Have you thought about getting life insurance but avoided it because you are intimidated by the process of applying?
Or because the topic of death isn’t one you like to dwell on too much?
Or maybe you’ve heard how long the process is and don’t want to deal with the hassle of a medical exam.
It could be one, two, or all three reasons. Either way, the longer you put off life insurance the more likely you will never get a policy to protect your loved ones. According to this life Best Life Rates study, only 41% of Americans have life insurance! Of those, only a third are on a basic group policy through work.
If you’re in this situation I know exactly what you are facing.
Before I eventually got life insurance last year I was on the fence for well over a year. I read there was a medical exam, didn’t understand the insurance jargon, and just didn’t feel like doing it.
But as my 30th birthday approached I realized if I didn’t get life insurance now, I probably never would. Ultimately, I got a life insurance policy to protect my significant other in the event of my untimely death.
In case something happened to me I wanted to know she and our dog wouldn’t have any financial issues with the house or anything else.
You might be in the same situation currently. Maybe you just got married or had kids and think life insurance is a good idea for your future.
While the process isn’t that hard it does take some time from beginning to end. But 4-6 weeks is well worth protecting your loved ones in case of an accident.
Today there are more options than ever when it comes to getting a life insurance policy. There are ones that last a certain term while others last a lifetime.
Some policies are cheap and others can be four times the prices for the same coverage. And there are even life insurance plans that where you can invest the money in the stock market.
It’s hardly a one fits all type of market. In this post I’ll show you a detailed breakdown of the following:
- Different types of life insurance policies
- The process of getting life insurance
- 15 Most common questions about getting life insurance
Term Life Insurance
When you hear the word life insurance I’m guessing you probably only think of term and whole life insurance as they are the most common. Term life insurance is the most recognized and popular method of life insurance.
Term life insurance is the most popular because it’s the easiest life insurance option to understand and enroll in quickly.
Permanent life insurance has a ton of great benefits but is a very complex and ongoing process. There is much more maintenance with these type of plans which is why term life insurance is the best option for the majority of people.
Term life insurance provides pure death benefit protection for a specific period of time. It is the simplest of all the life insurance options.
You pay a fee each month or year and if you pass away within your term length your beneficiary is rewarded. While you pay for your premium each year there is no cash value like whole life insurance (more on that soon).
The most common policies are usually 10, 15, 20, 25, and 30-year terms. Each year you are responsible to pay the annual premium to keep your coverage active.
Depending on the plan, your coverage might increase on an annual basis. But, in most cases, your premium will remain the same throughout the policy length.
Once your term is over and if you want to continue coverage you will need to re-qualify for a new life insurance policy based on your current age and health status. Almost always your premiums will increase as you age. Every policy is different but most of them will let you continue to renew until you are around 95-years-old.
Why Choose Term Life Insurance?
The reason term life insurance is the most popular is because it is the most affordable and simple as there is no cash value account. But, if you outlive your insurance policy the money is not returned in any way, it is essentially a donation to the insurance company.
Term life insurance is the easiest and most effective way to ensure your family is protected from any event in the future.
Types of Term Life Insurance
There are two different types of term life insurance — level term and decreasing policies. With a level term policy, your payout amount remains the same throughout your term. But with a decreasing term policy, the death benefit decreases over time despite premiums remaining the same.
The goal with term life insurance is to lock in the longest term for the lowest premium. Make sure to read and reread your policy to ensure you understand the term length, premiums, and death payouts as the policy ages.
Which life insurance provider is the best?
There are tons of life insurance different providers available online. You can also work with an insurance broker to help simplify the process.
I have used SoFi for life insurance but I also think Haven Life is a great option to consider.
Another great way to get started with life insurance is Policy Genius. After entering in some basic information you can get quotes from several life insurance companies. They also will provide quotes for renters, health, pet, and auto insurance.
Permanent Life Insurance
Think of permanent life insurance as the upgraded version of term life insurance. While your beneficiary still receives a death benefit payout in the event of your untimely death, there is also a cash component.
