Most people agree that life insurance is a necessity even if they have neglected to purchase it. In fact, the average person actually waits for some life changing event before thinking about it. It could be getting married, having a child, or even witnessing the death of a loved one that inspires a person to purchase life insurance for themselves. Unfortunately, the elements of insurance are not taught in any high school or college program, so when the time comes to purchase life insurance, people are understandably confused and uncertain about the product. The purpose of our site is to take out some of the uncertainty by providing you with the basic information about life insurance policies, thereby enabling you to make it a one-time purchase at the most reasonable cost. While you're here, please feel free to use our online service to find your best life insurance rates and quotes.
Common Life Insurance Terms
Term Life: A term life insurance policy is the type of insurance that is closest to car insurance. It has no value unless you die, just as your car insurance has no value unless you have an accident. At that time, it will pay the face value to your beneficiary. "Cheap" term life insurance is often purchased because it is the least expensive of all types of policies. It lasts for a number of years ranging from 10 to 30 depending on your age and the terms of your contract. At the end of that time period, it is renewable, but at a significantly higher cost. Therefore, most term policies are simply cancelled at the end of the contract. Term life has no cash value and cannot be borrowed against. If you stop paying the premium, the policy is cancelled.
Term Life Vocabulary
The term “level”—whenever it is applied in insurance—simply means the value to which it is applied will be unchanged for the life of the contract. Level Term is the most common term life and simply means that the premium and the face value will stay the same for the entire period (term) of the contract. The policy may have a renewable feature, but once it is renewed the “level” guarantee is removed, and both the premium and face value can change. If you do choose to renew it, the policy will usually convert to "annual renewable, meaning your premium will change every year. With some policies, you can convert to whole life, but of course, your premium will be much higher there as well.
A modified term policy is often sold just to get you into the contract. It may have a very tempting premium the first month or even the first year—as low as $1.00. However, the premiums will change on a regular basis, often every time you enter a new five year age band. The face value usually remains level for the life of the term.
Graded Benefit Term:
A graded benefit policy can be either whole life or term. In either case, while the premium and face value remain level, there is a 2 or 3 year waiting period before the entire face value can be paid. These are guaranteed issue policies and will be sold without health questions. Due to the high risk an insurance company is taking in selling a product without health underwriting, they will limit the payout during those first two years in an attempt to control possible loss.
Decreasing term is often sold as mortgage life insurance. It is even cheaper than level term and begins with a very high face value. The premium will remain level throughout the life of the policy, but the face value will go down. When sold as mortgage life insurance, it is designed to keep pace with the decreasing principle on your loan. As the loan is reduced, so is the amount that would be needed to pay it off if you should die.
Like most life insurance, term life has a variety of possible riders including spouse term, child term, disability protection and more. The most valuable rider is the disability rider. This rider pays your premium if you should become disabled. In some policies, the rider even guarantees renewal of the policy at the end of the term. This is not true in all cases, however, so be sure to check your policy for the precise details.
The purpose of term life is to provide for a beneficiary in the event of the untimely death of the policy holder. It is a good choice for a business owner who needs to protect a business loan or for a young family who would need an income while children are young but may not need as much coverage in later life. It is not a good choice for creating a legacy or leaving an inheritance to favored loved ones.
Learn also about No
The opposite of Term Life is Permanent Life insurance. This form of life insurance lasts your entire life. Like term, premiums and benefit can be level, modified or graded. It is more expensive than term because while there is a high probability that a term policy will expire without ever paying benefits, a whole life policy will have to pay out sooner or later. If you purchase it while you are young, the premium will be relatively low because of the likelihood that you have a long life ahead of you during which you will be paying premium which the company will invest. All permanent life insurance builds cash value, meaning you can borrow against it, and if you decide at some point that you no longer need it, you can cash surrender it or even take a reduced paid up policy.
A whole life policy is one form of permanent life insurance. As long as you purchase “guaranteed whole life” rather than “modified” whole life, your premium will remain level as long as you live. Most of today’s policies insure you to age 120, but often there is no premium after age 100. These policies also have riders such as spouse, child, disability, unemployment waivers, accelerated death benefit and more.
Universal life is another type of permanent life insurance and is usually cheaper than whole life, but somewhat more expensive than Term. It is a little more difficult to understand than whole life and can be unsatisfactory unless you have an agent who fully understands the options for setting it up. If well done, a universal life insurance policy can be one of the best, most flexible forms of life insurance.
Universal Life has two separate accounts. The benefit is the amount that will be paid upon death. The cash accumulation is the amount of cash your policy has built. The cash accumulation pays your premium on the life side. Your premium goes into a savings account first, where it earns interest. Each month the cost of insurance and fees are deducted to pay for the universal life insurance policy. Because of this arrangement, the policy is flexible, meaning you can change your premium and your face value. You can also make withdrawals from the accumulation account as long as you always leave enough to pay your cost of insurance. If you never make any withdrawals, and if the policy is properly designed, it can build enough cash over 20 years so that the policy can pay for itself in later life.
Choosing Your Company
Some agents will make light of company ratings, citing the amount of investment and number of policies a company has and discounting the companies’ overall investment portfolio. While the average client is not interested in a complete breakdown of the company portfolio, it is a good idea to know something about the company’s reputation and stability.
A.M. Best or are probably the most familiar names when it comes to ratings. Another one is Moody’s. Most of these agencies are remarkably lenient and give favorable ratings to most of their member companies. After all, the agencies are getting paid to rate the company as favorably as the law allows, so a company that receives a B or lower from these agencies is a company that may have some problems. Nevertheless, the agency will provide you with historical information about the company.
The most accurate rating agency in the country is Weiss rating agency. Once known as TheStreet.com, this agency is supported by the membership of investors and private individuals. Companies cannot join or pay dues to get rated. Consequently the standards are very high and the requirements for getting a good rating are very strict. For example, Weiss gives an A+ to only six Life/health insurance companies in the entire country. There are a few more than get an A and a sizeable number that get a B. If you find a company receiving anything less than a C from Weiss, it is definitely a good idea to do more research before going with that company.
You can also check with the Better Business Bureau in your state to find out if the company has received any recent complaints.