Life Insurance Made Easy
The basics on buying Life Insurance
Introduction
Hi There! Before you begin reading, I’d like to take the time out to truly thank you for downloading this guide. There is A LOT of information out there regarding life insurance. Some parts more confusing than others. But I’ve tried my best to consolidate the information, focusing on the important stuff, and filtering out the unnecessary, in hopes that this guide will help ease some of the headache that comes along with picking the right coverage.
Ready? Great! Let’s get started!
Life Insurance Basics
Life insurance is a very important part of the financial planning process. It is a security blanket for your family if anything were to happen to you. Close your eyes for a moment and imagine how
things would be if your income disappeared. How would the bills get paid? Would your spouse/children/dependents have to choose work over other activities? Would they even be able to cover the various debt left behind? Some of these items include the following:
ü Medical expenses, burial costs and estate taxes ü Monthly bills and expenses
ü College tuition
ü Mortgage payments ü Retirement
These are some of the things that life insurance could and generally does cover. You don’t want any assets you may have being
liquidated because there isn’t enough money left to cover
outstanding expenses or taxes. Choosing the right policy can provide them and you, complete peace of mind.
Different Types of Life
Insurance
Life insurance comes in many different varieties, and sometimes it can be hard to differentiate between the different products. Some policies last a lifetime (permanent), while others only provide
protection for a specific period of time (temporary). Here are some of the basics of each type of life insurance available.
Term Insurance – Term insurance provides coverage for a set period of time, typically ranging from one to thirty years. There is no cash value associated with term policies, however, they typically provide the largest insurance protection for an affordable premium. The younger you are, the lower the cost of term coverage will be. This is because in the eyes of an insurer, there are less risks associated with being younger. Even though you start with a lower premium at a younger age, after the term period, you will be up for renewal, which
may result in a higher premium. Some carriers will allow you to keep your policy “in force” which guarantees a premium for a certain
amount of time, but at the end of that period a medical examination may be required for coverage to continue.
In some cases, term coverage can be traded in for permanent coverage, but premiums will be higher than when the policy was temporary.
Permanent Insurance – Permanent insurance provides long-term financial protection. Outside of the fact that this type of policy lasts for a lifetime, it also includes a death benefit and builds cash value over time that can be borrowed against for almost anything. The three most common types of permanent life insurance are Whole Life, Universal Life, and Variable Life. I have included the basics for each below.
Ø Whole Life – This is a permanent life insurance policy that grows over time at a fixed rate set by the insurer. The premiums are higher than a term policy, but they remain the same
throughout the life of the policy, which happens to last a
lifetime. This type of coverage builds cash value over time that can be borrowed against the face value (death benefit) or
surrendered and subtracted from the face value prior to being paid to a beneficiary.
Ø
Universal Life – Another permanent policy that allows for greater flexibility when it comes to premium payments as well as the face value amount of your policy. With this kind of policy, the premiums you pay go into a separate account that builds interest over time. As value builds, flexibility grows. If you decide not to pay your premium for a period of time, the policy will not lapse (loss of coverage). Instead, the premium will come from any cash value that has been accumulated overtime. However, when this cash value amount has run out, if no premium payments have been made, the policy will expire.
You might have heard of Indexed Universal Life insurance, and it is essentially the same concept, except for the fact that the cash value amount of a policy can be allocated to an equity index account (such as the S&P 500) as opposed to a fixed
account. These policies aren’t as risky as variable life policies (which we will discuss next) because no money is actually invested directly into the stock market.
Ø Variable Life – This is the riskiest type of life insurance because both the death benefit and the cash value depend on the
performance of investment accounts. The upside to this kind of policy is that if the underlying investments do well, your death benefit and cash value could be much higher than planned. Of course, the opposite can happen if the investments don’t do well, so make sure you understand what you’re getting into when deciding on this type of policy. Agents working with any kind of Variable product are required to be FINRA Series 6 and Series 7 certified, so make sure your agent is legally allowed to work with these kinds of products.
If you would like a guaranteed death benefit, it may be possible with certain carriers, but at a higher premium.
Purchasing Life Insurance
When you’re finally ready to purchase life insurance coverage, there are a few things to consider, including how much coverage fits your needs, what type of policy, and most importantly, how much
insurance you can afford.
In the last chapter we focused on the different types of policies you can choose when picking life insurance, so the bulk of this chapter will focus on your coverage needs and affordability. We will get to actual coverage amounts shortly, but first I’d like to touch on face value (death benefits) and cash value (living benefits) for a moment. Term (temporary) policies do not include living benefits, which means they have no cash value. However, they typically come with much higher face value amounts than permanent policies do, and they are much cheaper. Many people (including myself) choose to have term life coverage in place due to these facts. Remember, the whole idea is
to protect your loved ones as much as you can so that they are not feeling any financial burden if something were to happen to you. Term policies run for a set period of time, so if you have younger children, it would make more sense to pick a longer term, to ensure that they are covered into early adulthood.
A permanent policy provides a lifetime of protection, generally at a higher premium, but the trade-off is the potential for cash value that comes along with this type of policy and the fact that the premium payment in most cases won’t ever change. The cash value that comes with this type of policy can be used in many different ways. Some examples include; Making a home repair, paying for college, buying a new car, taking a trip, and more. One of the benefits is that
borrowing against the policy will not cancel out your coverage. As long as you pay the cash value loan back into your policy, your face value amount will remain the same. Worst case scenario, the amount loaned would be deducted from the face value benefit amount. As stated in the chapter before, cash value coverage comes in several types: Whole Life, Universal Life, Indexed Universal Life & Variable Life. It is important to have a clear understanding of these types of policies before signing up for one, because they can be a bit difficult to understand. If you are confused at any point during the
application process, be sure to consult with your life insurance agent before signing anything!
Now when it comes to the “how much coverage?” question, well this number will vary based on your personal and financial situation. No two families are alike, so I don’t believe in a “one-size fits all”
approach when it comes to coverage amounts. An agent might do a “Needs Analysis” to estimate the amount of coverage you need, but I’m a fan of individuals/couples sitting down and really going over everything amongst themselves. I only say this because when talking with an agent you might forget about certain items that a spouse or family member might remember. So I recommend sitting down with your family and figuring out what amount of coverage would truly
make things easier, and fit within your budget (super important!). If you get stuck at any point don’t worry, that is what your agent is there for J.
The last point I’d like to make before we reach the end of this guide is to never feel intimidated by an agent. I know some agents can come off as if they are the key to you being protected, and that you NEED to pay the highest premium possible to ensure this. Stay away from those kinds of agents. We are supposed to be in this business to help people with protecting their families and assets, not to bully them into making shaky decisions that benefit us. At the end of the day, only you and/or your spouse know what is best for your family. We’re here to provide guidance, not force you into a decision. Life Insurance is a big deal, and you should feel good about whatever policy you purchase, whether it’s worth $10,000 or $5,000,000.
Never sign anything you don’t feel comfortable with, and make sure to ask your agent as many questions as you want, because at the end of the day, if they are truly worried about your well-being and
making sure your family is protected, they will be willing to address any questions or concerns you may have. If not, then it might be time to find another agent.
