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Apr 15, 20223 min

Understanding Life Insurance Basics


Do I need life insurance?

You need life insurance if someone you love is (or will be) dependent on you financially. Life insurance aims to provide a solution for those who seek:

  • Income replacement
  • Mortgage protection
  • Estate planning
  • Leaving a legacy
  • Burial expenses
  • Safe investment diversification

Do I need life insurance if I have it through my employer?

Most often yes, as life insurance through employment are only valid when you are working, which means that if you lose or quit your job you will be uninsured. Also, it is important to note that if you contract an illness (such as cancer or another terminal disease) that will result in you being unemployed before passing, you may be uninsured at a time that you need protection (since you won’t be employed anymore). Lastly, life insurance through your employer (2-3x your yearly income) most often isn’t sufficient for most individual life insurance needs (recommended 10x your yearly income). We often recommend those who have life insurance needs to supplement their employer’s life insurance with individual life insurance outside of work.

How much life insurance do I need?

In order to determine how much life insurance coverage you need, you need to review the following:

  • Current liabilities - mortgage and outstanding debt
  • Ongoing costs - rent, medical costs, etc.
  • Future liabilities - retiring family that may rely on you, children’s college education costs, funeral costs, etc.
  • Affordability - how much extra income can be diverted to life insurance per month after expenditures
  • It is important to review you and your partner’s assets (i.e. investments, etc.) to determine if term or permanent life insurance and how much coverage is most suitable for you.

How much does life insurance cost?

The cost of life insurance depends on your gender, age, tobacco use, family medical history, past medical history, and current health (amongst other factors). The cost of insurance increases, naturally, as the amount of coverage purchased increases and also depends on the carrier and structure of that particular product.

Can I get a better price if I buy directly from the insurer?

No, life insurance prices are fixed by law and are subject to the insurance carrier and state’s department of insurance approval. Most often, a client will choose to work with a broker that works with many life insurance carriers and can shop around based on suitability for the client.

Product Types

What is a term policy?

Term insurance covers you with life insurance for a specific number of years. They are used for the purpose of peace of mind that if you die within that period of time your beneficiaries will receive the death benefit. Term is suitable for those who only have a temporary need for life insurance or have a limited budget, since they are the cheapest form of life insurance. After your term ends, you will no longer be covered and if you would like to purchase more insurance you may have to pay a higher premium (since your age and health will be more advanced).

What is the “return of premium” feature?

Some policies offer a return of premium option to refund all or some of the premiums paid to the term policy if the insured does not pass away during the period of the term. These premiums are higher than normal term policy premiums.

Should I buy Return of Premium life insurance?

Return of Premium life insurance will often be 2x or 3x as expensive as purchasing normal term insurance. If you prefer to put that money towards other investments then the Return of Premium rider will not be suitable for you. Most often, you will get a greater return in the market with the funds rather than selecting a Return of Premium rider.

What is a permanent policy?

Permanent policies are designed for those looking for life-long protection, or an option to accumulate tax-free growth with your cash value that can be accessed through withdrawals and loans. A portion of the premium of a permanent policy is used to build up a cash value. The cash value allows you to build up a supplemental retirement income, be leveraged against for a loan, or the interest on your cash value can be used to pay your policy premium after your policy is fully paid up.

What is universal life insurance?

Universal life insurance, also called UL, is a permanent life insurance that provides a guaranteed death benefit with a flexible premium and adjustable coverage amount throughout your life. Often, these allow for a greater amount of interest to be earned through the cash value that can be accessed tax-free through withdrawals and loans. Universal life insurance currently have the lowest premiums offered for the mass market permanent life insurance and can be structured as a high interest savings account.

Which one is better: Term life insurance or permanent?