Essentially, your money isn’t wasted like term life insurance as you can’t outlive the policy. As the name implies there is no set term for the policy and is intended to last your entire lifetime. Here are some of the most popular types of permanent life insurance:
Whole Life Insurance
The most well-known version of permanent life insurance is a whole life policy. In this type of coverage, the premium amount is locked and will remain the same for the rest of your life. This will help if you are on a budget and is a great option to take advantage of when you are young.
If you start a whole life insurance policy when you are young you will pay the same amount over time and can lock in a lower rate. Despite aging or health issues, your premium will almost always remain the same!
Whole life insurance offers fixed premiums, guaranteed protection, and guaranteed cash value accumulation until the day you die. But, as the policy is lifelong it is also much more expensive than term life insurance. Whole life coverage is not a very flexible coverage and doesn’t give you the same benefits of universal life insurance.
How do Cash Reserves Work?
With whole life insurance, you are allowed to borrow money against the cash in your policy. Just because you can do this doesn’t mean you should.
By borrowing the money you have the chance of losing it and are charged interest from the insurance provider. But sometimes pulling the money out for a good investment idea is worth it.
For example, in 2011, post housing market crash, real estate was very low and people accessed their cash reserves to buy real estate for a fraction of the price.
Universal Life Insurance
While not as well known as whole life insurance, universal life insurance is another type of permanent coverage. This coverage does provide a death benefit and cash value fund as well as even more flexibility.
The best part is that the cash value fund is able to grow tax-deferred on a specific index or interest rates. With Universal life insurance, you can also increase the death benefit and reduce premiums over time.
If your cash account grows so much you might not even have a premium! There are several types of universal life insurance:
Guaranteed Universal Life Insurance Policy
Universal guaranteed life insurance is usually much lower priced than whole life insurance and has flexible death benefits. These policies have a specific death benefit and payments do not change over time.
But, these plans have little to no cash value. If you are unable to make a payment you would forfeit the policy and have little or no cash value.
Most whole insurance plans don’t extend past 85 years old but universal life insurance can go from 90 – 121 years old depending on the provider!
Indexed Universal Life Insurance
Indexed universal life insurance links the policy’s cash component to a stock market index like the S&P 500. One of the pros’ of this type of insurance is that since it is linked to the stock market index which can grow over time. But, the plan does have a cap on your policy.
Your policy will detail how much of your cash value account actually participate in any gains. For example, if your rate is 75% and the S&P goes up 10% you would get a 7.5% return.
But, if the index does go down you will not lose cash value and instead receive a 0% return. This is a huge benefit of indexed universal life insurance!
Cap on Gains
For example, if the market is up 12% and your cap is 10% you only get up to the 10% returns. Plus with your participation rate, you will then get a percentage of your overall cap.
Premiums and Death Benefits
This part gets tricky. You can technically decrease your payments or even skip a payment if you have enough cash value to cover the costs.
This is something you need to diligently keep track of to ensure you don’t forfeit the entire policy from a missed payment. Additionally, some plans will also let you adjust your death benefit if personal circumstances change.
Variable Life Insurance
The third type of permanent life insurance is a variable life insurance policy. Variable life insurance offers a death benefit, cash account, and the ability to trade equities with your cash account.
This life insurance policy has the potential to grow the account value as you can invest in the stock market.
On the other hand, it is riskier than whole life insurance as equities can also decrease in value. This is not the choice if you don’t understand or dislike the stock market, especially at a later stage in life. It can be a great addition to an already diversified portfolio but should not be used as the sole life insurance policy.
Variable Universal Life Insurance
Variable universal life insurance is very similar to variable life insurance. It includes all the benefits of a variable life insurance policy with the ability to contribute toward mutual funds as well.
Like a variable life insurance plan, there is more risk investing in mutual funds than whole life insurance.
