The Basics of Life Insurance

Written by Jason Fisher

Confused about life insurance? Confused about some of the general life insurance terms you’ve been hearing? Wondering if you even need it?

Here’s the Life Insurance 101 you’ve been looking for!

We’ll answer the most basic questions in the most simple way for you. The more clear we can make it, the better your buying experience will be.

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We know life insurance isn’t a super fun topic, so we’ll make it brief and easy to understand.

Life Insurance 101: Basic Terminology

Life Insurance Basics

Protect your family by having life insurance coverage

This article will answer some of the most frequently asked questions regarding life insurance. First, here are some of the most common terms relating to life insurance, explained in super easy to read format.

  • Life Insurance: insurance which pays money to your heirs when you die.
  • Premium: the monthly, quarterly, or annual price you pay for your insurance coverage.
  • Beneficiary: the person you select to receive the payout after you die.
  • Death Benefit: the amount of insurance in dollars due to your beneficiaries (also called Face Amount).
  • Cash Value: the accessible amount of cash in your policy.

Those are the most common terms you’ll hear if you’re buying basic coverages. This Life Insurance 101 article doesn’t get into the more complicated aspects of life insurance, like Modified Endowment Contracts. But, if you have a good grasp on these terms, you’ll have a decent understanding of what means what when discussing insurance options with your agent. And while I mentioned it, you may want to talk to an agent if this is your first ever purchase, just to make sure you get what you need, nothing more.

Types of Life Insurance Explained

There are three basic kinds of coverage, and within each type, there are different specifications within each one. Let’s talk about what each is from a bird’s eye view first.

Term

Term is short for terminate, meaning your coverage is temporary. It could last as little as one year, or up to 40. You choose when you buy your policy. Your premium can fluctuate, or be locked into one price range the whole duration of the policy. Term is usually the best bang for your buck, and costs the least per thousand. If you’re in the Life Insurance 101 crowd, this may be your best option to start. You can always upgrade.

Universal

Universal life insurance is a blend between term and whole life. It’s permanent in nature, and can last your entire life as long as you keep up with your payment. It’s like term insurance though, because there is no accessible cash build up (unless you pay in extra on purpose). The death benefit is usually a level amount, meaning it won’t increase over time.

Whole

Whole life is good for, well, your whole life. It’s a permanent life insurance policy, and it’s made to slowly grow with you over time. There is a level premium, and a cash value element inside the policy as well. You can borrow against the cash value when needed, for whatever you want.

How Much Life Insurance Coverage Do You Really Need?

One of the things most new buyers struggle with is how much to purchase. There is no perfect solution, as every situation and family is unique. But, there are some “by the book” methods to buying.

The biggest rule of thumb? Get 10-20x your income.

The primary use of life insurance is to replace income which you would have earned for your family. Replacing 10x or 20x years of your income is usually the go-to amount. If you’re younger and you’re the breadwinner in the family, lean towards 20x. If you’re older, and your income is not the only income, you could lean towards 10x and be safe. Your age is a big factor in determining how much life insurance you need as well as the price of your premiums.

You may also want to add extra if you have debts you’d like to have paid off, like a mortgage or small business loan. Additionally, you may have funeral and medical expenses you’d like to pay for, or even add some extra for your family to do with as they please. Legacy and charity can also be a part of the death benefit but is not typical in basic insurance planning.

Get the Best Rates with an Independent Agent

When you’ve got the basics down, it might be time to go ahead and find an independent agent to work with. Like us! An independent agent is one who doesn’t work for a single life insurance company, but rather offers you insurance from all the major carriers.

If you use a captive agent, you’ll only be able to buy life insurance from that one company. If you didn’t like the price, you would have to manually search all the companies yourself.

And independent agent solves this.

Also, if you have any medical concerns, a dangerous occupation, participate in hazardous activities, have a bad driving record, or live an unhealthy lifestyle due to diet or habits like smoking, you might really need an independent agent anyway, to make sure you find a company who won’t decline your application.

How to Purchase a Life Insurance Policy

The final step of Life Insurance 101, purchasing a policy!

If you’ve completed the above successfully and you’ve applied for life insurance, there’s more to do. You have to complete a medical exam. There are policies which require no exam, even up to a million dollar life insurance policy, but you might pay a little extra. The medical exam involves an examiner meeting with you to draw blood, measure your height and weight, and complete a urinalysis. It takes about 20 minutes per person but could vary based on requirements per the company you apply with.

The insurance underwriters will review this medical exam info, as well as your medical history, your driving record, current medications, and your current doctor’s records.

You’ll get your final rating after you’re approved, and this rating will determine your final premium. If the premium was agreeable, you can accept the policy and finish the delivery requirements. If the rating you received was not good, and the price was too expensive, you could decline to accept and you’re not responsible for any premiums. In fact, it is a good practice to regularly review your policy information to ensure that you are still getting the best rate possible for your needs. You may want to upgrade your policy or replace your existing policy entirely.

Once you have received your policy, it is important that you store your policy in a safe place and make the policy information available to your loved ones or beneficiaries.

Final Thoughts on The Basics of Life Insurance

Not so bad right?

Well, there you have it, Life Insurance 101. If you have further questions, please don’t hesitate to contact us and we’ll be happy to help you find the most affordable policy to fit your needs.

Perhaps you’re wondering if you can qualify for life insurance based on certain health conditions, such as someone needing life insurance during pregnancy or life insurance with lupus. We can answer your questions and help you get the coverage you deserve.

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About Jason Fisher
Jason Fisher is a life insurance specialist, founder of BestLifeRates.org and co-founder of Waterway Financial Group, LLC, an independent agency in South Carolina. He is also co-founder of The Life Insurance Blog as well as a frequent contributor to many finance and insurance related blogs. He has been published in Forbes, Yahoo!Finance, and other large publications. For media inquiries, please email only.

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