When considering the purchase of life insurance, it is important to educate yourself on the different coverage options so that you can make an informed decision that is best for your current situation. But where do you start?
Life Happens is a nonprofit organization dedicated to helping Americans take personal financial responsibility through the ownership of life insurance and related products. Their website, www.lifehappens.org, contains videos, guides and calculators that can be very helpful when researching life insurance coverage. They do not endorse any particular product, company or insurance advisor. Their only interest is seeing that consumers get the coverage they need to protect themselves and their loved ones.
Eventually, you’ll want to touch base with a local advisor who can help answer your questions and also provide you with no-obligation quotes. Here are some common questions that our insurance advisors receive about life insurance coverage when working with clients:
Q. How much life insurance coverage do I need?
A. The amount of coverage you need depends on your financial situation as well as your future goals. To get a preliminary sense of your needs before meeting with an advisor, try the Life Happens Life Insurance Needs Calculator. It will walk you through the various questions you need to ask yourself and provide you with a rough estimate of how much life insurance you need to protect your family.
Q. What type of life insurance should I buy?
A. The kind of coverage that’s right for you depends on your circumstances and financial goals. But, generally speaking, term life insurance offers the greatest coverage for the lowest initial premium and is a great solution for people with temporary needs or a limited budget. Permanent insurance may make more sense if you anticipate a need for lifelong protection, or if the option of accumulating tax-deferred cash values is attractive to you.
Also, keep in mind that it doesn’t have to be one or the other. A combination of term and permanent life insurance could be the right answer for you.
- Term life insurance
A life insurance policy that provides a stated benefit upon the holder’s death, provided that the death occurs within a certain specified time period. Policy does not build up a cash value.
- Permanent life insurance
Life insurance that provides coverage throughout the insured’s lifetime and also provides a savings element.
- Universal life insurance
A type of flexible permanent life insurance offering both term life insurance as well as a savings element, which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered as a policyholder’s circumstances change.
- Whole life insurance
A basic type of permanent life insurance. It provides coverage that lasts a lifetime and also builds up a cash value that you can borrow against, withdraw or use to pay future premiums.
- Universal life insurance
Q. How much will it cost?
A. There are a number of factors that go into determining life insurance premiums including age, health and lifestyle. To get the most accurate premium estimate you can request a no-obligation quote from your insurance advisor.
Q. Do I really need to have a medical exam?
A. The use of a medical exam to determine premium depends on the type of insurance and the amount of coverage requested. Traditional term and permanent life insurance policies typically require an exam, but alternatively, there are simplified issue products available for smaller coverage amounts that do not require an exam. For this type of coverage, applicants simply need to answer some health history questions to see if they qualify.
Q. I already have some life insurance coverage. Do I need more?
A. When people buy life insurance, they tend to “set it and forget it.” Yet life can change quickly and bring on added responsibilities that may warrant additional life insurance. Try using the Life Happens Life Insurance Needs Calculator to see if your current coverage is still meeting your financial needs and goals.
Understanding Common Life Insurance Terms
The world of insurance has its own unique set of vocabulary to describe its products. To help you understand the information included in a life insurance policy, we’ve gathered some common terms you may encounter.
Accelerated death benefit
A life insurance policy option that provides policy proceeds to insured individuals while they are still living, in the event of a terminal illness. Such benefits kick in if the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries.
The person or party named by the policyowner of a life insurance policy to receive the policy death benefit.
The savings element of a permanent life insurance policy, which represents the policyowner’s interest in the policy. Also called the cash surrender value or surrender value, it is the cash amount offered to the policyowner by the issuing life carrier upon cancellation of the contract.
The party designated to receive proceeds of a life insurance policy following the insured’s death if the primary beneficiary predeceased the insured.
Convertible term insurance policy
A term life insurance policy that gives the policyowner the right to convert the policy to a permanent plan of insurance.
A return of part of the premium to policyholders from an insurance company’s earnings.
The amount of the death benefit payable under a life insurance policy.
This refers to a policy that is currently active. When applying for coverage, you may be asked to provide information for other life insurance policies that you currently have in force.
When naming an irrevocable beneficiary, the policyowner has the right to change the beneficiary designation only after obtaining that beneficiary’s consent.
The owner and beneficiaries of a life insurance policy must have an insurable interest in the insured when submitting an application, meaning they are likely to suffer some financial loss or detriment if the insured dies.
Some life insurance applications will ask for the insured’s net worth, which is the value of all assets, minus the total of all liabilities. Put another way, net worth is what is owned minus what is owed.
Amount paid to the insurance company to buy a policy and keep it in force. Premiums are typically charged annually, semiannually, or monthly. However, there is also a single premium option for some permanent life insurance products.
Renewable term life insurance
A term life insurance policy that can be renewed at the end of the policy term.