Primer on Life Insurance

Written By Katie Martens

In this article we will cover:

  • Who needs life insurance and when

  • What types of life insurance are available

  • How to compare policies & analyze insurance companies/agents

  • How to apply for life insurance

The Four W’s (and One H) of Life Insurance

Who

Who should buy life insurance? Usually, anyone who has dependents who are minors, AKA parents. But, if your child is a minor and also has special needs, consult a legal expert to determine whether life insurance is right for your situation. Generally, the cost of life insurance goes up as you age, so if you’re a parent in your 30s, it would probably be an ideal time to get life insurance.

Who benefits from life insurance? Whoever is named as the beneficiary on the life insurance policy. For example, say you have followed the suggested steps in this article and you’ve found an insurance agent and the type of life insurance you’d like to purchase. Your agent, in setting up the policy, will ask for the names of your beneficiaries. You can name people in order of priority, or name only one person. If you continue making your payments on your life insurance policy, and then you die, whoever you named on that policy receives the money from your life insurance policy.

What

Life insurance is a way for you to provide financial support for those who depend on your income, as well as help your loved ones pay for your debts after you’re gone. Life insurance can usually be broken down into two types:

  1. Term - provides coverage over a specific time period

  2. Permanent - provides coverage for your entire life

Here are the hallmarks of term life insurance and whole life insurance:

Where

Now that you know what life insurance is, and who can benefit from it, where can you get it? Sometimes, employers provide life insurance coverage as one of the benefits of working there. Typically, you have to go through an insurance agent to get life insurance. And if you’re anything like me, you receive a lot of mailers from local insurance agents. Think about these things when looking for where to take your life insurance business:

  • Competitive rates

  • Coverage options that fit your insurance needs

  • Positive customer service experience

Just as my dad is never satisfied getting one estimate from one mechanic for car repairs, neither should you be satisfied with one life insurance quote from one agent or company. Get multiple quotes in order to see what you would pay under each company’s plan, and the differences in coverage.

Look for a company that has strong financial ratings in the A range from independent rating agencies such as A.M. Best, Moody’s and Standard & Poor’s. Insurance companies provide ratings on their websites. You can also ask your insurance agent to provide companies’ ratings.

Generally, word of mouth among your friends and family can be the source of some of your best contacts to find the right agent or company for you. Those companies or agents have earned the trust of someone you know, and if that friend or family member is trustworthy (let’s be honest, we have some friends who are endodontists who we wouldn’t trust to do our own root canals), you have good reason to believe that agent or company would work for you, too.

When

When should I get life insurance? As frustrating as this answer is, it depends on your situation. My dad took out term life insurance while my siblings and I were minors, and as soon as my youngest sibling turned 18, his term policy ended. My mom stayed home to raise us, so if my dad had died suddenly, we wouldn’t have had a way to pay the mortgage or pay the bills as we would with dad’s income.

My husband has life insurance that costs about $29 per month. The lump sum, if he dies, is meant to cover the remaining balance of the house so that the kids and I don’t have to worry about paying a mortgage after he’s gone. Our financial advisor still pesters me to take out my own life insurance policy. I used to get away with not getting one because I don’t like needles and didn’t want to submit to the blood draw that this policy required in order to provide a quote. Recently, my financial advisor called to tell me there’s a new policy that doesn’t require a blood draw. Good, grand, wonderful. I still haven’t committed to doing it, but that leads me to two questions I think are important for everyone thinking about life insurance:

  1. How much can I afford to pay on the premiums?

  2. What am I covering for my loved ones if I passed away unexpectedly?

Because I am a small business owner and have no reliable income each month, and because I’m the primary parent for our 2 small kids, the replacement income from a life insurance policy would probably go towards the cost of before and after care for our kids and towards their education costs.

I once had a client that believed his best estate planning vehicle would be through life insurance policies for his wife and baby. He had something like 9 different life insurance policies. He did not remain my client for long once I expressed my disagreement with his plans. Remember that life insurance policies are one tool of many to use in creating a good estate plan for yourself.

How

How is life insurance calculated? Generally, no matter where you go, agents will want to know the following to calculate how much life insurance you’ll need:

  • Your age

  • Your long term financial obligations

  • Your assets

For example, say you are a 35-year-old with a spouse and 2 kids. If you anticipate paying for your children’s college, that will get added into your long term financial obligations. If you and your spouse have a mortgage, that gets added into your long term financial obligations. Once all of those obligations are totaled, the agent will subtract any of your assets, like a 401K or an IRA. If there is an amount leftover between those two numbers, life insurance is meant to fill that gap.

So remember:

Financial obligations - assets = gap that life insurance fills

Another method for thinking about how to calculate the amount of life insurance you need is to use the “L-I-F-E” guide:

  • Liabilities (mortgage, car loans, credit cards, student loan debt)

  • Income needs for your family to replace your future salary and cover living expenses, savings needs and an emergency fund

  • Final expenses

  • Education expenses for your children or grandchildren

How do I apply for life insurance? Once you find the company or agent that feels like the right fit for your needs, you’ll have to fill out an application. These applications usually require your basic personal information, your social security number, a driver’s license, and an Attending Physician Statement to help the insurance company verify your medical history. Be aware that you may be asked questions about your lifestyle, like if you’re a smoker, during the application process. Also, many insurance companies require applicants to get a physical exam by the company’s medical examiner before approving you for coverage.

Key takeaways:

  • Who: anyone who has kids, usually

  • What: life insurance is usually broken down into 2 categories, whole and term.

  • Where: find life insurance with an agent you’d trust

  • When: obtaining a life insurance policy usually depends on your age, the age of your dependents, and when you can afford it

  • How: how to apply and how life insurance coverages are calculated