Insurability

When you submit an application to insure a child, the insurance company will want to know why. Think about it. Usually a person gets life insurance to (more…)

The steps to the process are:

1. Gather your financial and insurance data into one place.
2. Meet with your financial planner.
3. Meet with your accountant.
4. Meet with your attorney.
5. Meet with a certified life insurance agent.
6. Review your findings with a trusted family member or friend.
7. Follow up and make a decision with confidence.

Now that the process has been outlined, let’s dive into how each step will work.

1. Gather your financial and insurance data into one place.
It’s hard to get somewhere when you don’t know where you’re starting from. It sounds like no-brainer, but sadly this is where most people fall short and give up.

Every situation is different because everyone has different family, career, entertainment, and financial goals. A life insurance plan should be in harmony with those goals, not in conflict with those goals.

Though it may be laborious, gather all your current financial and insurance information into one place, whether it be a box, physical folder, or a folder on a computer. You’ll want to be armed with this information when you meet with your professional advisors.

2. Meet with your financial planner.
You may have been thrown off guard when we said you would be meeting with your professional advisors. Don’t be. Professional advisors exist to save you money and headache. They should save you more money than they charge or else you should find new ones.

The purpose of meeting with a financial planner is to know how you are spending your money and how much you would be able to allocate to an insurance policy.

What if I don’t have a financial planner? You can search for them online, ask friends and family, or ask other professionals, such as bankers and lawyers, for recommendations. Preliminarily choose a financial planner and call his/her office. Ask how many clients the company cares for. Ask how long the company has been in business. This may seem intrusive but don’t worry. Due diligence is the most important part of the process. A good professional adviser will not be ashamed of his/her reputation. If you get negative feedback from the first meeting with the planner, choose a new financial planner and repeat the process. Trust your instincts.

In your meeting, share with your financial planner all your life goals and current financial and insurance information. State that you are thinking about getting life insurance. Ask your planner what he/she would recommend for your situation. Take detailed notes. Thank your planner for the advice and say that you will also be meeting with your accountant, attorney, and life insurance agent. If you don’t have an accountant, attorney, or life insurance agent, ask your financial planner for a good reference.

3. Meet with your accountant.
The purpose of meeting with your accountant is to discuss how a life insurance policy would affect your tax situation.

If you don’t have an accountant you trust, follow the same process as outlined for finding a certified financial planner. Meet with your accountant. Share with him/her your life goals and financial and insurance information. Ask what life insurance product would best fit your tax strategy. Then, state the life insurance policy your financial planner recommended and discuss it will your accountant. Take notes. Thank your accountant for his/her time, and state that you will also be meeting with your attorney and life insurance agent. It is important for your professional advisers to know that you are an informed client who will do the proper research. When your advisers know this about you, they will treat you with great respect and be very helpful to you.

4. Meet with your attorney.
Don’t be afraid of attorneys. You might want to meet with a lawyer who specializes in estate planning when looking into life insurance. You want to be aware of estate laws that might affect the benefits of a life insurance policy.

State that you have previously met with your financial planner and accountant and that you have come to talk about estate planning strategies. Take notes. Discuss how various term and whole life policies would affect the insured’s estate. If you are the insured, ask what advantages or disadvantages your heirs might encounter if you were to pass on. If the policy would insure another person, ask what advantages or disadvantages the beneficiaries might encounter if that person were to pass on. Thank the attorney for his/her time and state that you will be meeting with a life insurance agent and get back to him/her if you have further questions.

5. Meet with a certified life insurance agent.
If you don’t have a life insurance agent, follow the process of obtaining referrals as described above. Again, ask how long the agent has had a license and been in the business.

Tell the agent that you’ve met with your financial advisor, accountant, and estate attorney. Share with your life insurance agent your goals and current financial and insurance information. Ask which life insurance policy the agent would recommend and why. Take notes as always. Ask for the advantages and disadvantages to every policy that is discussed. Ask which riders and other options would be best for your situation. Ask the agent for quotes of a few policies so that you may review them later.

Thank the agent for his/her time and say that you’ll get back to him/her any more questions you might have.

6. Review your findings with a trusted family member or friend.
Review your notes when you get home so that you can better understand what was said in your meetings. Take your time. Later, review your notes with your spouse or someone you can trust. It always helps to have another person there to point out things you might not have noticed.

7. Follow up and make a decision with confidence.
If you have any concerns or questions, follow up with your professional advisers to resolve them. They will be happy to help you if you treat them in a courteous manner.

