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Life Insurance - Common Questions

Who needs Life Insurance?

Most of us need life insurance. There are a lot of reasons to have it. It can do a number of different things to protect your family or business.

FAMILY:

At the most basic level, you need life insurance to cover outstanding debts and to provide enough income to provide for your families needs after your death.

The primary thing an insurance policy should do is wipe out debt. You don't want your family to have to worry about large debts like a mortgage, automobile loans, credit cards, and other such debt when your gone.

The second thing is you have to decide how your family will survive financially when you are no longer there to provide. Such as:

There are more things to consider, but you get the idea. Your death will impact the lives around you. How do you want to ease the burden.

BUSINESS:

There are a lot of reasons to also get life insurance to protect your business. To site a few examples:

The reasons are many. The process is very similar to getting a personal life insurance policy. It protects those left behind and pays off debt.

What's the best way to get quotes for life insurance?

To do it properly you need to put some effort into getting quotes. I would suggest talking to a life insurance agent that has as many of the companies I've listed here: Carrier Websites

Ask them for a list of the companies they are quoting for you. Some agents will try and tell you they are quoting all the companies on the planet when they only have a few that they sell for.

Then go to your captive companies like State Farm, American Family, etc. if you would like to. They are one company and will only give you one quote and set of options.

You will receive more options and a more experienced agent when you go through a independent (on average). They are more specialized and have more product knowledge than a captive agent will.

If you decide to see if you can get a quote online, here are a few links to good websites that will provide you with multiple agents and quotes:

Note: You will not be able to get Permanent Insurance (i.e., Whole Life or Universal Life) quotes on the internet. They are to complex and there are to many variables for it to be done accurately. If you want to get quote for permanent insurance online this is what I suggest: Fill out a form for a term quote and when the agent contacts you tell them you are also interested in a permanent quote. 99% of the agents will have no problem with that.

What is the difference between whole life and universal life insurance?

Whole Life Insurance and Universal Life Insurance are essentially the same thing at the root. They are both permanent. They provide the ability to build a cash value. You can borrow against them or take out loans if you have money in the policy. The cash value grows tax free.

When you get an illustration for either you essentially have just that, an illustration. It is not guaranteed. In Whole Life there can be variations depending on the dividends received over the life of the policy. In Universal Life there can be variations depending on the interest rate stability.

From a death benefit standpoint, in a Universal Life policy you can have a guaranteed premium with a guaranteed death benefit. As long as you pay the guaranteed premium the insurance will not lapse. The only risk you bare is the cash value not the benefit. Universal Life is less expensive than Whole Life. You can still put the difference (what you save having the UL policy rather than a whole life) into the Universal Life and have that money grow, tax free in the account. You can always put in more up to the MEC limit. (A Modified Endowment Contract (MEC) is a life insurance policy that has had cumulative premium payments made during the first seven years that exceed a limit defined in the tax code... to avoid the tax consequences you need to fund your policy beneath this limit)

With a Whole Life policy, everything is locked in. You'll pay the same premium for the rest of your life. Your face amount cannot change. The interest rate will remain level. This explains the high premiums. The insurance company takes on a lot of risk. No matter how they are doing financially, they must honor your policy.

Unlike a Whole Life policy, the premiums in a Universal Life are flexible as well as the face amount. So as your needs change throughout your life, so too can your policy change to meet your needs.

It is my opinion that a Universal Life policy is the best road to take in most situations. It offers much more flexibility and is more cost effective. We could go into great actuarial detail with these policies but it will not bring clarity. We'll stick to the basics here.

Like any investment there is risk but it can be minimized by professional guidance. By placing yourself with a company that has a solid track record, a high financial rating, and a philosophy that supports the policyholders’ objectives you can secure your families future.

What type's of life insurance are there?

There are 3 main types:

There are variations on these themes. But most will be related to these 3 areas.

How do I know how much I need?

There are a lot of experts that suggest everyone should have at least 5-8 times your annual salary in life insurance. It's a good place to start, but it's a little more complicated than that.

You need to weigh it against your assets, the percentage of income you currently provide for your family, your future expected earnings, tax consequences, education... everyone's life is different. It's easy for an agent to want to simplify the process, but a good agent will look at a families situation and ask the right questions and offer suggestions.

Use the chart I have created here: Assessing Your Life Insurance Needs

It will help you break down your needs and provide guidance in deciding how much life insurance is right for your situation.