Understanding Life Insurance
Simply put, life insurance is a contract between an Insurance Company (the carrier) and You (the policy owner, normally the insured) in which the carrier agrees to pay a predetermined amount (the death benefit) to your selected beneficiaries upon your death, in return for your paying specified insurance premiums for the term of the contract.
There are really 2 types of Life Insurance. Term and Whole Life. Each of these have many subtypes or variations that are offered by the Insurance Companies. What is available varies from carrier to carrier.
Term Life Insurance: The insurance company is “betting” that you will not die during the term of the coverage, whereas you are betting that you will die while covered. (not a bad bet to lose). Once established, premiums remain constant for the specified term.
Whole Life Insurance: The insurance company assumes you will die during the term and is betting that they will collect more in premiums (and investment income) before having to pay the death benefit. Most whole life policies have a savings component where a portion of the premium is invested for growth and develops a cash value, from which you can borrow. Whole life is much more expensive than term.
Final Expense Insurance: a type of whole life policy that is primarily focused on ages 50 to 85, who are concerned that they do not have enough savings to cover their funeral costs, outstanding debts and any other individual concerns. This insurance is usually issued for $5.000 to $25,000 face amounts. Individual insurance carries may vary. If you are at that stage of life where you don’t have the savings to cover your final expenses, then this insurance may be right for you. Alternatively, some funeral homes or memorial facilities may offer prepaid funeral arrangements. Compare available options and see what is best for you. In general, benefits from final expense insurance is paid immediately to your beneficiaries to be used as necessary. Prepaid programs limit you to using the selling firm and may be inconvenient if you relocate, prior to your passing.
The way the Insurance company makes money is by collecting more in premiums (and investments made with those premiums) before having to pay the death benefit. You gain by having peace of mind, knowing that your loved ones are protected from financial hardship if you were no longer with them. Overall, both parties win.
The insurance company has a team of actuaries to evaluate the risks they incur when issuing a life insurance contract. They also have a team of investment specialists to maximize their returns on the premiums they collect. Armed with that information, also your age, sex, tobacco use, health, height, weight, family health history, lifestyle and many other characteristics, they classify applicants into risk classifications to determine what premium levels they need to charge in an effort to show a positive return on their pool of policies. This process of determining classification is called underwriting.
Until this underwriting is complete, there is no accurate way to estimate the premiums an insurance company might charge for your specific policy. Quotes from this or any other website are approximate estimates based on broad risk classifications. The final premium will be offered after the insurance company evaluates all underwriting data. Once an offer is made, then it is up to you, as the proposed insured or policyholder, to accept or reject the policy offer. Different insurance companies treat various health conditions differently, based on their actuarial experience, and that is where an informed agent can be of the most assistance in helping you select the carrier most likely to accept your unique situation. The more forthright you are during the application process, the quicker the process will be. The lowest price “quote” may not be your best solution.
It seems obvious, but as you age and as your health deteriorates, your initial rates will increase. Don’t put off buying life insurance. Today’s rates will probably be the best you will ever see. There are a few ways in which you can improve your health to obtain better rates. These include: losing weight if you are overweight, quitting smoking or using tobacco, and getting in shape through diet and exercise. Unfortunately, these take time. Don’t wait for a sale! They don’t happen!