With all your questions resolved you can then make a “go”/”no go” decision. It may not be the right time to buy life insurance. Only you will know because only you will have done the research for your unique situation.

If you decide you do want to purchase a policy, the next decision is which one and how much. Do something you can live with. Don’t make any impulse decisions, and don’t get into something you won’t be able to pay for later. When you decide, be happy and confident that you did the right thing. You just put in more effort than 99% of the people that buy life insurance.

A participating policy usually can only be a whole life insurance policy. It is normally not available for a term life insurance policy. Profits can be paid to the policy owners in the form of spendable cash, cash value, additional paid-up insurance, reduced premiums, or term life insurance.

An example of a participating policy would be a story about Carlos. Carlos wisely decides to follow our Life Insurance Selection Process to discover that choosing a participating whole life insurance product would be best for him in his current situation. He selects a good company and buys the insurance. His life insurance company happens to make a profit the following year after collecting premiums, paying claims, paying operational expenses, and earning investment revenue. The company decides that it has $10 billion to share with its 10,000,000 participants. Therefore, each participating policy owner receives $1,000 in the form of his/her choice.

So what should you know about whole life insurance?  You should know about maturity, insurability, death benefits, premiums, cash values, dividends, riders, beneficiaries, ownership, advantages, and disadvantages.  Let’s take it one step at a time.

First Thing’s First: Know the Terms

Before going any further, the most important thing we can communicate to you is to know the terms of the policy contract.  The policy is a legally binding contract between you, the owner, and the life insurance company.  Know all of your options and what your contract says before signing anything!   Go to your attorney, accountant, financial advisor, and certified life insurance agent for their professional advice. That’s why you pay them.  We feel much better now knowing that you’ll do your due diligence before signing anything.  Now, on to the subject of maturity.

Whole Life Insurance Maturity

One of the biggest differences between whole life and term life is maturity.  When will the policy pay the beneficiaries?  In term life insurance, the maturity is only if the insured dies within a certain block of time, such as 1, 5, 10, or 20 years.  It is possible that the insured could not die within that space of time and the beneficiaries not receive any payment.  In whole life insurance the term is for your whole life life, hence the name “whole life insurance.“   The insured is covered for his/her entire life as long as the conditions of the policy are met.

Insurability

Whole life insurance is no different from any other insurance you buy.  The insurance provider must know it’s a good deal for them.

Remember that actuaries provide insurance companies with data to reflect the probability that a person with certain characteristics will pass away.  How well you measure up to those data tables determines whether or not you will be approved by the underwriting process.

Factors, such as smoking, drinking, diabetes, health conditions, family health history, recreational history, and traveling history all can have a negative effect on a person’s insurability.  You may be asked loads of questions and be required to complete a health exam before you are granted life insurance.  

Whole Life Insurance Death Benefits

The death benefit, or the face value, is paid to the beneficiary if the insured dies or reaches the maturity age (usually 100 years old).   The death benefit is usually guaranteed to never decrease.  The death benefit of a whole life insurance policy is different from a term life policy in that they oftentimes go up with time.

Whole Life Insurance Premiums

Premiums are paid by the policy owner to the insurance companies.  Premium is a fancy word for the money you give to an insurance company in exchange for their service.  Payments for a whole life insurance policy are generally higher than term because the length of coverage is greater.  Think of it from a life insurance company’s perspective: “I have to make a payment sometime in the next 100 years if I sell whole life insurance” vs. “there is a 15% change that I might have to make a payment in the next 20 years if I sell term insurance.”  You can logically see that the risk to a life insurance company in whole life is much greater than term life, so companies will charge more to compensate for the increased risk.

Whole life insurance and term life insurance premiums are typically guaranteed never to go up over the term of the policy.

Whole Life Insurance Cash Values

Another important aspect of a whole life insurance policy is the cash value that is created.  The cash value is the same as the surrender value or the cash surrender value.  This value increases over time. 

You can also borrow from this cash value.  It works in much the same way as borrowing money from the local bank.  You borrow a certain sum of money and pay it back with interest.

The policy owner can also cancel the policy at any time in exchange for the cash value.  The cash value can be referred to as the surrender value because you can surrender your right to insurance for this money.

Whole Life Insurance Dividends

If a whole life insurance policy is a participating policy, the cash value may be increased by dividends.  This happens when an insurance company makes a profit and decides to share that profit with its “participating” members. 

Life insurance dividends are tax-free if they don’t exceed the total premiums you have paid.  Ask your accountant for more details.

