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As mainstream life insurance companies join digital start-ups in offering life insurance online, they are bringing convenience to what has traditionally been a cumbersome process. Here are the key things to consider in your search for the financial security that life insurance can provide for your loved ones. Read on to learn about the following topics and more:
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Price is important, but there are other factors to consider in choosing a life insurance company. Even if you’re comfortable with an online application, the company should also provide access to licensed agents, in case any questions arise. You can use ratings and scores from organizations such as the Better Business Bureau and Trustpilot to learn about a company’s customer service standards. Whether you purchase from a carrier or an agency representing many carriers, you want assurance that the company issuing the policy will live up to its financial obligations. The best indicators of a carrier’s financial strength are the ratings provided by specialists such as Fitch Ratings and AM Best.
Life insurance products generally fall into one of two policy types, term life and permanent life, which includes whole life and universal life.
Term, whole and universal life insurance basics
| Term | Whole | Universal | |
|---|---|---|---|
| Death Benefit | Yes | Yes | Yes |
| Medical Exam | Not always | Usually | Usually |
| Cash Value | No | Yes | Yes |
| Length of Coverage | Terms are usually 10-30 years | Remainder of the your life | Remainder of the your life |
Term life insurance and permanent life policies each have their own set of advantages.
Permanent life policies,
for example, accumulate cash value and provide lifelong protection. The lower prices
and the structure of term
life allow you to adjust your coverage as your needs evolve.
In terms of price, term life premiums are normally a fraction of the cost of those
for permanent life insurance.
The structure of a term life policy also allows it to meet needs that could diminish
over time. If your children
are young or your mortgage is new, your life insurance needs are going to be greater
today than they will be in
20 or 30 years. By then, your children are likely to be self-sufficient, or your
mortgage will be close to being paid off.
The price and structure of term life also gives them flexibility. Even if you
already have a whole life policy,
you can “stack” a term policy on top of it to bump up your overall coverage for a fixed
period of time. Or you can
stack a short term-life policy atop a longer one to similarly adjust your overall
coverage in phases.
The group life insurance policy you get through work or your trade association is a great
benefit. Unfortunately, these rarely provide
enough coverage to meet the needs of your dependents in the event of your untimely
death.
With most group life insurance policies, the death benefit works out to one to two times
your annual salary. However, your survivors’
needs, including living expenses and future education costs, can quickly exceed this
sum. Some experts recommend six to eight times your
annual salary, but even this amount often comes up short.
When you purchase a
personal life insurance policy,
you get to select a death benefit and any policy riders to meet your dependents’
needs.
While most group policies allow you to increase your death benefit, these policies
usually end when you leave the job. In some cases, you can
convert a group policy into a personal policy, but when you do, you lose the price
advantages of your group rate.
On the other hand, your personal policy will stick with you through job changes, at
the rate you lock in when you obtain it.
Selecting a death benefit for your life insurance policy might seem like a daunting
task, but it doesn’t have to be. The most common ways to determine
the amount
of life insurance coverage you need are the income-replacement approach and
a needs analysis.
Of the two, the income-replacement approach is easiest. Just multiply the number
of years you plan to continue working by the average annual income you
anticipate providing for your dependents during this time. The income you provide, after
you deduct things like taxes and money you spend on yourself, is
usually about one-half to two-thirds of your gross annual salary, with higher earners on
the lower end of the range.
A needs-analysis takes a little more time. Insurance advisers often recommend
considering some form of the DIME method, which is an acronym for debts, income,
mortgage and education.
Your debts include loan balances that could pass on to your survivors, and income is
really funds to cover your dependents’ living expenses until they become
self-sufficient. Including funds to pay off your mortgage, or several years rent,
would allow your family to remain in your home for as long as they choose.
Education includes funds to cover college tuition or other higher education for your
children, as well as possible job training or retraining for your spouse.
After you add up these needs, you can subtract the value of other assets you intend to
pass on, such as savings, investments and existing life insurance benefits.
The difference between your needs and these latter resources is the gap your new life
insurance policy can fill.
While life insurance can seem overwhelming at times, it’s comforting to know there are rules in place to protect you. Like most other forms of insurance, life insurance is primarily regulated at the state level, and here are key things to know about your rights as a consumer.
You can learn more about these and other regulations by visiting your state insurance commissioner’s website.
Traditional life insurance underwriting can be a lengthy process, but insurance
companies are adopting new underwriting styles to speed things up. Don’t be surprised
to see terms such
as accelerated underwriting, simplified issue and guaranteed issue as you shop for
coverage. Here is what each of these terms can tell you about the policy you are
considering.
Accelerated underwriting
Like traditional underwriting, accelerated underwriting requires an application and your
consent to let the insurance company pull third-party data, including your prescription,
credit
and driving records. Sometimes, this is all the information the insurance company needs
to determine your eligibility and rate.
