One of the biggest concerns of parents everywhere is what would happen to their children and families if they should die unexpectedly, leaving the surviving parent or guardian with mounting financial obligations and no way to meet them. Without proper planning and foresight, the consequences of losing the main income earner could be catastrophic. In a matter of months or even weeks, the surviving family would lose their home, their cars, and anything else that was bought using credit cards or loans.
Life insurance is the most common way for individuals to insure that when they die their family is able to continue living their lives as comfortable as they always have.
Life insurance provides security to the grieving family, giving them one less thing to think about during such trying times.
Adequate life insurance will not only replace lost income, but will also pay any funeral expenses, pay taxes, and even ensure that favorite charities can continue to count on support even after the contributor’s demise.
Shopping for and purchasing Life Insurance can be just daunting.
Although every Life Insurance policy pays the beneficiaries a cash benefit upon the death of the policyholder, that is just about all that various individual policies have in common.
Since every family has different financial circumstances, they will also require different options in their policies.
To give you an idea of how insurance agents determine which policy is the best fit for each individual, we interviewed a Life Insurance Agent from a leading insurance company. Although the answers given here come from a single agent, most other agents follow identical industry standards when deciding which policy is the best for which individual
Q: First let’s start with the basics. What are the main types of Life Insurance policies?
A: There are basically two major types of Life Insurance polices. These are Whole Life and Term Policies. Most people, when asked, will know that there two types. However, saying you would like to purchase a Whole Life policy would be like going to an Auto Dealer and stating that you want to buy a red car.
There are literally dozens of other choices to be made before you can get your red car.
Life Insurance is the same way. Before deciding on a policy, the agent needs to interview you for over an hour before he can even begin to narrow down the choices.
Q: What are the differences between the two major types and which is best for me?
A;The first type is Term Life Insurance. Term insurance can cover anywhere from 1 to 30 years usually in five year increments.
These plans are designed to pay a benefit if you die during the term the insurance is in force. For example, if you purchase 20 year term insurance, and you die within that twenty years, your beneficiaries will collect the benefit.
The disadvantage to this plan is that if you don’t die within the twenty year term, you receive no death benefit and you receive no part of the premium you paid. The advantage is that Term insurance premiums are usually lower and the death benefit is usually higher than any other type of policy.
The second type of plan is called Whole Life. This type of policy covers you until you die. Also, this policy acts as a type of savings account. Part of your monthly premium can be withdrawn, just like a savings account. The advantage of this type of plan is that the insurance doesn’t expire. It is in force until you die. The savings aspect of Whole Life is also an attractive benefit.
The premiums for this type of plan are much higher for the same amount of coverage in a Term life plan.
Those are the two main types of policies but as we discussed earlier, there are many other subtypes of policies that have features drawn from both types of insurance. Some examples are Universal whole life, variable life and variable/universal life. Even these have subtypes.
Q: You mentioned that for the same benefit, different plans have different premiums. How do you decide the rate for individual plans.
A: The premium is determined by which type of insurance you choose. However, a much larger influence on your monthly premium rate is which risk category the policyholder falls.
People are unique. Their risk factors, such as age, health, habits, and others are also unique to each individual.
Obviously, the lower the risk you are perceived to be the lower your insurance rate will be. For example, a 25 year old wanting to buy 20 year term life insurance will be quoted a much lower rate than a 60 year old man wanting to purchase the same policy.
Generally there are five insurance rate categories.
The insurance rate your agent quotes you will depend on which category you fit. Each insurance company may have slight differences but the categories are generally as follows:
Preferred Plus Rate-this is the best category with the least risk and therefore, the lowest premiums.
Preferred Term Rate-this is the next best category. Most policyholders fall into this category.
Standard Term Life and Substandard Term Life are the last two categories. These two generally have the largest premiums. The Substandard category includes people that have serious health problems. Additional charges are usually added to cover this increased risk.
Q; Other than the factors we discussed, are there any other factors that influence how much you will pay for your health insurance.
A: One of the easiest ways to lower your monthly premium is to have one Insurance company and one agent handle all of your insurance needs.
Almost every insurance company will give you a discount on your life insurance if you also purchase your automobile, homeowners and any other insurance from them. Depending on your insurance rates, this could add up to a substantial amount of savings if they give you a 10 or even 15 percent discount on your entire insurance bill.
Q: How difficult is it to receive your insurance settlement upon the death of the policyholder?
A. Collecting your settlement is a pretty straightforward process but to make sure the process goes smoothly, there are a few steps to take in advance:
Make sure the policyholder and the beneficiaries know where the actual policy is kept, safety deposit box, file cabinet, etc..
Make sure everyone is aware of how to cash in the policy
Make sure the process is thoroughly familiar to everyone BEFORE the policyholder dies. Losing a loved one is bad enough without the added stress of having to deal with financial affairs.
One additional type of insurance that is designed to pay out after the holder death is Credit Life Insurance. If you’ve ever taken out a loan you were probably offered credit insurance. Credit insurance is designed to either continue payments until the policy holder is again able to resume regular payments or to pay off the entire loan.
Credit Life Insurance is designed to pay off the entire loan in the event of the policy holders death. The difference between regular life insurance and credit insurance is that the credit insurance is paid directly to the finance company or bank to satisy the holders debt.
Finally, another type of insurance that has been in the news lately is called Universal Health Care. Many states already provide insurance for low or no-income families. The Federal Government has been struggling for years to develop an insurance program to cover people in the whole country.
California like all States, has millions of uninsured and under insured residents. To help some of the most vulnerable of those received quality health care, California formed the Managed Risk Medical Insurance Board (MRMIB).
The MRMIB administers free or low-cost insurance plans to qualified California residents. The primary plans include Access for Infants and Mothers (AIM), Healthy Families Program (HFP), and the Major Risk Medical Insurance Program (MRMIP).
Both the AIM and the HFP plans have websites that contain information about each plan.
The Insurance Industry is a multi-billion dollar industry. There is an insurance to cover every possible contingency. Life insurance is and will always be an important part of the financial planning for families everywhere.