This is the first article in a series of three written to address the life insurance questions of familial age groups. This first installment addresses the unique needs of young families with dependents. The second installment will address the needs of middle aged couples and families. And, the third installment addresses the concerns of older couples and retirees.
In is simplest form, life insurance transfers the risk of death to an insurer. Usually, the purpose of life Insurance is to provide for those you leave behind when you die. Adequate life insurance coverage is especially important for young families. The loss of a provider’s income can be devastating to a young person with one or more children. This situation is especially tragic when you consider how inexpensive and easy it is for young healthy people to secure an appropriate death benefit.
How much life insurance do we need?
For young wage earners, determining the right death benefit usually consists of determining how much capital will be needed to fund the future needs of your dependents. The least expensive form of insurance, and often the most appropriate for this purpose, is term life Insurance.
If you are considering purchasing a term life insurance policy to replace your income should you die and untimely death, here’s a simple process to estimate the amount of coverage you may need:
The above process should give you a pretty good idea of how much death benefit you need and the term you need to specify. You can fine tune this figure by adding 5 or 6 percent per year to cover inflation.
What kind of life insurance should we buy?
Term Life Insurance is relatively easy to understand. In return for your premium, the life insurance company promises to pay a fixed sum to your designated beneficiary should you die within the term of the policy. The "term" is the period of the insurance contract, or policy. At the end of the term the policy expires. Often, term policies will carry a "conversion" option. This rider or option allows the consumer to convert the term policy to permanent, or cash value, insurance within a specified period of time. This can be a valuable provision should you become uninsurable during the term of the policy. Numerous other riders and features are available from the many providers of term life Insurance.
When considering riders, keep in mind why you are buying the policy in the first place. And, be careful not to double insure. You may already be covered for disability. If so, adding a disability rider doesn’t make much sense. Return of Premium "ROP" riders are also very popular with insurance companies and agents alike. They serve to pump the premium payment. But, do the math and carefully consider whether or not you want to add this feature. You may want to check with your financial adviser before committing to riders.
In addition to term life, cash value life insurance products have been developed to permit the consumer to secure permanent insurance and accumulate savings for variety of purposes on a tax deferred basis. These include: Whole Life, Universal Life and Variable Life products.
Permanent life insurance is more expensive than term for the same death benefit. Some agents like to characterize term life as "renting" and cash value products as "owning." The comparison is drawn between renting and owning your home. This disingenuous appeal to the young person’s preference for "ownership" is designed to serve the needs of the agent, not the client. Once the client buys off on the buy versus own pitch, it is relatively easy to promote an expensive cash value product over less expensive term life. This usually results in a benefit amount compromise that meets the client’s need in part and the agent’s desire for a big commission more fully. If your purpose is to replace a primary wage earner’s income, while children are in the home, term insurance is likely the most appropriate product and much less expensive than a cash value policy.
Permanent life insurance products accumulate cash value over time. One or more of these products may be appropriate when the purpose of the insurance is to accumulate savings and provide a death benefit for heirs. It’s important to compare the two primary elements of cash value products to financial alternatives when considering a permanent life insurance purchase. These elements are the characteristics of the "death benefit" and the projected "cash value" accumulation. The life insurance illustration will provide the information you need. Just make sure you understand everything in the illustration before buying the product. If you do make a purchase, you still have 10 days after you receive the policy to run it past your financial adviser. If, for any reason, you decided not to keep the policy within ten days of receipt you can cancel without penalty. Its call your "free look, and, it’s the law.
How do I get a quote?
If you do a quick Google or Yahoo search on "life insurance quote" you’ll be greeted with a huge number of hits. Some of these hits will come from insurance companies. Insurance carrier’s web sites promote their products. You won’t learn much about competitive products from a carrier’s web site. You’ll also get many hits from quote companies like QuoteAuction.com NetQuote.com and Insurme.com. Be careful here. You’ll be asked to enter your information to get a free quote. But, you may get more than you bargained for. These companies sell your information to as many as 6 agents. So, you will likely get 5 or 6 phone calls per quote source. You’ll also get dozens of emails.
Many agents buy leads from these sources in order to keep a healthy flow of prospects. But, leads purchased from these sources are always expensive and often of little or no value. As a result, some agents have begun making their quote engines available to clients directly. The author of this article makes his health insurance and life insurance source available to consumers at
www.selfserveinsurance.net .The best you can hope for online is to get a rough idea of what insurance may cost. If you are in excellent health you can specify Preferred or Preferred Best in the risk rating box. But, there’s no guarantee that the carrier’s underwriting department will rate you per your guess, or per your agent’s guess for that matter. Eventually, you need to specify a carrier and file an application. Then the underwriting process begins.
If you pay an initial two months premium with the application the agent should provide you with a signed "conditional receipt." The conditional receipt binds the insurance company if the risk is approved as applied for, and subject to a myriad of other conditions on the receipt. If you are totally without life insurance it may be a good idea to pay the up front premium and get a conditional receipt. This will at least provide a measure of comfort while the application is in underwriting.
What is involved in the underwriting process?
If you are young, of average stature, and in good health the underwriting process will be quick and painless. Depending on the amount of insurance you are seeking, you may be asked to meet with a paramedic. The paramedic will fill out a questionnaire, measure your weight and take one or more body fluid samples. This process is painless and usually takes only about 20 minutes. Often it can be taken care of in your home or office.
If you indicate a medical condition on your application or to the paramedic, the underwriter may request medical records from your physician. In any event he will certainly request your records from the Medical Information Bureau (MIB). Not to be confused with "Men in Black," the MIB is a service organization that collects medical data on life and health insurance applicants for insurance companies. Even if you do miss something in your statement to the paramedic, chances are the MIB will make the underwriter aware of your condition. So, don’t fudge. Tell the whole truth regarding any medical condition you may have up front.
Usually, the underwriter will complete his job within a few weeks. The policy will either be issued at the risk rating indicated on the application or the underwriter may issue an offer to insure at another rating. If the underwriter offers to issue the policy at an unacceptable rating you always have the alternative of applying with another carrier. A good independent agent will likely already have one or more alternatives for you to consider.
Chartered Benefits Consultant
Date: 07/25/2006
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