Life Insurance for Dummies [A Complete Beginner’s Guide]

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Have you ever heard a friend or a colleague from work talking about life insurance? At that moment, did you realize that you have no idea what life insurance for dummies is about?

If you have ever found yourself in this position, you certainly must have felt curious, at the very least.

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You may wonder why a young and healthy friend would even think about ensuring his family’s future in case he died. Maybe the idea of getting life insurance seemed unnecessary.

Until now, that is. Now you’re finding yourself intrigued by it and want to know more about life insurance.

Worry no more! This is the ultimate guide to help you understand what this is all about.

Life Insurance For Dummies [Working Principles]

Let’s start with the basics.

The concept of life insurance is actually pretty simple: it is basically a contract between a policyholder and an insurance company or an independent agent.

This contract signed between both parties guarantees that the insurer will pay a certain amount of money to a designated beneficiary upon the policyholder’s death.

Now, this sum of money — called ‘death benefit’ — will vary, depending on how much the policyholder pays in premiums.

When you get a life insurance policy, you have to pay premiums each month. These premiums ensure that your beneficiaries — the people who you choose to receive the sum of money —  will receive the death benefit.

Premiums can vary from cheap monthly or annual values to more expensive monthly or annual values. It will depend on the type of policy that you hire.

There are several types of life insurance policies available. You have to choose the best option based on your needs and your financial status.

Keep in mind that not all policies are exclusive to death cases. There are policies that cover terminal illnesses and critical illnesses as well.

Here are a couple of life insurance-related terms to know:

Waiting Period

This is the period between the moment you sign the insurance contract and the moment it goes into effect.

For instance, let’s consider that Insurer A has a waiting period of 1 year. You get a policy today, thus your beneficiary will only receive the death benefit if you pass away after 1 year.

If you are to pass away before your policy completes the first year, your beneficiary will only receive the amount you paid in premiums during that period.

Contestability Period

This is the period in which the insurer is allowed to investigate the policyholder’s death.

The insurer does this in order to ensure that the policyholder didn’t fake their death (there are more life insurance fraud cases than you can imagine) or that the policyholder didn’t pass away from something that was not included in the contract.

Is Life Insurance Necessary for You?

You may wonder whether you need life insurance. Naturally, none of us wishes to die nor do we even think about the possibility of dying.

However, we’re only human and our lives are like a precious crystal that could break at any time.

The future is uncertain, and we never know what is going to happen in the next few years, months, days, hours. If you’re not sure about getting an insurance policy, think about your family.

Think about your spouse. Think about your children, if you have any. Do you think they would be able to support themselves financially without you and your income?

If you get a policy and were to pass away suddenly, your family would be financially secured. Your children would have money to pay for their college tuition.

Your spouse would have money to pay off all of your debts. The family would always have a place to live as they would be able to pay the mortgage.

Take these things into consideration and then ask yourself the same question once again. Is life insurance necessary for you?

What is the Cash Value of Life Insurance?

Some types of life insurance policies offer a feature called ‘cash value’. This feature might even make the policy become more valuable.

Cash value is not a concept that is hard to understand, so don’t worry. It is simply a sum of money that builds up while you pay the monthly or annual premiums. In this type of policy, part of your money goes to the death benefit and the other part builds up the cash value.

You may wonder what the point of cash value is. The thing with cash value is: you can access this money while you’re alive! That is right. You can look at cash value almost as if it were some type of emergency savings.

If you’re tight on budget, you can withdraw or borrow money from the cash value; it depends on the type of policy you have. Also, if you’re short on money and can’t pay the premiums for a while, you can use the cash value money to do that!

Just keep in mind that when you subtract money from the cash value, the insurer will reduce the death benefit. You should also be aware that not all types of life insurance offer cash value.

Different Types of Life Insurance for Dummies

different options availableAs we mentioned before, there are many types of life insurance available in the market.

There are policies that last for the entirety of your life and there are policies that only last for a number of years.

Some of them allow you to have access to the money while alive and some others only have the death benefit.

Let’s see the different types of life insurance so you can better understand this subject.

Term Life Insurance

This is the most common type of insurance and also the least expensive.

Term life insurance is a type of policy in which the insurer gives the policyholder different options on the amount of time that they will have policy coverage.

Some insurers offer 5, 10, 20, or 30 years of coverage, but this number can change depending on the insurer.

If you pass away during the term of your policy, your beneficiary will receive the death benefit.

