Life insurance can be an overwhelming shopping experience for most people. So many different terms and jargon its easy to get confused and it’s hard to admit you don’t understand something. Here is a list of some basic terms you should know to help you have a better understanding of what your dealing with.
When You’re Shopping for Life Insurance
Term life insurance refers to insurance that is purchased for a period of years (the term) which are typically 5, 10, 20, and 30 years. Since the premium remains the same throughout the policy term, the rates for a longer term are higher than rates for a shorter term because of the higher risk
Before term policies expire, most companies will offer a renewal however be sitting down because the pricing is steep and will be based on your new age. Many insurers will also have a conversion option that allows the policyholder to convert the term policy to a permanent policy such as Universal Life or Whole Life without you having to prove you are still healthy. You will, however, pay the rate based on the new type of policy based on your new age.
Term insurance quotes can easily be done online as most independent agents have a “quote engine” on their website. It’s important to note that an online quote must be confirmed with an agent because there are underwriting questions that must be asked and answered before the application can be submitted.
Whole Life Insurance
Whole life is permanent insurance that provides coverage throughout your lifetime. These policies accumulate cash value because the premium you pay is actually more than the cost of insurance during the early years and less than the cost of insurance in the latter years. The insurance company also pays a small amount of interest on the cash value account each month.
Whole life insurance is most attractive because the death benefit is guaranteed for your lifetime as long as you pay your premium, the premium does not change, and you can borrow the cash that accumulates in the policy.
Universal Life Insurance (UL)
Universal life is a type of flexible permanent life insurance that offers lower cost insurance protection (like term) combined with a savings element (like whole life). The money in the savings account is invested by the insurer and credited to the account to allow for building the cash value of the policy.
The main difference between UL and term or whole life insurance is its flexibility. With a UL policy, the premiums and face amount can be changed to accommodate life changes of the policyholder. Also with a UL policy, there is a minimum interest rate established by the insurer, but if the insurance company’s portfolio outperforms the minimum interest rate for the policy, the insurer will apply the excess earnings to the cash value of the policy. UL also allows access to the cash value through loans and partial surrender.
The death benefit is the amount the insurer agrees to pay your beneficiary in the event of your death tax-free.
When You Apply for an Insurance Policy
This is the amount you pay in return for the insurance policy. Typical premium periods are monthly, quarterly, semi-annually, or annually. Your premium will be based on many factors such as your age, your health, the amount of coverage, and your weight and height.
This is a process your insurer will require to determine the rate class you will be assigned. The process typically includes an application containing questions about your health, a medical exam, a blood and urine analysis, and reports from your doctors and any medical facilities you listed on the application.
MIB (Medical Information Bureau)
Most insurers check the MIB database while going through the underwriting process. This database does not contain your medical records, it does, however, provide member insurance companies with information regarding health conditions and lifestyle information.
When You’ve Been Approved for Coverage
Your beneficiary is the person(s) or organization(s) that you assign to receive the death benefit in your policy when you die.
Your contingent beneficiary (alternate) receives the death benefit when your beneficiary does not survive your death. For example, you might name your spouse as beneficiary and then your children as contingent beneficiaries.
A savings account found in Whole Life and Universal Life policies that earn interest and is available to the policyholder through policy loans or surrender.
Riders are options that are available to purchase and add to your life insurance. Since they are an extension of coverage, most all riders require additional premium.
A policy loan is when a policyholder borrows from their insurer and uses the cash value in their policy as collateral. Policy loans may or may not have to be repaid, but in all cases, the unpaid balance of the loan will be deducted from the death benefit if you die with an unpaid balance.
When a policyholder surrenders a life insurance policy, they are exchanging all their rights under the policy for the accumulated cash value, minus any surrender charges. Only a whole life or universal life policy can be surrendered.
Find A Life Insurance Broker & Get Started!
It is really important for you to understand what kind of policy you are getting and that it fits your needs. Starting with these definitions you can ask the right questions to figure out what you need. Find a life insurance broker that will ask about your needs first before making a recommendation. Don’t take anything if you are unsure if its right for you or seems overly complicated. A good life insurance broker will explain everything clearly to help you make the right decision.
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