The main pros of variable life insurance is the chance of increasing your cash value from investment choices with high returns. But it does require a lot of hands-on management which might be more hassle than it’s worth.
Plus, the first five years the majority of your premiums go towards fees to maintain the account and administrative fees.
Term Life Insurance vs. Permanent Life Insurance
If you had to compare the two it’s really like comparing apples to oranges. Term life insurance is the most common because it is the most affordable and easy to understand.
If you die within your coverage plan your death benefit will be paid out, assuming you have made all your premium payments. These policies can range between $30-$50 per month for a 20-30 year term based on a payout of $500,000 for those in their 20’s and 30’s.
Whole life insurance is much more expensive, but like anything you get what you pay for in life. Not only do you receive a death benefit but also the cash value account. This is where the premiums are partially used to fund your account.
As time goes on your premium fees go more into your cash payout account. Whole life insurance can cost up to four times or more than term life insurance. And this is for the same death benefit!
Term life insurance is much more affordable and easier to understand. The high premiums, cash account, and investments with permanent life insurance might be too complicated for most people. Here are some other types of life insurance policies as well:
Group Life Insurance
While technically not a life insurance policy, group life insurance is something to understand in this complicated process. Group life insurance is offered through your employer at minimal cost or 100% free depending on your employer.
If your employer does offer group life insurance it good benefit to take advantage of. Group life insurance is almost always term life insurance but can be whole depending on your employer.
The coverage is generally low and based on your annual salary. While group life insurance is a great benefit don’t use it as a sole life insurance as you are only eligible when employed.
Final Expense Life Insurance
Final expense life insurance is different than any other plans and is intended to be used only for funeral costs. Often known as burial insurance, this option will primarily be purchased by individuals between the age of 50-85 years old.
This coverage will help your loved ones with funeral expenses such as burial, memorial service, headstone, and other related costs.
Today, the average price of a funeral is around $10,000 and can be a huge burden on your family. This coverage is much lower than normal life insurance payouts and the premium is also much lower.
No Medical Exam Life Insurance
Unlike all the other life insurance policies, no medical life insurance policies do not require you to receive a medical examination for approval.
Most life insurance policies will not cover certain pre-existing conditions and no medical exam is a great alternative. These policies are approved much quicker but also have much higher premiums.
These can also be known as simple issue life insurance. The simplified part refers to not having to go through the medical exam.
You do still need to fill out the health questionnaire which will include questions about tobacco use, past medical history, and if you’ve been diagnosed with serious illnesses or injuries.
The Costs of No Medical Exam Policies
When you don’t take a medical exam you are viewed as a liability to the insurance provider. Your rates will be directly tied to the chances of outliving your policy. The younger and healthier you are the less you will pay than someone who is older and has poor health.
Your policy will be higher than choosing a policy with a medical exam. While the medical exam might seem like a waste of time it will help you potentially save thousands of dollars over time.
Guaranteed Issue Life Insurance
Another option for no medical exams is a guaranteed issue life insurance. This is the most expensive way to buy life insurance. Plus the coverage amounts rarely exceed $100,000.
Also, some plans will only pay a partial death benefit or the amount paid in premiums if you die within the first few years of the policy. This is typically chosen as a last resort life insurance policy.
Accidental Death Insurance
Technically this isn’t a life insurance policy as it is only paid out to your beneficiary if you die in an accident.
If you have a stroke, cancer, or other sicknesses you will not be covered by accidental death insurance. This is more of a supplementary life insurance policy than a stand-alone policy.
Survivorship Life Insurance
Survivorship life insurance policy allows you to cover more than one person on the policy. This is almost always cheaper than paying for two life insurance policies.
The first way to set up the policy is known as the first to die. This means that your coverage will pay out when the first person passes away.
The second way to payout a survivorship life insurance policy is a joint and survivor option. This would pay out when the second person passes away.
Survivorship life insurance is a great way to save money and works well if one person is in exceptional health. As pre-existing health conditions are a huge prerequisite for life insurance poor health can make it difficult to secure coverage later in life.
