Life Insurance

Categories

Mortgage Protection
If something happens to you, will your spouse be able to make the mortgage payments on just one income? How can you protect your family from losing their home?
Mortgage Protection
If something happens to you, will your spouse be able to make the mortgage payments on just one income? How can you protect your family from losing their home?
Final Expenses
Final Expenses
Income Protection
Income Protection

Why buy life insurance?

about everyone could stand to be insured. About the only exception would be someone who has nobody that will suffer, either emotionally or financially, from their loss, and who has nobody they would want to give a final gift to. That being said, most people that buy life insurance have a particular need in mind, such as:

  • Mortgage Protection
  • Income Protection for Education
  • Final Expenses
  • Legacy Creation

The first two are usually (but not always) covered by some type of term insurance because the need is for a set time period. At some point in the future, your mortgage may be paid off, and your kids may already be out of college.

Final Expenses and Creation of a Legacy (or Estate) are usually covered by a permanent policy, since you would never know the time period in question in order to use term.

When Should You Purchase Life Insurance?

Having coverage that protects your family is an excellent idea at any time. The best time to buy life insurance protection is “as soon as possible.”

There are two reasons to get coverage when you are young. Life insurance is tied to the age of the insured person. The premiums are cheaper the younger you are. There is also a higher probability of developing a serious health problem as you age. You may not be able to purchase life insurance if you wait until you’re older. The younger and healthier you are when you buy it, the cheaper the insurance will be, and the more likely you will qualify for it. Also, the increase in price with age is far from linear. It is a curve that starts out flat and takes off like a rocket as you get into your 50’s and 60’s.

When looking for life insurance, you face two decisions. What type is best? How much do you need? As you gather information and quotes, you will likely navigate the coverage amount and type in line with what you can afford. Here is an overview of three types of life insurance and points you need to know.

Term Life Insurance

Term life insurance is a straightforward and the least expensive kind of policy, dollar for dollar, compared to any permanent policy. It has no cash value. The only function of a term life insurance policy is to pay the beneficiary a specific lump sum upon an insured person’s death. However, these days there are some variations in Term Life Insurance products.

Straight Term Insurance

Straight Term Insurance is the simplest and cheapest. The policy limit and death benefit are the same. A $250,000 policy has a $250,000 death benefit. The policy provides money to replace income, salary, other contributions, and final expenses to protect the insured person’s family should the insured die during the term.

A contract is signed with the agreement to pay the premium. The policy lapses if the insured person stops paying. The insured owes no money to the insurance company, and no refund of the premium is paid if the policy lapses before the term end. With simple term life, all of your money goes to buying the death benefit. If you do not die during the term, that money is gone.

At the end of the term, depending on your age and health, you may be able to renew it, although the price will likely be much higher. Also, the limits decrease as you get older. You might find you are no longer eligible for the same size benefit as you were when you were younger, assuming you still qualify based on your health.

Decreasing Term Insurance

A type of Term Insurance often used for mortgage protection is called Decreasing Term. If you buy a new house with a 30 year mortgage, you could take out a 30-year decreasing term policy. The death benefit decreases in a similar fashion to the loan balance. The benefit is that this type of insurance is cheaper. However it is usually not that much cheaper than regular term. Depending on your budget, you would decide whether saving some money every month is worth it. We can quickly compare the rates for a policy of a certain size and see if it is worth it to you to pay a little less, but then not leave as much to your survivors should the unthinkable happen.

Term Life Insurance with Return of Premium

A relatively new type of term insurance is called Return of Premium (or Cash Back Option). A return of premium rider permits a term life insurance policyholder to recover premiums paid over the policy’s life. They are refunded if the policyholder outlives the term. The advantages to this are obvious. It is seen as a win/win. If you die during the term, your beneficiary gets the death benefit. If you don’t die during the term, you get all your money back. What do you lose? Two things:

  • You paid more money throughout the policy for this option
  • You lost the interest you could have earned elsewhere with the money you paid for the insurance.

Return of Premium Term Insurance reduces the net cost to zero. Adding the rider increases the cost substantially. Whether it makes financial sense depends on the probability of investing the money elsewhere for a higher return. For those in good health, it may offer a means of setting aside tax-deferred funds. Companies also limit this type of insurance by age. Beyond a certain age, it becomes difficult to qualify for it.

Whole Life Insurance

Whole life insurance is designed for your dependents’ protection while building cash value. Policies pay a death benefit when a person dies. There is also a cash value savings component that builds over time. Besides delivering a death benefit, whole life policies permit the accumulation of cash value policy owners receive if they are surrendered.

The fixed premium does not increase during the insured’s lifetime, as long as they pay the premiums as agreed, for the time a policy is in force. The policy pays when an insured person reaches the age specified in the policy (usually over 100) or when the policyholder dies. Whole life insurance is more expensive than term insurance but has the benefit of building cash value.

Whole life insurance is often seen being used for the extremes of a lifespan. Older people often buy a whole life policy, say $10,000 to $25,000, to cover their final expenses of a burial or cremation without leaving that burden to their family. On the other hand, many people buy such a product for their children or their grandchildren when they are born due to the extremely low price. For example, if I were to buy a $25,000 whole life policy at my age, it would cost me over $100 per month. However, I could buy one for a 1-year old grandchild for well under $10 per month.