Whole Life Insurance Riders

Riders are additional conditions to a life insurance policy.  Examples include additional premium, waiver of premium, accelerated death benefit, accidental death benefit, accidental dismemberment, disability income, guaranteed insurability, and level term riders.  There can be many other varieties of these riders. 

Beneficiaries

The death benefit is paid to the beneficiary.  There can be one or in special cases thousands of beneficiaries associated with one insurance policy.  The policy owner can designate an individual or entity to be a beneficiary.  For example, your uncle Joe could designate you as the sole beneficiary or leave you out of it all together and assign the Red Cross to receive a death benefit.  Joe could also give you 95% and the Red Cross 5%.  He could give leave his wife 100% if she were alive when he passed on and leave instructions to give you 95% and the Red Cross 5% if his wife were not alive when he passed on.

The possible combinations for beneficiaries and beneficiary entitlements are endless.  We recommend that you consider this point carefully.  Every situation is different.  We also recommend that you designate at least 3 levels of beneficiary conditions.  What we mean by this is to include something like “my wife gets 100%.  If she were to predecease me (die before I do), my four children get 25% each.  If my wife and any of my four children were to predecease me, the remaining children split the benefit equally.  If my wife and all children were to predecease me, my friend, Lucy Doe, gets 75% and the Red Cross gets 25%.”

Whole Life Insurance Ownership

The individual or entity who signs as the life insurance policy holder is the owner.  This person or entity has the power to choose the beneficiary or beneficiaries are and how the benefit will divided among beneficiaries.  This person or entity has the contractual obligation to pay the premiums.

It may be confusing when we say that an entity can own a life insurance policy.  Let’s say you want to create a corporation for your family restaurant, Bob’s Food Place, for liability and tax purposes.  Bob’s Food Place now becomes Bob’s Food Place, Inc., and it is now a separate, legal entity from yourself.  Now suppose that after careful consideration with its professional accountants, attorneys, financial advisers, and life insurance agents Bob’s Food Place, Inc. wants to insure the business against the loss of key business personnel.  Bob’s Food Place, Inc. can buy a life insurance policy for you and another one for your brother, Bob.  Bob’s Food Place, Inc. is now the policy owner, is responsible for paying the premiums, and is free to designate itself as the sole beneficiary.  Companies do this sort of thing all the time.

Advantages of Whole Life Insurance

The primary advantages to a whole life insurance policy are:

1. The coverage of the insurance is for the entire life of the insured.  You won’t have to renew the insurance ever again unless you want to add more insurance.
2. The insured will only have to pass the underwriting process once.  Future declines in health or an increase in dangerous activities will not increase your premium.
3. Cash value builds in the policy.
4. You can borrow against the cash values of the policy.
5. Dividends can usually be taken out tax free.

Disadvantages of Whole Life Insurance

The primary disadvantages of a whole life insurance policy are:

1. You are stuck with the same premium for the life of the insured.  If you decide to cancel the policy, you get the remaining cash value.  The isn’t always a bad thing, though, because the cash value usually exceeds have much you have paid after about 3 years.  Basically, you come out ahead after 3 years.
2. The premiums are usually higher for the same coverage amount than term life insurance.  This is because the life insurance company is taking on more risk because they know the insured will die at some point in the future.

Remember to consult with your professional advisers and know your options and the terms of the contract before purchasing any type of insurance.  Good luck.

Insurance companies employ actuaries to collect critical information about various types of people. The following is an example of actuarial data from 2003 supplied by the United States Social Security Administration at http://www.ssa.gov/OACT/STATS/table4c6.html.

Actuarial tables are basically probabilities of when groups of people will die. Notice that a person born in 2003 (age 0) is expected to live 74 more years, and an 80-year-old person is expected to live 7.43 more years. That’s why a life insurance company would charge a policy holder much more to insure a person of greater age.

Clearly, life insurance companies worth billions of dollars have more up to date information. Also, they track historical data to compare them with the actuaries’ estimates.

In addition to age and gender, insurance companies are concerned with habits of smoking, drinking, travel, and recrecreation as well as medical history.

Accumulated Premiums - the dollar amount of all the premiums paid to date from the policy owner to the life insurance company.

Annual Premium - payments made from the policy owner to the life insurance company made once per year.  Generally, this payment method is less expense than a Monthly Premium payment schedule because there are less transaction costs.

Beneficiary - an entity or individual who receives a death benefit from a life insurance company after the terms of the policy have been met.