Accelerated underwriting attempts to give applications the same level of scrutiny as
traditional underwriting. This is why policies written through either underwriting
style tend to provide
the best rates for those in average to above-average health. Those who don’t
qualify for coverage through accelerated underwriting might be asked to undergo a
medical exam.
Simplified issue and guaranteed issue
Simplified-issue and guaranteed-issue (also called guaranteed acceptance) policies
have broader eligibility guidelines and also don’t require medical
exams.
With a simplified-issue application, you only need to answer a few general questions
about your health, and there are few medical restrictions on eligibility. For a
guaranteed-issue policy,
you’ll only need to meet one or two eligibility guidelines, such as being in the right
age group or belonging to a specified membership organization.
Simplified-issue term policies are sometimes available with benefit amounts up to
$250,000. Many insurance companies also offer whole life policies, which build cash
value, through
simplified-issue or guaranteed-issue underwriting. With benefit amounts often up to
$30,000, these policies are often marketed as final expense insurance, suitable
for covering the costs of
your funeral and burial, or other similar expenses.
Dollar-for-dollar, simplified-issue and guaranteed-issue policies tend to cost more.
However, their relatively low benefit amounts help keep the premiums affordable.
Term life insurance comes with affordable premiums and a variety of term lengths, and this makes them suitable for addressing a wide range of life insurance needs. Here are common reasons to purchase term life.
When it comes to comparing term life to permanent life, some of the differences are more obvious than the others. Here’s a breakdown of how key benefits of term life compare to those available in permanent life, including whole and universal life.
| Term | Permanent | Advantage | |
|---|---|---|---|
| Premium Costs | Term life premiums are usually a fraction of the cost universal and whole life premiums. | Permanent life premiums can be five to 10 times the cost of those for term life insurance. | Term |
| Long-Term Cost | If you outlive your term, the policy usually ends with no further benefit to you. | A permanent life insurance policy builds cash value, which can eventually grow to exceed your total premium outlay. | Permanent |
| Death Benefit | Paid if you die while the policy is in force. | Paid if the policy is in force when you die. | Tie |
| Living Benefits | Most carriers offer optional riders that allow you to forgo payments if you become disabled and access your death benefit in the event of a severe medical issue. | You can borrow against the policy’s cash value at any time, for any reason. Optional riders are available to access your death benefit in the event of a severe medical issue. | Permanent |
| Flexibility | The price and structure of term life enables you to adjust your coverage as your needs evolve. | Universal life policies offer flexible payment options, within limitations. | Term |
There’s never a bad time to buy life insurance. But there are times when doing so is more
opportune, and other times when your life insurance needs might be more urgent.
The best time to buy life insurance, particularly permanent life, is when you are
young. The price you get on premiums is set at the age you purchase the policy,
with some exceptions
for universal life. Even if you stay in perfect health, your price goes up on each
birthday until you lock in your rate. If you wait too long, you might develop a medical
condition that
could increase your premiums even more, or disqualify you from coverage.
Other good
times to purchase life insurance are when you get married,
purchase a home or have children. Even if you are not the primary
breadwinner in your household, the loss of your
income would likely have a financial impact on your spouse.
Life insurance inevitably gets more expensive as you age, but if you are an older person
without existing coverage, you can consider a “final expense” policy. These tend to
come with
very few medical restrictions, and since they are offered as whole life, they build
cash value and remain in place for the rest of your life. The typical benefit
amounts range from
$2,000 to $30,000, which is usually enough to spare your loved ones the costs of your
funeral, burial or other similar expenses.
Online life insurance agencies have shaken up the marketplace, but it’s important to
remember that not all online agencies are alike. Some offer a fully online
application process that includes
instant-issue coverage. Others blend online intake with live customer service, or
just collect basic information before referring you to an agent. Regardless of
the structure of the online agency
you choose, convenience, privacy and immediacy tend to be the greatest benefits of
online life insurance shopping.
Convenience
The internet is open 24/7, which allows you to shop for life insurance on your own
schedule. With some online agencies, you can complete an application, get
approved and initiate the policy in
minutes. Others give you a non-guaranteed quote and let you choose between completing a
lengthier application online or with a live agent, by phone or chat.
Privacy
A traditional life insurance application includes at-times probing questions about your
lifestyle and medical history. While many online applications request similar
information, it feels less invasive
when you’re entering such information into your computer. Since you will be required
to provide confidential and sensitive information, make sure to fill out the
application in a private location, over
a secure network. Remember to also follow all the other data-security practices
you need to protect confidential information.
Immediacy
The growing acceptance of accelerated underwriting means some agencies can determine
your eligibility and rate within minutes. Others can at least give you a
ballpark estimate with a non-guaranteed quote,
requiring only a little more time to complete the process. This level of immediacy can
be handy for those in a rush. It might also help you comparison shop.