What happens to us when we die? It’s an age old question that none of us will know until we get there. The question we should know the answer to is, “What will happen to our loved ones when we die?” Unfortunately way too many people choose to ignore the latter question because they are afraid of the former. To help as many people as I can understand the need and how to get life insurance I put together this guide.
Why do I need life insurance?
Try not to think of life insurance as planning for your death. Think of it more like a gift to the people that rely on you financially or would be inconvenienced financially were you to pass away. In my case my family’s lifestyle would be impacted greatly if I were to pass away. If you read my blog regularly you know we are making pretty good money so I took out a $2.5 million policy on myself so that if anything happens to me my wife will be able to spend her time mourning and keeping the boys lives in order, as much order as possible. She will not have to think about how the mortgage gets paid or how to make ends meet. If you do not have someone that is directly dependent on your income then you will want a small policy that will make it easy to take care of any financial obligations you may have (debt, funeral, etc.). This will make it easier for the executer of your estate to clear up any final expenses.
How much life insurance do I need?
I get this question and the answer is always, “It depends.” It depends on how much you are making, what your financial obligations are, and how much debt you have. As a rule of thumb, most people will get about ten times their annual income. This will typically leave enough money for a spouse to get the finances straightened out and still have plenty left over to replace your income.
If you have large amounts of debt then you may want to increase that number to make sure that you wipe out all the debt your family has and still have a sizable nest egg for your family. Of course you do not want such a large policy that you have to sleep with one eye open at night.
If one person in your family is a stay at home parent then you will need a decent size policy on them just to cover the cost of all the duties they take care of. It is hard to estimate the cost of shuttling kids, cleaning, etc. but you know that if you had to replace that person there is a significant cost. I frequently see families get between $250 and $500 thousand dollars of coverage on a non-income producing spouse.
Finally if your personal obligations are small and you just need to make sure your estate and final expenses are taken care of, you can look at a policy that is tailored to just your needs. I have seen people purchase as low as $20k worth of coverage just to tie up any loose ends.
What Types of Policies are Available?
Overall, there are still two primary categories to life insurance that are available in the marketplace today. These include term and permanent:
Term Life Policies
With term life insurance, the policy consists of pure death benefit coverage in return for the payment of a premium. These particular policies do not contain any type of cash value or investment component. This is why term life is considered to be the most basic form of life insurance that there is.
It is also typically the most affordable – especially for those who are young and in good health. In fact, for individuals who wish to obtain a large amount of death benefit for a low premium cost, term policies can be a very good option.
As the name suggests, term life is sold for specific time periods, or “terms.” These are usually 10 years, 15 years, 20 years, or 30 years – although there are some term life plans that are sold for as short as 1 or 5 years, and for as long as 40.
When a term policy expires – provided that the insured has held the policy throughout its entire length – and if the insured still wants coverage, he or she will need to re-qualify for another policy at their then-current age and health condition. Because they will be older – and they may also possibly have an adverse health condition – the new policy’s premium will likely be higher. (If the individual has been diagnosed with various health conditions, they may be deemed as uninsurable and may not be able to obtain future coverage).
Because a term policy is considered to be “temporary” coverage, it is oftentimes thought to be a good way to cover temporary needs. As an example, this type of insurance may be a good way to cover the cost of a child’s future college education if a parent or grandparent were to pass away before the child turns age 18. Likewise, term life insurance can also be a good way to ensure that a 15 or a 30-year home mortgage will be paid off if a breadwinner passes away while there is still a balance to be paid off.
Term Life Insurance Quotes
The premiums for term life plans are typically lower than those for whole life insurance – especially for applicants who are young and in good health. These policies can provide a great way to purchase a high amount of death benefit coverage for a very low price.
In some cases, term policies may include a conversion rider that will allow the policy to convert over into a permanent policy after a certain period of time. When looking at your first set of term life insurance quotes the premiums may vary greatly, but you need to know that there are several different types of policies that are available in the marketplace today. These include:
- Renewable – This type of term coverage is able to be renewed by the insured after each time period – or “term” – has elapsed. This is allowed without the need to complete a new application for coverage or to pass a new medical examination.
- Convertible – With convertible policies, the insured is able to convert from a term policy over to a permanent life insurance policy in the future. Provided that the conditions of the policy have been met and the premium payments have continued to be made, there will be no medical exam required in order to do so.
- Decreasing – With a decreasing term policy, the amount of the death benefit will decrease over time, until it gets to zero. At that time, the policy ends.
- Increasing – Converse to a decreasing term plan, with increasing term life coverage, the death benefit will increase over time. However, the amount of the premium on this type of policy will typically remain the same throughout the life of the policy.
Because there are so many different types of term life insurance on the market today, applicants can pick and choose which will work best, based on their specific coverage needs and goals, essentially allowing them to “customize” their coverage.
Permanent Life Policies
This type of life insurance will include both a death benefit and a cash value component. The cash value in a permanent policy is allowed to grow on a tax-deferred basis. This means that there are no taxes that are due on the gain until the time that the money is withdrawn. This can essentially allow the cash to grow and compound on an exponential basis.
Unlike term life insurance, permanent life policies do not have any type of set “term” of coverage, but rather they last indefinitely. Those who purchase permanent coverage will typically plan to keep their coverage for the “whole” of their lives.