Cash Surrender Value - the amount of money the policy owner can receive if the policy is cancelled.  The policy holder surrenders the right to receive a future death benefit in exchange for immediate cash.

Death Benefit- the dollar amount a beneficiary receives when all conditions of a life insurance policy are fulfilled.

Dividend - a payment made to the account of the policy owner when the life insurance company experiences a profit and elects to share a portion of the profit with its customers.

Face Value - the amount a policy is originally worth to the beneficiary when the insured dies or when the policy matures.  However, the actual benefit can be more or less than the initial face value.

Insurability - the level at which a person can be insured.  Factors include physical health, family health history, recreational activities, work environment, and travel activities.

Insurance Policy - a legally binding contract entered into by a certified life insurance company and a policy holder.  It is very important to understand the terms of the contract and consult with your certified accountant, attorney, and life insurance agent for advice because every situation is unique.

Insured - the entity or individual who is covered in an insurance policy.  If this person were to pass on and all terms of the life insurance contract were fulfilled, the designated beneficiaries would receive the death benefit.

Maturity- the time at which the cash benefit is paid to the beneficiary(ies).  This happens when the insured passes on or reaches a specified age (usually 100).

Monthly Premium - payments made from the customer to the life insurance company made once every month.  Generally, this payment method is more expense than an Annual Premium payment schedule because there are more transaction costs.

Paid-Up - a policy can be paid off before maturity.  Most whole life insurance policies are “paid-up” or calculated to be funded by age 100.  You can elect to buy Paid-Up insurance at 90 or 70 or any other age you wish. 

Policy Owner- the individual or entity that has entered into a contractual agreement with a life insurance company to pay premiums in exchange for cash values and/or a death benefit.  Note that the policy owner can be the same person as the insured but doesn’t necessarily have to be the same person.  For example, a grandparent can be the owner of a policy where the grandchild is insured.

Premium- a payment made from the policy owner to the life insurance company.  It is one of but not the only form of revenue for the life insurance company.  The amount of the premium depends on the health and lifestyle of the insured, the amount of death benefit, length of contract, and any additional riders.

Reinsurance Company - an organization that insures a normal insurance comapany against financial loss.

Rider- an addendum or additional clause to an insurance contract.  Think of a rider as an additional condition “riding” on top of (or in addition to) a policy.  There can be many types of riders with various options.  Usually, riders provide a benefit to the policy owner.  Therefore, they usually cause the amount of the premium to be higher.

Single Premium - one payment pays for the entire policy.

Underwriting - The process an insurance company goes through to decide if a person can be insured and at what price.

Waiver of Premium Rider- the insurance company would pay the premiums for a policy owner if a specified event were to occur.  This waiver of premium is an advantage to the policy owner, so there is usually a small additional fee added to the premium.  For example, assume that Sally does her homework and discovers that insurance premiums with no riders cost $200 per month and premiums with a 2-year, disability waiver of premium rider would cost her $209 per month.   The rider states that if she were to become disabled from working at any time within 2 years, the premiums would be paid by the insurance company.  Sally decides to include the rider in her policy.  7 months later, Sally becomes disabled.  The insurance company will now pay the remaining premiums according to the terms of the contract.  Basically, it’s insurance on your insurance policy.  You insure yourself against the risk of not being able to pay the premiums of the insurance policy.

Think about your current family situation: the cars you drive, the activities your children are involved in, and the house you live in.  Now take yourself and your current income out of the equation.  No sum of money can ever replace a cherished relationship, but what would your family face financially?  Would your children still participating in the same activities?  Would your wife/husband still driving the same car?  Would your family still be able to enjoy their home they have been living in? 

Many people are not in a financial situation to maintain their current lifestyle if one of their sources of income abruptly comes to an end.   This is where life insurance comes in.  With a life insurance policy you can make sure your family has the financial resources available if something were to happen to you.

It is most common for the “bread winner,” or the person with the primary source of income, to be insured first.  Imagine a pyramid of insurance needs.  Maslow created his famous hierarchy of needs.  In essence, he said that you wouldn’t want to become a political theologian while neglecting to find enough food and water to survive.  In the life insurance game you wouldn’t want to overlook the fundamental value of the primary bread winner either.
 
Now let’s say you have a spouse who works at home.  This spouse’s job includes taking care of the children, preparing meals, grocery shopping, looking after the home, and other time consuming activities like driving the kids to various places and doing laundry.  Does a work-at-home spouse also have financial value?  Many people miss this key point.  Not only would the loss be emotionally devastating to the family, in many cases it is also financially devastating as well. 

