There are four parts to a life insurance contract: the life insurance company, the policy owner, the individual(s) being insured (often the same as the owner), and the beneficiary – often a family member, business or business partner, or other legal entity like a trust.
The life insurance company agrees to ‘insure’ or pay a death benefit to the policy’s beneficiary assuming the policy is ‘in force’ or active at the time of the insured’s death. The policy owner is responsible for paying premiums in order to maintain the policy in force.
The purposes of life insurance
The most common purpose of life insurance is to protect the finances of one’s family or friends in case of a wage-earner’s death, but that’s not its only use.
Life insurance can be used:
- To hire childcare to replace a home-maker’s contribution
- For estate protection
- For mortgage protection
- To fund a retirement
- To protect a business against the loss of a key employee
- As an employment benefit
Life insurance can be divided into three basic categories: term life insurance, whole life insurance, and universal life insurance.
Term Life Insurance – Provides coverage for a fixed duration of time (e.g. 20 years). The policy only pays a death benefit if the insured individual dies before the policy expires.
Whole Life Insurance – These policies guarantee coverage up to a certain age (usually age 95 or 100) and provide cash value, which means that they can be liquidated for cash in the event the insurance is no longer needed.
Universal Life Insurance – These policies can be maintained indefinitely and are often referred to or defined as “Lifetime” coverage. These policies carry minimal cash value and allow for flexible payments of any amount at any time (up to certain government-stipulated maximums).
Choosing the right life insurance policy
Two questions present difficulty for most life insurance buyers:
- How big of a death benefit do I need?
- How long do I need coverage?
The simplest answers to these questions can be provided by determining “How much income or revenue your family or business would need on an annual basis to maintain their current financial well-being?” and “How long your family or business needs the protection?”
- Most people need a death benefit at least 8 to 12 times their annual income.
- Wage-earners need coverage for at least as long as they expect to be gainfully employed.
- Homemakers need coverage for at least as long as their dependents (children, invalids, etc.), who need care, will be in the home.
The amount of coverage you select should be equal to the financial loss which the death of the insured will impose upon you (or your beneficiary) and many Industry experts recommend that you purchase 8 to 12 times your current annual income.
However, this rule of thumb does not account for current assets or any special needs you and your family may have. Additionally, your age and income have a direct bearing on your life insurance needs. Generally, the younger you are, the more insurance you need to replace a loss of lifetime income for your beneficiary.
We recommend you consider these important factors in estimating your family’s financial needs in the event of your death.
- The amount of yearly income needed
- The number of years this income will be needed
- The average annual percentage of interest your investments will earn
- Future college education expenses
- Anticipated funeral and burial expenses
- Retirement needs
- Special needs for children or other family member(s)
The Application Process
Buying life insurance typically takes 4-6 weeks. Why? Because each insurance company has a process they use to determine if, and at what health rating they are willing to offer coverage to an applicant. Here are the steps a life insurance buyer typically undertakes to obtain life insurance:
- Compare life insurance quotes from various insurers. Your rates are only estimates based on your age, sex, and basic medical information.
- Complete an application. The application is completed via a phone interview process that will be gathering any additional information needed. The completed application is then sent to you for review and signature.
- Undergo a medical exam. The insurance company collects data about your personal health by sending a medical examiner to your home or office, free of charge.
- Wait for underwriting. For most applications, the insurer requires several weeks to collect and evaluate data from your physician and perhaps other sources of information.
- Accept an offer. If the insurer is willing to accept your application, they will send you an offer. To put your contract in force, sign the offer and return it with your first premium payment. Until you do so, there is never an obligation to buy.
Most life insurance companies require a medical exam as part of the life insurance application process. The medical exam can be completed at your home or any other convenient location of your choice and typically 15-30 minutes to complete. Exams are conducted by a licensed paramedical or medical doctor and generally require a blood and urine specimen, blood pressure readings, height and weight measurement, and a series of questions regarding your medical history.
As an independent company, we can explore many carriers for our clients dependent on their needs. Some of our preferred partners are listed below. If you would like for us to explore other carriers, please ask.