With survivorships, life insurance one person’s poor health is slightly offset if the other person is in excellent health.
The Process of Getting Life Insurance
Before I get into the details of all the different types of life insurance policies it’s important to understand the actual process of getting life insurance. Unlike auto, home, or renters insurance you can’t just sign up online today and be covered tomorrow.
In 2017, I went through the lengthy process of getting life insurance and want to share with you some tips to make it as easy as possible.
The first thing I did was exactly what you’re doing now. Research.
I had to start learning about the insurance terms, how it works, and started applying for quotes online. Before you get started on quotes check out the most common life insurance terms to help you decipher the different policy details.
Life Insurance Glossary of Terms
The owner is yourself or the person who is entering into contact to receive a life insurance policy. Typically this is also the “insured” person but not always.
This will be the policy between you and the insurance provider of your choice. It will include all names, terms, fees, and costs of your policy.
Also known as the carrier, provider, and company who will write your insurance policy.
The death benefit is the lump sum payout from the insurer to the beneficiary. This can be paid out in a lump sum, annual payments, or monthly payments which is decided by the beneficiary.
Depending on your policy, the death benefit can remain the same or increase along with the cash value account. If you take any withdrawal these would be subtracted from the death benefit amount.
This will be the individual or individuals who will receive the death benefit from your policy. You can name several beneficiaries or just one. The would be paid the entire amount of your coverage tax-free.
Cash Payout Account
If you opt for a whole life insurance plan you will also receive a cash payout account separate from your death benefit payout. Depending on your life insurance plan your cash payout account can fluctuate with your investments and be used to withdraw the funds if needed.
Getting Your First Life Insurance Quotes
Now that you understand the most common life insurance terms here are the next steps. To start applying online you won’t need much information to get started. You will need:
- How much coverage you intend to get
- How much you want to pay each month or year
- Know your height and weight
After submitting the quotes I received a call the next day and had my interview. This was exhausting. They will ask you for detailed records of any and all past medical issues.
I had to provide information from the past ten years of medical history, prescriptions, and all doctors contact information. Based on the interview your rates can change from the initial quote.
Your Health Matters
After getting several quotes and playing with life insurance calculators I quickly began to see that your overall health is very important when it comes to your premium.
If you have used tobacco or continue to use tobacco your rate will go up drastically. You might not even be approved for coverage.
Depending on the provider and your past medical history, the life insurance provider might also want to do a physical exam. While there is no cost to you it’s still not the most enjoyable process.
They will send someone to your house or you can visit a location they provide. They will typically get a blood and urine sample plus ask you additional questions.
Once you have answered all medical questions and received your physical the insurance provider will contact you within a few days for the approval status. Two days later I received a call and my policy was approved and went into underwriting.
They might update your premium based on the medical results but now you can ask them to provide a detailed breakdown of the options available. I recommend looking at all the options as the premium will change with term length and payout amount.
Now that you understand the most common life insurance terms and process here are the most commonly asked questions about life insurance.
15 Most Common Questions About Life Insurance
Which life insurance policy should I choose?
If you need life insurance quickly and easily usually the best solution is a term life plan as it is the most affordable. Term life insurance is much easier to understand and requires little work on your end after the policy is set up.
Depending on your family, assets, and tons of other factors term life insurance might not cover all of your needs.
Are there any tax benefits to life insurance?
Depending on the policy you choose there might be tax advantages. With some whole life insurance policy and cash value accounts your investments are tax-deferred.
Can I have several different life insurance policies?
Yes, you absolutely can have multiple life insurance policies. You can even have several of the same types of life insurance policies.
As you get older it will generally be harder and more expensive to qualify for term life insurance. You can always get one at 25, 35, 45, etc. The same goes for any of the types of whole life insurance mentioned previously.
I have life insurance at work, do I still need additional coverage?
Life insurance at work is a great perk but only works if you are employed there. If you quit your job tomorrow you no longer have life insurance.
