in Detroit, Michigan, United States and has been helping small businesses from around the world in providing quality marketing content, social media management and editing services. You can reach her through this email, email@example.com or visit her website, Kay Quality Services.