Life Insurance 101
The Basics
Unfortunately, the majority of the people we serve initially believe that life insurance is all the same. What you pay is what you pay and what you get is what you get. Therefore most people will just shop around to see which insurance company will offer the most amount of coverage for the cheapest rate, which is how and why the majority of people end up with a Term Life Insurance policy - not that there's anything wrong with a Term Life policy but often times, it's not the right policy for that particular persons situation or need.
When it comes to life insurance, the more you learn about it, the more you realize just how overwhelming and complex it can really get. There are several life insurance categories offered on the market and then variations of each category that include:
-
Term
-
Whole
-
Universal
-
Variable
-
Variable-Universal (VUL)
-
Index UL
Here's the good news, were going to breakdown the basics of life insurance and keep this super simple for you. The 2 most common life insurance policies sold on the market is: 1) Term Life Insurance and 2) Whole Life Insurance. And these two types of Life Insurance policies are as opposite as night is to day. So lets begin...
Term Life
Term Life Insurance is the lowest cost life insurance policy sold on the market. Why is it so much cheaper than all the other types of life insurance policies? Because it's a temporary policy. It's not a permanent life insurance policy that will cover you forever. The reason they call it "Term" is because "Term" is the abbreviation for "Term-inate". As some point down the road, if you outlive the assigned term, that policy will eventually terminate or expire on you. Another way to look at it is you're just renting the policy instead of actually owning it.
If Term Life Insurance is just a temporary policy, then why in the world would anyone want a Term Life Insurance policy? Well for one, it's designed to give you a much larger amount of coverage for a much much lower rate and two, it's designed to give you a temporary policy when you have a temporary need.
Examples of when a Term Life Insurance policy might make more sense:
-
Mortgage protection
-
Years of lost income
-
College funding
-
Debt protection. I.e. auto, credit cards, medical bills, unpaid taxes, etc.
-
Or to leave a financial legacy, just to name a few
Term Life Insurance policies can be structured 1 of 2 different ways. There are Term Life Insurance policies that will cover you for a specified number of years: 5, 10, 15, 20.....all the way up to 40 years, depending on your current age and health. There are also Term Life Insurance policies that will cover you up to a certain age, like Term to age 70, 75 or age 80. The premiums for Term Life Insurance policies that are for a specified number of years, are typically locked in for that entire period; however, Term Life Insurance policies that expire at certain ages are mostly structured to where the premiums will increase overtime, mostly in 5 year age bands: I.e. 50, 55, 60 and so forth. These increases are a result of the policy's "renewal periods" where the policy basically "renews" or starts over. And unless theirs a guarantee to renew, most of them exclude that feature and could terminate your policy at any renewal period due to sudden health changes. If the insurance carrier does renew the policy, it's being renewed at the current age, not the age you were when the policy was first issued, which creates the higher rate. Some can even be locked in up to a certain age then renews annually thereafter up until the terminated age. Primerica is notorious for selling Term Life Insurance policies structured this way.
Here's the bottom line - once you've had that policy for a certain amount of years or to a certain age, that's when the policy will Term-inate and your coverage will end. Now because you rented the policy and never owned it, these type of life insurance policies don't return any portion of the premiums you paid into it, unless you purchased a "Return of Premium" Term Life Insurance policy. ROP Term Life Insurance polices will have a much higher premium than traditional Term Life Insurance policies because the policy is designed to return all of the premiums paid at the end of the specified term and the policy never lapsed. Think of it this way: Owning or renting your home. Either way, you have protection, a roof over your head. If you bought your home with no money down and lived there for 5 years, even if you sold it with 25 more years of scheduled payments, you've built some equity into it. If you rented a home for 5 years then moved out, you're not getting any of your money back.
Question: Can a Term Life Insurance policy be converted into a permanent plan of insurance? In most cases, Yes. Unless specified in the policy, when converting your policy from a Term Life to a Whole Life, the new rate is based off of your current age. Most conversions can occur without evidence of insurability which means, no medical underwriting would be involved.
One final thing to point out is that the underwriting for most Term Life Insurance policies are a lot stricter than other life insurance policies. Because you're trying to get a lot more coverage for a lot less premium, insurance companies want to do their best to ensure you will outlive the term so they won't be stuck with a large death claim on their hands.
TERM
INATE
Whole Life
Whole Life Insurance is a permanent life insurance policy that's good for your...Whole. Life. Regardless who the insurance company is or the coverage amount, all whole life insurance policies contain the same basic framework. Once a Whole Life Insurance policy is issued, you now own it from the insurance carrier. The policy is then locked in for life which means the rates will never increase, the death benefit will never decrease, and the policy can never be cancelled by the insurance carrier except for non payment. So you see, regardless of what age the insured lives till or if any health changes occur down the road, the insurance carrier cannot change, modify or cancel the life insurance policy for any other reason, just like the mortgage company cant change, modify or cancel your home mortgage loan, except when in default. Whole Life Insurance premiums are more expensive than Term Life Insurance for the simple fact that there is a 100% guarantee a death claim will be made, assuming the premiums were paid on time and the policy was still active at the time of the insureds death. Whole Life Insurance policies accrue cash value just like you're building equity when you own your home.
Examples of when a Whole Life insurance policy might make more sense:
-
Funeral or Final Expenses
-
Loss of income (Husband & Wife both receiving social security)
-
Debt protection
-
Estate planning
-
Bad Medical History
-
Young children for grow up plans and cash value
Unlike a Term Life Insurance policy that will only cover you for a specified number of years or to a certain age, some Whole Life Insurance policies can actually be paid up after a specified number of years or when a certain age is attained. The term "Paid Up" refers to no more premiums required to be paid and the policy remains in force until the insureds demise. These type of policies are available with most carriers and typically offered to those under the age of 60 and in moderate health.