If there is an option at work it is generally a lower payout than most term life insurance policies. While I would recommend enrolling if you want a true life insurance policy go outside your employer. This will give you double protection and won’t need to worry if you decided to leave your job.
What age should I get life insurance?
Life insurance isn’t for everyone. If you’re single and don’t have anyone you might not need life insurance at this time.
For example, I got life insurance at 29 as I wanted to lock in the lowest rate possible and wanted my girlfriend (and dog) covered in case anything happened to me. If you have a significant other, children or other family members you want taken care of you should look into getting a policy.
The most important part of life insurance is making sure you are financially able to afford the plan.
Can I do the medical exam at my own doctor’s office?
Unfortunately, you cannot. Life insurance providers do not want a third party performing the exam. Luckily the exam is free to you and doesn’t take much time.
What happens if I lie to an underwriter and they find out?
When it comes to health and money people might stretch the truth at times. While it may seem like a good idea, lying about your past medical history can have a very negative impact on your life insurance policy.
If you do get through and they find out about it after coverage they can cancel you immediately. Even worse, if you do pass away and they discover the lie your death benefit won’t be paid out.
How much life insurance coverage should I get?
This is probably the hardest question to determine when you select a life insurance plan. If you’re getting term life insurance the popular options will be between $300,000 – $1,000,000.
The higher the payout, the higher the premium.
I highly encourage you to get a detailed breakdown from your insurance provider. Sometimes increasing the coverage $100,000 or $200,000 is only another $50-100 per year. If you choose to go with annual payments you also get a slight discount on the premium.
What kind of health do I need to be in for health insurance?
If you’ve been consistent about your fitness and nutrition this will pay off greatly with health insurance rates. All pre-existing conditions are a major factor in determining your premium. One of the biggest conditions to affect the rate is smoking.
Who should be my beneficiary?
This will be unique to every person. Remember, if you’re unsure you can always list several beneficiaries and edit in the future.
What happens if I can’t pay the premium?
If you stumble into some money troubles you might have options. Contact your life insurance provider and see if a grace window is allowed.
Usually, term life insurance policies have a shorter grace window than permanent life insurance policies.
How should I prepare for my life insurance exam?
The first thing you should do is drink plenty of water before your exam. This will help clean out your system and allow you to provide a sample when needed.
You should also watch the foods you eat the week leading up to your exam. By eliminating certain foods you will keep your blood pressure and cholesterol levels lower.
Here are some other common tips:
- Don’t exercise the day of your exam.
- Avoid alcohol for one week leading up to the exam.
- Don’t eat before your exam (you will need to fast so I recommend scheduling it first thing in the morning).
- Avoid caffeine 2-3 days prior to your exam.
Can you convert from term to whole life insurance?
Yes, some companies will allow you to convert your term life insurance policy into a permanent policy in the future.
If my health changes over time can I get a new rate?
This will depend on your life insurance provider. Things like smoking, DUI, and heart attack can have a negative impact on your rate. Some carriers will allow you to do another test in the future which might help lower your rate.
When will I get returns from my whole life insurance policy?
If you choose a whole life insurance policy, part of your premium will go towards your cash account. The first five years, especially the first year, will not yield much if any results. You should look at permanent life insurance options as long-term savings that won’t generate returns quickly.
Final Thoughts on Life Insurance
The best solution is to speak with a life insurance broker or research companies individually online. You can apply for quotes relatively easy and get a feel for the payments and coverage.
Term life insurance will work for most people and lasts a specific number of years. If you want more protection without having to renew a whole life insurance will be a better policy.
Plus, you can grow your cash account over time and take out as a loan if needed in the future.
The biggest piece of advice is to study the coverage, ask tons of questions, and know exactly what your coverage entails. I’d hate to see you get coverage and a year from now have the premiums rise or payout decrease if you didn’t plan on it.
Get informed, do your research, and make sure your loved ones are protected with some type of life insurance.