Life Insurance – Having the Right Coverage at the Right Time

By Jamie Nielsen, Jr.

cardboard cut-outs of a family, home and automobile

Death is an uncomfortable discussion topic, especially when it comes to talking about your death or the death of someone you love. However, death is one of the few guarantees in life. Life insurance helps protect your loved ones when it impacts your family.

Not all life insurance is the same. Your need for life insurance depends on your personal life goals and financial obligations. As your life circumstances change, your life insurance coverage will likely need to change as well.

Types of Life Insurance

There are two major types of life insurance – term and whole life.

Term Life Insurance

Term life insurance is the simplest form of life insurance. It pays out only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions. With term life insurance, the initial cost of insurance is lower, but premiums increase as you age. Term life policies are most often purchased by individuals to financially protect their spouse and children if the policyholder dies during their working years. Death benefits for term life policies are paid out in a lump sum, as opposed to regular installments. There are two basic types of term life insurance policies:

  • Level term means that the death benefit stays the same throughout the duration of the policy.
  • Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.

In 2003, 97% of the term life insurance bought was level term.

Life insurance products for groups are different from life insurance sold to individuals. Group life insurance is a term product that does not appreciate in cash value. Group life insurance is usually provided by an employer covering you for the duration of your employment, and it may end when you leave employment. The limits are capped depending on what the employer allows, and you may not have to participate in a medical exam.

Whole Life Insurance

Whole life insurance, also referred to as permanent life insurance, pays a death benefit whenever you die—even if you live to be 100. Whole life insurance policies accumulate cash value over time, come with a fixed rate, and require premiums to be paid for as long as the insured live. Because of this, the premiums are generally higher than term life policy premiums. Whole life plans may accumulate as tax-deferred over time and can be used as an estate planning tool if you have wealth that you would like to preserve and eventually transfer to your beneficiaries. There are three major types of whole life or permanent life insurance:

  • Traditional whole life is a policy where both the death benefit and the premium are designed to stay the same throughout the life of the policy.
  • Universal life allows policyholders to adjust premium payments or coverage amounts throughout their lifetime rather than having to lock into a fixed rate for life.
  • Variable universal life allows the cash value of the policy to function like a mutual fund.

With traditional whole life policies, the insurance company could charge a premium that increases each year, but that would make it hard for most people to afford life insurance at advanced ages. Instead, the company keeps the premium level by charging a premium that, in the early years, is higher than what is needed to pay claims, invests that money, and then uses it to supplement the level premium to help pay the cost of life insurance for older people. By law, when these overpayments reach a certain amount, they must be available to the policyholder as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy.

Underwriting for Life Insurance

All life insurance policies have some form of underwriting and the type you choose will determine the extent. For example, for a whole life policy, you will likely have to undergo full underwriting, a medical exam, and a credit check, and your doctors will need to provide your full medical records. On the other end of the spectrum, for group insurance, all you may need is to answer a few questions and sign paperwork.

New Jersey Life Insurance Agents

Having a comprehensive life insurance policy can help provide for your family when you die but choosing a plan can be overwhelming and emotional. The experts at Hanson & Ryan can help you understand your options and choose the policy that is right for you and your family. Please contact us today to help.