Deep Dive into Life Insurance

Jimmy Cooper, Marketing Coordinator

With how unpredictable our world is, life insurance is something everyone should have. However, it can feel overwhelming with so many insurance companies, plans, and policy types to choose from. Ensuring you pick a policy that works for you and your family will give you peace of mind as you prepare for the future.

 So, what exactly is life insurance, and why is it important?

Great question. Life insurance is, at its core, a contract between you and an insurance company. Payments are made to an insurance company, and in return, the insurance company will pay a death benefit, or a sum of money, to your listed beneficiaries in the event of your death. Beneficiaries can use the money however they choose but often act as a replacement for lost income, to cover funeral and medical expenses you leave behind, help with major expenses such as a home mortgage or college tuition for a child, and so on.

Term Life, Whole Life, Annuities, and Return of Premium

Four main types of policies fall under the life insurance umbrella: term life, whole life, annuities, and return of premium life. The two most common are whole life and term life.

1. Term life generally has lower premium rates and is a good choice if you are on a limited budget or are set to a timeframe (typically 10 to 30 years). For its affordability, it is the most popular type of life insurance policy for its affordability policies sold according to the Insurance Barometer Report. As you get older, your needs for life insurance may change, often based on additional expenses you have incurred, such as a home, children, caring for parents, recurring medical care, and so on. Most term life insurance policies are convertible to a permanent policy like whole life, though options depend on the policy and insurer you choose. Most insurance agents will offer a term life conversion option that will allow you to change to a permanent policy without re-applying or taking a life insurance medical exam. If the insured passes away during the policy term, beneficiaries can make a claim and collect the death benefit money tax-free.
2. Whole life provides lifelong coverage and offers a fixed death benefit and cash value that grows at a guaranteed rate of return. Because it does build in cash value and can last the duration of your life, it is more expensive than term life insurance. Since the policy lasts the duration of your life, it is referred to as permanent life insurance. The cash value builds on a tax-deferred basis over the policy’s life. This will be the savings portion of the policy. You can typically borrow against the cash value of the policy or even make a withdrawal. If you end the policy, you can get the cash value minus any surrender charge. In most policies, the cash value grows slowly over many years, so you won’t have access to a lot of cash value immediately.
3. Annuities are investment or insurance policies that provide beneficiaries with regular intervals of fixed payments. Typically payments are made monthly, quarterly, annually, or semi-annually. This is achieved by the insurance company taking your benefit payout and investing it long-term on a tax-deferred basis. In return, the insurance company provides a stream of income that lasts for the remainder of the insured’s life. Annuities are best for people who want a reliable income stream during retirement and have the ability to dedicate a large sum of money upfront for their future.
4. Return of Premium (ROP) is a type of term life insurance policy that provides your beneficiaries a death benefit if you pass away during the term of your policy; however, if you outlive the policy term, you are refunded the premiums you have paid by outliving the policy term. The rates tend to be increased from a traditional term life policy. ROPs are great as long as you can afford the additional cost to the rate and you are able to outlive your term.

What is the Cost?

Cost heavily depends on the type of policy you purchase, your lifestyle, age, sex, and overall health. For example, you will pay a higher rate if your hobbies include skydiving, scuba diving, or any other dangerous activity. Younger individuals usually pay a lower rate because the chance of death is less likely. Statistically, females live longer than males, setting policies for males at a higher rate. The most crucial impact will be your overall health. Insurance companies will assess current and past medical conditions and records to calculate your life expectancy to configure your rate. The shorter your life expectancy, the higher your rate will be.

One of the biggest questions or concerns people have when choosing a policy is how to select an appropriate coverage amount. The best way to calculate coverage is to add all expenses you want to cover, such as income replacement, monthly bills and expenses, college tuition and education, medical fees, and end-of-life expenses. Then, minus any amounts that could be used to cover those expenses, for example, savings accounts, existing life insurance, or retirement savings. Equals the amount of life insurance coverage that will be required.

Submitting a Claim

Filing a claim is a simple process and is typically paid within a month after the agent has received all documentation. It is important to always notify your beneficiaries about your policy and the agent’s name as they will need this information to submit a claim. They will not need the contract to begin the claim process, only the insurance agent’s name. Insurers will only pay beneficiaries listed on your policy. The first step is to notify the agent that your relative has passed away and submit their death certificate. Keep in mind that the agent will not send the death certificate back; as a result, always request multiple certified copies in case you need them in the future. Complete the claim form and reach out to the insurance agent to verify all requirements have been submitted.

In a Nut Shell

Life insurance is essential and not as daunting as it may appear initially. It is best to sit down with your family to determine your needs and what will work with your budget. Then reach out to an agent to find a policy that matches your budget. Remember, it is never too late to start thinking about life insurance, but getting a policy sooner rather than later can improve your premium rates and give you peace of mind.

Click here to read the 16 questions to ask your insurance agent to help get you started. If you are still feeling overwhelmed about any type of insurance, Price & Ramey has knowledgeable insurance specialists on our team that would be happy to find the right policy for you, including life insurance, but also extending to home, auto, liability, health, and business policies. Chat with a member of our team today at (877) 563-4386 or visit Price & Ramey for more information and to make sure you are prepared for the unexpected.