In the weeks following the death of a work-at-home spouse, family and friends will volunteer to care for the children, watch over the household, etc.  Eventually those who have helped will have to go back to their normal lives.  The surviving spouse will then have to find an alternate way to care for the children and work all at the same time.  With the cost of child care, home care, and preschool the surviving spouse may become financially strapped, and unable to provide these cares for the children.  This is why it is also important to consider looking at life insurance for the work-at-home spouse as well. 

The two most basic types of insurance are whole life and term.

The most common benefits to life insurance are:

1. Leave money to your family or friends.  When purchasing life insurance, you designate beneficiaries (the people who will receive money if you pass on).  You can designate 1 or 100 beneficiaries in varying amounts, which provides nice flexibility.
2. You will have a better plan for the future.  A plan is better than no plan.  You can prepare for the future by establishing a system that will address future needs.
3. Provides a vehicle for investment.  More about this topic will be covered later.

The most common disadvantages to life insurance are:

1. It costs money.
2. It can take some time to figure out which plan or policy to go with.  You might not know who to talk to or which company to go with.  Like anything else, it’s easy to put it off. 

Most of us are familiar with the term “insurance”.  We pay premiums to an insurance company; whether it be for our vehicles, our homes, or our health, and in return these companies “insure” us that if anything extreme were to happen, (your house burns down, you get in a car accident, you cut yourself while cooking and need some serious stitches) you would be covered for a certain amount of money so you wouldn’t have to drain your life savings trying to pay for the bills.  Life insurance is similar it is just an insurance policy which is put on your life. 

All of us have a 100% chance of dying.  Eventually, everyone will pass on.  It may not be tomorrow, but ultimately the time will come.  Life insurance is a policy in which you pay premiums into and in return the insurance provider will pay a benefit to whomever you select (your beneficiaries) when you pass on. 

People have life insurance policies for many different reasons.  Some want to insure their families will not be left with any debt they may have incurred over the years, they want to make sure their funeral arrangements will be paid for, and that their kids will be able to go to college and get an education.  Life insurance policies can also be used for investment purposes, and for insuring your family will be taken care of, and maintain their current lifestyle when your wage is no longer available. 

There are two major categories of life insurance: whole life and term.

More on whole life insurance information >

More on term life insurance information >

For example, lets say that Bill, a 35-year-old in good health, selects a 10-year, $100,000, term life insurance policy for a $30 per month.  Bill is diligent in paying his premiums, and at the end of the ten year policy he is still alive.  Bill then ends up with no life insurance benefits.  At this time he has the option to select another term policy, which will often times have a higher premium because Bill is now older and possibly in lesser health, he also has the option to not have life insurance, or go with a whole life insurance policy.

For another example lets take Bill and his same ten year policy and say that Bill dies within that ten year period he is covered.  Bill was still diligent in paying his premiums, therefore his family, or beneficiary will receive $100,000. 

Although you are not guaranteed to die in the term that you have selected in a term life insurance policy, term life insurance still has many benefits:

1. You will have a low premium rate ($30 per month instead of $100 per month for whole life)
2. The policies are very simple and easy to understand
3. As a policy holder, you are able to make decisions.  You will be able to decide the amount of time you wish to be covered, whether it be 10, 20, or 30 years, until the kids are out of college and can support themselves, or until your mortgage is paid off.  The policy holder will also get to decide the amount of coverage they want, whether it be $100,000 or several million dollars.  You need a policy that will will meet you needs and ensure tyour loved ones are cared for when you’re gone. 

Term life insurance is comparable to health insurance.  You are constantly paying a premium for health insurance, but never know if you are going to get sick, injured, or even ever use your policy. You keep that health insurance around knowing it is as a safety net, and if anything severe where to ever happen to you or your family you would rather be safe than sorry.

Term life insurance is just like any other form of insurance in that you are minimizing risk. There is a risk that you could die, so you make regular, relatively small payments to a company so they will bail you out if something major happens. You want insurance to make up for the unknown. If you knew when you were going to have hospital bills, you wouldn’t have health insurance until a few months before. If you knew when you were going to die, you wouldn’t get term life insurance until the month before.

1. What should I know about life insurance if I am a senior citizen?
2. What should I know if I am helping a senior citizen get life insurance?

First, know that life insurance for seniors will always cost more than for a younger person. (more…)