Life Insurance 101: The Basics Everyone Should Know
Life Insurance 101
A Blog by Daniel Brookman of Stolly Insurance Westerville
Life Insurance can be a complicated and difficult topic of conversation. No one likes to think about their inevitable mortality and weighing the pros and cons of each contract can be overwhelming. What I try to do for clients is take this thorny subject and make it easy to understand so they can get the policy that’s right for them and move on with their life. I’m going to share what I believe are the key components of life insurance that everyone should know.
Term and Permanent
The way to win the game of life insurance is to die with your policy in force. If you don’t, the insurance company will have collected premiums without paying a claim thereby winning the game themselves. Term insurance has a level death benefit and a guaranteed premium for a certain number of years. This can be as little as one year or as many as 30 years that the premium is guaranteed for, but once that level premium period ends the cost of the policy can increase by 10 times or more. Term policies are designed to expire before the insured reaches life expectancy although most plans offer you the privilege of converting to a permanent plan in the future without requalifying.
Permanent life insurance which is further broken down into the two main types of whole life and universal life are designed to stay in force for the insured’s entire life. This guarantees that the insured wins the game of life insurance because so long as premiums are maintained, the insurance company guarantees they’ll pay the death claim. Permanent policies also include cash value accounts that accumulate money on a tax deferred basis. They are eligible for dividends and interests which can grow the account either fixed or variably allowing the policy owner to access those increased cash values on a tax favorable basis while alive if done properly.
So the choice is easy right? Permanent insurance it is.
Not so fast, because the insurance company knows the permanent plan is going to have a claim if premiums are maintained they charge more for it. Therefore while many people would prefer permanent protection, their budget might only allow them to afford term insurance. This is especially true when the need is very large but the budget is not; like young families for example. Oftentimes the best policy for a young family is term life insurance. However, for someone who is interested in making sure the coverage is there when they die or finds the tax advantages of cash value policies attractive, they may opt for a permanent plan. Older Americans who are trying to achieve estate planning goals or business owners who want to borrow money from themselves instead of the bank when expanding their business are two great examples of people who can benefit from permanent life insurance.
How much should I buy?
Okay, so now you understand a little more about term and permanent life insurance you might wonder how much you need. Completing a needs analysis is the best way to determine how much life insurance to buy. If you wish to tackle this on your own, you can follow the popular acronym LIFE which stands for Liabilities, Income, Final Expenses, and Education putting in the totals you think you’ll need to cover each category. But I definitely recommend working with an agent who can offer additional information and insight during the process.
Another option is to use an online calculator of which there are many. I recommend Life Happens which is a nonprofit organization dedicated to helping people understand the need for life insurance products. To help you get started, they have a great calculator on their website at: http://www.lifehappens.org/insurance-overview/life-insurance/calculate-your-needs/. What is most important is to consider the people who would be dependent on this money if anything happened to you because life insurance isn’t for the person who died, it’s for the loved ones who didn’t!
What do I do next?
If you’re ready to get started on figuring out your need for life insurance and finding the policy that’s right for you, please call Stolly Insurance Group. Our team of educated and professional agents can help you pick out the right policy, complete the application and underwriting process, and put your brand new life insurance policy in force so you can focus on the ones you bought it for.