Universal Life Insurance

Universal life insurance is another type of permanent insurance. It is more flexible and provides permanent protection for the policy holder’s dependents. It gives the insured person more control over premiums than whole life insurance. Typically, a universal life policy allows the policy owner to change the death benefits at specific times or vary the timing or amount of premium payments.

Both whole life and universal life policies allow loans or withdrawals against the policy’s cash value. Variable life is another type of insurance that offers additional investment options. The policy owner is required to take time for investment management. At Your Insurance Professors we focus on Whole Life and Indexed Universal Life.

Indexed Universal Life

An indexed universal life insurance policy helps build wealth while providing a death benefit for your loved ones. A portion of the premium goes toward annual renewable term insurance. The remainder is added to the policy’s cash value after the deduction of fees.

On an annual or monthly basis, interest, based on the equity index, increases and is credited to the cash value. Indexed universal life proves valuable to some policyholders. Before making a purchase, it is essential to understand how it works.

The policies are best for those who are seeking a tax-free option for a large upfront investment. Indexed universal life insurance policies provide tax-free gains, flexibility, and greater upside potential. They offer permanent coverage as long as premium payments are made on time without allowing the policy to lapse. Drawbacks include no guarantee of market return or premium amounts and caps on returns. Part of the flexibility has to do with how it is structured. For a given premium, you would be able to choose whether the cash accumulation was more important to you or the death benefit. In other words, you could have a larger death benefit that does not accumulate much cash, or a smaller death benefit that accumulates cash much more quickly. For the same death benefit, indexed universal life policies are cheaper than whole life policies. The downside is they are more complicated, and both the insured and the agent need to understand how to structure it to meet the insured’s needs.

Type of Underwriting

Underwriting is the process where the insurance company looks at all the known information about the prospective client and decides if they want to insure him or her, for what policy limit, and for what premium. Most of this has to do with age and health. There are three typical types of insurance underwriting:

Fully Underwritten

Full underwriting involves the company sending a medical professional to your house to check your height, weight, blood pressure, and to draw blood and urine for analysis. That way they can be sure of your physical health before they issue the policy. They also do a thorough search of available medical records. A fully underwritten policy has the advantage that it will be cheaper than the other two types. It is great for people who are young and healthy and have time to wait to get insurance. The process may take a couple of months. We have access to some fully underwritten products, but it is not our specialty. It is a double-edged sword. If you were young and healthy and they do not find anything, then it was a good choice, and you will save money on the policy.

Non-Medical Underwriting

Another type of policy is called Non-Medical, and this is one of our specialties. No nurse will visit you. There are plenty of medical questions on the application, but until proven otherwise, the company takes your word and the word of the agent for your responses. This is one of the reasons that insurance agents have to see you to issue a policy. In the company’s eyes, the agent is the field underwriter, and they trust us to do a good job, both for you and the insurance company. Dollar for dollar, a non-medical policy would be a little more expensive than a fully underwritten one. On the positive side, you usually know immediately if they are going to reject you. Sometimes the decision is made online in seconds. Non-medical is also much more forgiving if you are not young and healthy. People with many different diseases or ailments can still get insurance with non-medical underwriting.

Guaranteed Issue
Guaranteed issue means just that. The company will insure almost anyone. Of course, there is a cost. Any guaranteed issue insurance will be quite expensive. It is frequently chosen by people who are over 70 years old, and too unhealthy to qualify for other types of insurance, but who want to leave something to their families as a legacy or to cover their final expenses.

How Healthy Do You Need To Be?

Although it is a given that we would all like to be 22 and in perfect health, the reality is that is a pretty small demographic. What if you are older or not in such great health? At Your Insurance Professor, we have access to companies and insurance products that would still be available to you. Below is a list of conditions you might have where you could still find insurance you would qualify for. In some cases, it would depend on how long since you were last treated. Note, this list is far from exhaustive. Contact us and we can advise based on your situation:

  • AIDS (guaranteed issue only)
  • Asthma
  • Arthritis
  • Alzheimer’s (guaranteed issue only)
  • Blood Pressure
  • Cancer (depending on type)
  • Cystic Fibrosis
  • Depression
  • Diabetes
  • DUI, drugs, alcohol
  • Fibromyalgia
  • Heart Attack
  • Parkinson’s Disease
  • Sleep apnea

Exclusions

Until now, we have focused on age and health, but lifestyle also plays a role in determining your eligibility. However, just because you do something considered dangerous does not mean you can’t get insurance. During the underwriting process, the company can always choose to insure you but with an exclusion. For example, a common exclusion written into most insurance policies is an act of war exclusion. For soldiers, this often does not matter as the US military provides them with a robust insurance program without that exclusion. However, if you were in the military and had your own private insurance, it would not pay out if you were killed in battle, but it would pay out if you died from something else, like an accident sustained while working out in the gym.

In the applications, each company has a list of yes/no questions about things you might do. For example, the question might be, do you compete in motor sports? If you say yes to that, then you will likely be insured, but the insurance company will give you a “no motor sports” exclusion. Thus, if you died any other way, they would pay out, but if you died while participating in a car race, they would not.