These plans are usually intended to cover longer-term needs, as well, and they are oftentimes used in estate planning. Permanent life is also often purchased on younger individuals and then kept for many years. This way, the person has life insurance coverage, along with a savings vehicle that grows tax-deferred over time.
There are three types of permanent life insurance. They are:
- Whole Life – the most common permanent policy. It has the standard death benefit and uses a savings account as its investment piece. Along with deposits from your regular premiums, the savings account grows from dividends that the insurance company pays into the account. To help you get a better understanding we did an entire write up on whole life insurance.
- Universal or Adjustable Life – These policies offer a greater amount of flexibility than standard whole life policies. Many offer you the opportunity to increase your death benefit after passing a new medical examination. These policies will also let you pay your premiums from your cash balance. This can be a useful feature in times where your personal finances are stretched. Get a better understanding with our article on universal life insurance policies.
- Variable Life – Similar to whole life except that you can take the money in your savings account and invest it in stocks, bonds, mutual funds, and money market accounts. This comes with more risk so make sure you have a good grasp on those risks before purchasing a variable life insurance policy.
Permanent Life Insurance Quotes
In many cases, permanent life insurance quotes will be higher than term life quotes for a comparable amount of death benefit coverage on an individual. However, this is typically because with permanent coverage, the policy holder is not just purchasing death benefit coverage, but also the cash value component within the policy.
In addition, unlike term life insurance, a permanent policy will not expire after a certain number of years. Rather, provided that the premium continues being paid, the permanent policy will continue indefinitely.
How do I know I am using a good company?
What I liked most about the quotes you are getting from the tool on my site is that you only get top rated carriers. This means that they pass standards for financial stability and for fulfilling the claims necessary. Since for most people, it is hard to understand what that actually means I also put together a list of who I consider to be the best national level life insurance companies. Keep in mind that the life insurance quotes you get here may include some other more localized companies when you get your own quotes.
How are Rates are Determined?
When determining the price of a life insurance policy, there are several key criteria that go into coming up with the final quote. These can include the following:
- Type of Policy – One of the biggest factors in coming up with the premiums is what type of coverage you are purchasing. For example, will the coverage be term or permanent? In most cases, especially if an applicant is young and in good health, a term quote will be lower – at least initially. However, over time, as an applicant gets into the older ages, whole life insurance can become more competitive.
- Face Amount – The face amount refers to the amount of death benefit coverage that you are purchasing. This, too, will be a primary factor in the amount that you will be quoted for life insurance. As with most other types of goods or services, the higher the amount of coverage you are purchasing, the higher the quote will be.
- Riders – There are many different riders that may oftentimes be included on a policy to help in customizing it more towards the insured’s needs and goals. These “add on’s” can add to the overall price of the policy.
- Age of the Applicant – The applicant’s age is another key criteria in how much the insurance quote will be. A big part of the cost of life insurance is based on a person’s life expectancy. Therefore, your age at the time you apply will certainly factor into the price of your coverage.
- Applicant’s Health Condition – Another primary factor that will affect the quote on a term and whole insurance policy is the applicant’s health condition. Life insurance underwriters consider many different factors when pricing coverage – as well as deciding whether or not an applicant will even qualify for coverage at all. Some of the main components regarding a person’s overall health and body that are considered include his or her age, height and weight, overall health history, and family health history. Also considered is whether the person smokes and / or drinks alcohol (and if so, how often). In addition, other criteria will also be examined such as whether the applicant participates in any type of dangerous or “risky” hobbies such as sky diving or scuba diving. All of these criteria will be considered in order to determine the person’s overall risk to the insurance company.
- Insurance Company – The insurance company itself will also have a bearing on the amount that is quoted for term or whole insurance coverage – even with all other factors being equal. Often, when comparing insurance rates, individuals will find that policies have very similar – or even the same – benefits, yet will have drastically different premium quotes. For this reason, it is always a good idea to compare three or more quotes prior to making your final decision on a term or a whole life insurance policy. When reviewing an insurance company, it is always important to take a look at the financial strength of the insurer. This is because you will want the company to be there in the future when it is time for the claim to be paid out.
There are several ratings agencies in the industry such as A.M. Best, Standard & Poor’s, Fitch, TheStreet.com, and Moody’s that will assign ratings to insurance companies. These ratings are based on factors such as financial strength of the company, claims payout, and reputation in the industry. In most cases, these ratings are letter grades similar to those on a report card. It is important to stick with insurance companies that have high grades in the “A” range.
I really hope all this information helps you to make the best life insurance decision for you and your family and that you will take this very important step with your finances.
If you’re ready to get the process started, we can help. I have partnered with a great independent insurance agent who works with all of the top life insurers in the industry today, and they can get you the information that you need quickly, easily, and conveniently. All of this is done from the comfort of your home computer and without having to meet in person with an insurance agent. If you are ready to get started, all you need to do is just simply use the form on this page.
If you find that you have any additional questions about quotes, or even just about life insurance in general, the professionals at Root Financial will be happy to answer those questions for you. They are experts in all areas of life insurance, and can walk you through the information you need so that you can be confident you’re making the right decision for you and those you love.