The answer to this question depends on various factors including need and personal preference. Term An individual may choose to purchase term if they only need life insurance for a certain period of time (due to a higher amount of liabilities during that time and having dependents that rely on their income) and are confident in their assets being enough to cover for long term care, critical illness, and any remaining liabilities after the end of the term insurance. This is a suitable option if the individual prefers to invest their income in other vehicles to build their assets. If the individual has a lot of liabilities but little discretionary income, term will be a better option than a more expensive permanent life policy. Permanent An individual may choose to purchase permanent life insurance if they prefer to have life insurance coverage for their entire life. Often, individuals who choose to purchase permanent life insurance add additional riders, such as long term care and critical illness, for the ability to use their death benefit for a living benefit later in life. Individuals have greater than $11.4 million of taxable assets worldwide (or >$22.8 million as a married couple) often use life insurance as an important part of their estate planning. Permanent life insurance may be suitable for individuals who are very risk-averse when it comes to investing and is a better alternative than saving large amounts of cash (that they do not need to access for a long time) in a savings or checking account.

What are life insurance riders?

Life insurance riders are add-on benefits that can be chosen at will (and if available) to suit the customer’s needs. Riders must be chosen when the policy is purchased and cannot be added after the policy is already in-force. Examples of riders include:

  • Term conversation (converts term insurance to whole life without having to complete another medical exam at the end of the term)
  • Long term care rider
  • Accelerated death benefit/Terminal illness rider
  • Return of premium (ROP)
  • Policy Details

How does the insurance company determine my premium?

Factors such as age, gender, height, weight, health status (including whether or not you use tobacco), and if you participate in high-risk activities or occupations can all impact your insurance premium.

What is the underwriting process?

Underwriting is a process of which carriers determine whether you are able to qualify for life insurance, at what health rating, and how much your monthly premiums will be based on your risk (age, health, activities, etc.). Often, the underwriting process can involve a medical exam (scheduled by the life insurance carrier), requesting medical records, prescription database report, and a Motor Vehicle report to determine whether or not to approve, deny, or heighten the rate (and cost) of a life insurance policy for that individual.

Application Process

Do I need to take an exam?

A traditional life insurance policy requires a medical exam which includes a paramedical exam (questions related to health, health history, family health history, prescriptions, and activities). No medical exam policies offer coverages up to one million dollars of life insurance coverage but they are often more expensive than traditionally written policies.

What do insurance companies test for?

Your insurance broker will schedule a medical exam through the life insurance carrier that you’ve submitted your application to. A licensed nurse will ask you health-related questions and record your pulse, blood pressure levels, height and weight, and also take a blood sample. Sometimes, depending on your age and the company, a urine sample and electrocardiography (EKG) will also be required.

How long does it take to get my policy?

The underwriting process for a traditional policy can take anywhere between two to eight weeks. A no medical exam policy can be issued within a few minutes, though these are limited to certain ages, health, and amount of coverage (under a million). No medical exam policies can also be more expensive than a traditionally underwritten policy.

Why did I get conflicting life insurance rates?

Your real life insurance rates will depend on your health rating after underwriting as well as the product and carrier that you choose. Each carrier will provide the same health rating and cost of insurance for the client to every broker that they work with. If you are getting different ratings for the same carrier it could be because the broker has not actually provided the rating for you after underwriting and is going off of a standard (estimated) health rating quote.

Payments & Claims

What does it mean when a policy is “fully paid up?”

“Fully paid up” means that you have paid enough premiums for the interest on the premiums to cover the cost of the policy for the rest of your life, and therefore you won’t have to pay additional premiums and you will still be covered for the rest of your life.

What happens if I miss a premium payment?

If you have a term policy, they generally allow a 31 day grace period where you can make up the missed premium before they cancel your policy. If you have a permanent policy, the cost of insurance will be taken out of your cash value, after which they will terminate your policy if premiums are not paid.

How does the insurer know I died?

Your beneficiary will need to file a claim with the carrier. They will request a death certificate along with the policy number, social security number, and address. Once verified, the insurance company will need to pay out within 30 days or pay interest on the death benefit amount per day after 30 days.

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