A Guide to Understanding Life Insurance

Understanding Life Insurance v3

If you are concerned about what will happen to your loved ones after you die, you should consider investing in life insurance. However, you shouldn’t do so without becoming educated about what life insurance is and how it works. WRS Insurance Solutions is here to provide a basic rundown of this type of coverage, including who needs it, available types, how much it costs and how to acquire it as affordably as possible.

The Basics

With a life insurance policy, the policyholder pays premiums to an insurance carrier to maintain the policy. If the beneficiary dies while the policy is still in effect, the insurer pays the death benefit – a tax-free sum – to the policyholder’s beneficiaries. The death benefit can then be used to help the beneficiaries, typically relatives, to continue to achieve their financial goals and to meet their obligations despite the absence of the primary breadwinner.

What Does It Cover?

This type of policy covers most causes of death, including from accidents, illnesses or natural causes. It generally won’t pay if the policyholder dies by suicide within the first two years of coverage, if a beneficiary murders the policyholder or if fraudulent information is determined to have been provided on the application for coverage.

Who Needs It?

Considering that one in three families couldn’t meet their day-to-day expenses for more than a month without the primary breadwinner, it’s safe to say that many people need this type of coverage. 

For married people, this coverage provides support for the surviving spouse to cover mutually shared debts. The death benefit can be used however the beneficiary sees fit, so it can be used to pay for funeral costs or to pay for children’s educational needs. 

Even single people can benefit from this type of coverage – especially if they own their own business because they can name their partner as the beneficiary to ensure that the business remains intact following their death.

How Much Coverage is Needed?

All life insurance policies pays out a specified amount upon the death of the policyholder. Premiums will vary depending on the length of the policy and on the ultimate death benefit that will be paid. 

Therefore, to determine how much coverage you need, you should calculate the expenses that will need to be covered in the event of your death. These expenses may include shared debts with a spouse; educational costs for children; keeping a business going, or even for giving money to charity after your death.

Types of Life Insurance

Before investing in this type of coverage, it helps to understand the types of policies that are available. Here’s a quick rundown of the basics:

  • Term – A term policy covers a predetermined number of years; after that point, the policyholder stops paying premiums and coverage ends. This is the most popular type of coverage mostly because it’s the most affordable option. It can be enhanced with various riders, but you get nothing out of it if you outlive the policy.
  • Whole – Also known as permanent coverage, a whole policy involves paying premiums for as long as you live. This type of policy has a cash-value component that may increase in value as you pay your premiums. Ultimately, this component may increase the death benefit that is paid to beneficiaries when you die. Sometimes, the policy may pay dividends on the accumulated cash value. You can withdraw money from the cash-value component or use it as collateral for a loan.
  • Others – Although term and whole are the most popular options, there are a few others worth mentioning. Universal coverage is a form of permanent coverage in which the cash value is tied to a specific stock index that is selected by the insurer. The value can, therefore, decrease, so premiums may rise. Variable coverage is also tied to the market, but the policyholder selects which assets to invest in, and premiums are fixed.

Which Type of Coverage is Right for Me?

For most people, term coverage is sufficient. That’s especially true if you invest money in savings accounts. Term coverage is more affordable but still provides peace of mind. However, if you make the maximum contributions to your retirement accounts, the cash-value component of a whole policy may allow you to grow more of your money and therefore worth it.

How Much Will It Cost?

The amount that you will pay for this type of coverage will depend mostly on how much you need and the risk that you pose to the insurer. For example, if you are in poor health or engage in risky pastimes like skydiving, you will pay higher premiums. 

Premiums are regulated by state governments, so insurers rely on the same actuarial tables. As a result, someone with the same state of health and other characteristics as you should pay close to or the same as you do for coverage.

What is the Contestability Period? 

To minimize fraud, this type of insurance includes a contestability period. For the first two years of coverage, the insurer reserves the right to contest any claim that is made by beneficiaries after you die. 

Should they determine that you misrepresented your health or otherwise lied, the death benefit could be reduced or canceled entirely. After two years, the policy becomes incontestable.

How to Obtain This Type of Coverage

To obtain this type of coverage, you will undergo the following steps:

  1. Complete the application – This is where you provide basic health information, information about your hobbies and how much coverage you need. You will also provide information about primary and contingent beneficiaries – the latter being who receives the death benefit in the event of the death of the primary beneficiary.
  2. Complete a phone interview – During the interview, details from your application will be confirmed and expanded upon.
  3. Undergo a paramedical exam – Unless you aren’t getting much coverage or are in excellent health, you will have to undergo a basic checkup either at home or at a local doctor’s office. Blood and urine may also be collected to test for the use of illicit substances.
  4. Receive the attending physician statement – If you suffer from any serious or chronic illnesses, an attending physician statement will be drafted outlining those conditions and your prognosis.
  5. Wait for underwriting – Next, the insurer will perform underwriting to determine the risk that they assume in insuring you. They may examine your credit history, driving record and information about you in the Medical Information Bureau, which tracks previous applications for this type of insurance. All of this will determine how much your premiums will cost.
  6. Pay your first premium – Finally, you will have to make your first premium payment before your policy officially goes into effect. 

Tips for Saving on Coverage

A few ways to spend as little as possible on this type of coverage include:

  • Get the right amount – Base the amount of your death benefit on actual calculations for what needs to be paid after you die – don’t overextend yourself just to pay for a higher death benefit.
  • Get it early – Buy this type of coverage as early in life as you can. That way, you can lock in affordable rates while you are still young and healthy.
  • Improve your health – If you smoke, quit to avoid paying the dreaded “nicotine rate.” Note that you must be tobacco-free for at least two years to see a reduction in price and for at least five before you will qualify for the best rates.
  • Shop around – Finally, get quotes from as many insurers as you can to pinpoint the best coverage and price for you. The easiest way to do this is by connecting with WRS Insurance Solutions because we offer policies from a wide array of carriers, which makes it easy for you to arrive at the best deal.

Now that you know the basics, you can start looking into actual policies to protect yourself and your loved ones. Visit our website or give us a call to get started today!