Life Insurance

  • How to Select Life Insurance

    When shopping around for life insurance coverage for you and your family, it’s important to ask yourself the right questions. The decision of which type of insurance policy you choose is entirely dependent on your personal financial and family situation.

    Life insurance can help to offset the loss of income (today and for one’s future retirement income goals) while helping those who are left behind from being forced to deal with tough economic decisions. Life insurance can also be utilized for advanced estate planning including asset transfer, tax planning, small business goals, asset protection and even for long term care coverage with added riders.

    It is important to note that many people may require more life insurance as their family grows and may need less life insurance as they age and have increased their savings over time.  The following four considerations should help you to better align your life insurance goals with your financial plan and personal circumstances.

    1 How Much Life Insurance Do I Need?

    While you may be tempted to buy the most extensive policy which you can afford, the basic rule of thumb is to buy at least “10 times your annual salary.” This is a good starting point, but for parents who have younger children, it is essential to consider the costs associated with education. Some suggest an additional $100,000 of coverage for each child. Other considerations such as outstanding debt (such as a mortgage) which you may want to immediately be paid off- need to be addressed as well. 

    2 What Are the Different Types of Life Insurance Policies? 

    The most popular options for life insurance are term life, whole life, universal life, and variable life policies. In simple terms, a “term” policy is designed to cover the insured for a specified period of time, while “permanent’ policies are designed to last a lifetime with some versions helping to build up your savings.

    • Term life insurance coverage lasts for a certain number of years and then ends. These types of policies have the lowest premiums but offer limited protection and the fewest number of options. Many term life insurance policies let you renew policies (after the term ends) but at a higher premium. Some term policies may have provisions to ‘convert’ to permanent coverage
    • Whole life insurance requires you to pay the same amount in premiums for a certain number of years for a fixed amount of coverage. Whole life policies cash accounts are guaranteed to grow based on insurance company calculations. They usually offer the option for a fixed death benefit or an increasing benefit (paid up life) based on the value of the policy at the time of passing. Once your policy is paid off, any death benefits are secured. This type of policy places part of your premiums in a tax-deferred saving plan which you can borrow against. Whole life provides little flexibility with funding, investing or adjusting the death benefit.
    • Universal life insurance allows the most flexibility, since it will enable you to increase or decrease the amount of your coverage, along with modifying premiums and investment options. With universal life policies, cash grows in tune with current interest rates or invested against a crediting mechanism. In an indexed universal life (IUL) product, cash savings can be invested against one or multiple provided indices typically with a “cap” rate to limit upside potential but also with a guarantee of principal.

    Cash value builds up in your permanent life insurance policy when your premiums are split up into three pools: one portion for the death benefit, one portion for the insurer’s costs and profits, and one for the cash value.  Permanent policies usually have a level premium, in which money doled out to cash decreases over time, and money paid to insurance increases, in tune with the higher cost of insuring you as you age.

    Once you have accumulated a sizeable cash value, you can use these funds to: (1) Pay your policy premium (goal of self-funding premium in later years) (2) Take out a loan at a lower rate than banks offer (3) Create an investment portfolio that maintains and accumulates wealth or (4) Supplement retirement income (design for tax-free withdrawals)

    3 Who Should My Beneficiaries Be? 

    Your choice of the primary beneficiary for your policy is a critical decision to make. Usually, people choose a spouse or significant other, but you may choose anyone to make your primary beneficiary. You can even assign a charity or a trust as the primary beneficiary. Besides a primary beneficiary, make sure to designate a contingent beneficiary if your primary beneficiary passes first.

    4 What Other Types of Life Insurance Are Available?

    Guaranteed issue life insurance is an option for people who only wish to avoid having your loved ones pay for your funeral and minor outstanding debt. This type of insurance pays out a small sum, typically under $30,000, but does not require a medical check. Accidental death insurance is an option for those who want to ensure that in the event of an untimely death due to an accident, their loved ones will have the money they need. This type of life insurance will not pay out if a person dies from natural causes.

    Hybrid Life Insurance adds a long-term care “rider” to a permanent life insurance policy (whole life or universal life products, not term life).

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    The Application Process

    Below we’re discussing what you need to complete the application, what your medical examination might include and what to do if you don’t pass the health requirements. As you begin researching, your financial advisor or insurance agent can help you decide which policy best suits your needs and budget. In the meantime, keep reading to learn more about securing a life insurance policy.

    If you could just pick a policy and pay the premium, buying life insurance would be simple.

    Unfortunately, there are a few more steps to the process. To start, you’ll want to choose between permanent and term life insurance. A permanent life insurance policy covers you for your entire life, while term life insurance covers you for a set period of time. Additional steps and considerations include:

    • Calculating how much coverage is needed (based on spouse’s earning potential, the age of your children, current debt levels, monthly expenses and more).
    • How to pay for the policy (annually, semi-annually, quarterly or monthly).
    • Other life insurance policies you may already have. If you already have life insurance or are applying for more than one policy, this may cause the insurer to question why you need additional coverage.
    • Your annual income
    • Net worth, including assets such as real estate, stocks and cash assets. 

    Medical Information

    Even though you undergo a medical exam as part of the application process, you should still expect medical questions on the application. These questions may include information on your:

    • Height, Weight, Date of birth, Lifestyle habits and any “preexisting” medical conditions.

    If you smoke, drink or have other lifestyle habits that the insurer considers a risk, it may impact your eligibility for life insurance or the price you pay for your policy.

    What Can I Expect During the Medical Exam?

    The medical exam for each insurer may vary slightly. However, you can expect to undergo an in-person medical exam at a location approved by the insurance company. For some, this is the most uncomfortable part of the process.

    During the exam, the medical professional guides you through the requirements, which may include:

    • Documentation of your medical history (including surgeries, prescription medications and other details)
    • Details about your family’s medical history
    • Current blood pressure
    • Current heartbeat characteristics
    • Height and weight
    • Blood and urine samples
    • Questionnaire or interview about lifestyle habits such as drinking, exercise, smoking, recreational drug use, travel and certain risky hobbies

    There may be other tests depending on what policy you choose, your age or the amount of coverage needed. These could include a chest x-ray, an EKG or a treadmill (stress) test.

    What If You Are Not Approved?

    Your options after an insurer denies your application depend on the reasons for the denial. If you were turned down due to health risks, you can seek a policy that does not require a medical exam. These policies, however, can cost more money. You can also seek life insurance through your employer during an open enrollment period. These policies often don’t require a medical exam. Additionally, you can wait, improve health conditions under your control and try again later down the road.

    Your insurance agent can help you choose a policy that works best for you and helps you leave a legacy behind for your beneficiaries. In the meantime, consider making healthy lifestyle choices that make it possible for you to support your dependents for a long time to come. This will help you keep your premiums down and let you get as much life insurance as your budget allows.

    Questions: Call Jon Ulin, CFP® CEO (561) 210-7887 today to learn more and to set up a no-obligation consultation.

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