Life Insurance Guide

I am a professional licensed insurance agent in the state of Missouri. Many of my new clients are thankful that I take as much time as needed to explain what life insurance is, and what different types of policies are available to them. I wanted to post this as it may help in finding the right kind of life insurance policy for you and your family. I hope you can find this information useful.

I believe that owning life insurance is extremely important, and it is not unbiblical to own life insurance, or any type of insurance. But this is not the intent of my posting this, mainly I want to give you sort of a buyers guide. The Bible teaches that we should take care of our family, and that will continue to happen for anyone who dies and has life insurance.

There are four basic types of life insurance policies. Three of them are of most importance.

Accident Only This is a life insurance policy that pays only if you die by an accidental cause. Such as a car accident. This will not pay in the event of a natural death, such as heart attack, stroke, cancer ect. This is the least of expensive types of policies.

The advantage of this policy is the cost, and may be issued to someone who does have health problems.

The disadvantage of this policy is that it only covers accidental death.

Term Life This is the second least expensive types of Insurance. This insurance is what we call pure insurance. It covers you no matter what the cause of death is. This policy only covers you for a period of time that you choose... 1 - 5 - 10 - 15 - 20 - 30 years. After that time is up, you no longer have insurance. Most companies do allow you to convert your policy to a permanent plan without proof of insurability. But beware, some companies who push just this type of policy does not allow any conversion, because they don't have any permanent plans. This is a good policy for young people who are on a budget, and need coverage, and a lot of it.

The advantages the policy is the cost. And because of your budget, you can get a much larger death benefit with this policy than you can with a permanent type of insurance. Another great advantage is the fact that you are getting your foot in the door so to speak. Because of the convertibility aspects, you won't be declined because of health. Its yours, in most cases.

The disadvantages of this policy is that you will lose your coverage after your term is up. Most of the time, your mortgage is paid, and all other loans are taken care of , so you many not even need the coverage. But the problem is, you just don't know. You may very well still need the coverage. And when you are older it will cost you much more. Another disadvantage is that you were basically renting insurance for a period of time. You will have nothing to show for it. But IF you die, then you had a good policy. This is what we call IF you die insurance.

There is a debate in the industry based on a philosophy of "buy term and invest the rest". Some people advise that you should always buy term and figure what you would have paid on a permanent type of policy. Then you should invest the difference in mutual funds and make a higher rate of return on your money. I strongly disagree with this philosophy for many reasons.

Whole Life This is a permanent policy. It is the most expensive of all insurance policies. There are different kinds of Whole Life policies, such as paid up in 10 years, or 20 years and others. Basically when you buy this policy you start building equity. Your premium is locked in and will never change. You will have this policy for your entire life. Everything you see with this policy is what you get. You start to build cash/loan values that can be used for education, emergency, or even whatever you desired. It also builds what is called reduced paid up insurance. This is when you can deem your policy paid in full, but you will have a lesser face amount. For example, say you took out a $100,000 death benefit. Then in 25 years you decide to take this option. Then your policy is paid up but your new death benefit may only be $80,000. Another option is the extended term option. This option will buy you so many years of free insurance. I often ask people, would you rather wake up in 20 years realize that you rented insurance and have nothing there (term) or take about $5,000 and go on vacation if you so desire. Or cash it in all together and invest it in something with a higher rate of return. This insurance is WHEN you die insurance. (in event of rapture, I don't know)

The advantages of this policy is that it will be there your whole life. You build cash/loan values, your premium is locked in, and generally if you cashed it in in 20-30 years you get most if not all your premium back in the cash value, thus making this the cheapest insurance in the long run.

The disadvantages of this policy is that it much more expensive, and can't fit into everyone's budget. If you need a large death benefit and can't afford the whole life cost, then that is a disadvantage. Sometimes you can mix, whole life and term insurance to fit your budget.

Universal Life This policy is a bit more complex. It is a permanent type of policy, yet can be treated like a term. It is best known for its flexibility. Basically you determine how much you want to pay in premiums, there is generally a minimum required for the first few years of the policy. You can dump lump sums into your policy at any time. What starts to build within your policy is an account value. And you earn interest on that account value, usually somewhere between 4% to 7%. From that account your mortality cost is deducted from your account value every month, along with an administration fee and the premium mode fee. As long as you have an account value that will cover those cost, your policy can not lapse. So there could be times when you may need to skip paying your premiums, and your policy will not lapse because of it. You could skip a lot of premiums, and even take a withdraw out of your account, but you would be treating your policy as a term. Yet if you pay your premiums, especially above the minimum and never touch your account value, then you will have permanent insurance. But the negative is that the mortality cost could reach the maximum shown in your policy, and the interest rate could drop to its lowest guaranteed rate. Then this could result in you losing the policy in later years.

The Advantages of this policy is that it cost less than a whole life, is permanent, and can do a lot better for you as far as cash values go. You could have a very large cash value if the interest rate goes up, and you pay your premiums well. Generally because the cost is less, you can afford to get more coverage than you would have in a whole life policy as well.

The disadvantage of this policy is the guarantees of this policy is not very good at all. The interest rates could drop and the mortality cost could rise.

But with that said, it is in my opinion that usually this is the best policy a person can get for their money. It will usually do well for them, and for the cost, the tax-deferred cash values can be attractive. Its flexibility features are far better than that of term or whole life. This policy has been the focus of attention in the past, especially in the 80's. The interest rates were very high, around 14% to 16% and the cash values were sold as a retirement. You should never think of this policy as a retirement fund, although it may very well serve as a supplemental retirement.

Points to consider

1) Buying life insurance must start as soon as possible. For many reasons, A) The younger you are the cheaper the rates, and the sooner you will build up cash values. B)insurability is a key. You are healthy today, maybe not tomorow.
Life insurance companies do not like a high risk. They may rate it at a higher premium or decline it altogether. C) You may die while you wait.

2) Cheaper is not always better. You want to invest with a company who has experience, and is stable. Also has a tract record of paying their death claims without problems. AMBEST is a great place to research a company

3) If you are financially unable to pay those premiums, then this is a sign you really need coverage. You can't leave your family without your income.

4) Contrary to what most think, most life insurance companies are not out there to rip you off. Remember one premium might be all you make, and they will pay your family a large death benefit.

5) Sometimes it may be helpful for you to know what Commissions an agent is making off of your purchase. Most insurance companies pay about the same. We get paid the highest commission (60%) if we sell Whole Life. We get the lowest (28%) if we sell Term. We get medium (45%) for selling Universal Life.