The thing with this policy is: if you don’t pass away during the coverage period, you won’t receive the death benefit nor the money you spent on premiums.

However, some term life policies offer the option of returning the premiums. Keep in mind that, if you choose to have a return of premiums, you will have to pay more money on premiums.

On top of that, some policies allow you to renew the contract — at more expensive rates. If your policy is convertible, you can also request to convert your term life policy into a permanent life policy.

Level Term Life Insurance

Within term life insurance, there are different types of policies, such as level term and decreasing term insurance. The former is the most popular option and it’s basically what most term policies are about.

To put it simply, a level term policy means that the value of the death benefit will remain the same throughout your policy coverage.

It also means that the amount you pay in premiums monthly or annually will remain the same as well.

In other words, this type of policy ensures that the amount of money you pay — and the money your beneficiaries will receive — will remain ‘level’.

Decreasing Term Life Insurance

Term life insurance is cheaper than other types of insurance policies, but you might still consider it expensive for you. Maybe you’re on a tight budget. Maybe you just don’t want to spend too much money on insurance.

Either way, a decreasing term policy is a more budget-friendly type of insurance that will keep your family financially covered for a while.

You’re probably wondering why this policy is so cheap, right?

It’s easy: it doesn’t have a cash value feature and the death benefit will decrease over time. You’ll pay the same value on premiums during the period you have coverage, but the sum of money your beneficiaries will receive will decrease.

This policy seems like it’s not worth it, however, it is a great option for people who have unpaid debts, such as a mortgage or bank loans.

For instance, in case you pass away during the period of coverage, your family or business partners will have money to pay off debts.

Permanent Life Insurance

Another type of life insurance policy is permanent life insurance. Unlike term insurance — which only covers a set period of time (term) —, this policy lasts for your entire life. In other words, your coverage will never expire, so long as you keep paying the premiums regularly.

This policy offers valuable benefits that might be very convenient for most people. However, it is consequently more expensive than other policies.

Example: Whereas a 30-year-old healthy male would pay somewhere around $25 for a decreasing term policy, he would pay at least $100 for a permanent life insurance policy.

There is a reason why permanent policies are more expensive than other policies. They offer a feature that we have previously explained in this article: cash value.

In other words, you will pay higher premiums for this type of policy because you’ll get not only the death benefit, but you will also be able to access a sum of money while still alive.

An advantage of cash value is that it is virtually a tax-free savings account. If you’re interested in leaving money for your dependents without worrying about paying a lot of taxes, then this option is perfect for you!

Whole Life Insurance

Just like level term insurance is the most popular type of term life insurance, this policy is the most common type of permanent life insurance.

Whole life insurance, as its name suggests, is a policy that offers coverage for your whole life. You may be as young as 20 years old and you’ll still have coverage for the next many years of your life.

This policy offers the feature of the cash value that you may borrow or withdraw. Your insurer will establish the guidelines you should follow in order to avoid reducing your death benefit when you access this money.

Whole life insurance is ideal for individuals who want to ensure that their beneficiaries (or beneficiary) will be financially covered at any point in time.

It is also ideal for policyholders who want their premiums and death benefit to remain the same throughout the entirety of the coverage.

As for pricing, the premiums of this policy are more expensive than term life insurance premiums, and they vary based on several aspects.

For instance, if you’re a young, healthy person who doesn’t often drink and who doesn’t smoke, your premium rates will be lower than that of a person who has the opposite characteristics.

Universal Life Insurance

Now, if you’re looking for more flexibility of premiums and also death benefit, this type of policy might be the best for you.

Perhaps you’re on a tight budget in a certain month and you have some money left in the other. With a Universal policy, you’re allowed to pay the minimum premium rate as well as paying more than the cost of insurance.

When you pay more than the premium value, the exceeding will go directly to your cash value.

Another feature is that, if you have built enough cash value, you can skip a few payments without risking a policy lapse — that is, without risking missing any premium payment.

This flexibility in payment also extends to the death benefit. Maybe you’ll notice that your beneficiaries might need more money as time goes by.

In that case, some insurers allow policyholders to increase the value of their death benefit — which also increases the monthly or annual premiums.

The opposite is also true: as you get older, you may notice that your beneficiaries are already able to provide for themselves or that their monthly costs are no longer the same.

In that case, you can request your insurer to reduce the value of the death benefit. Consequently, the premium rates will also decrease.

Variable Life Insurance

Similar to Whole Life Insurance, this policy will cover you for the entirety of your life, as long as you pay the monthly premiums regularly. On top of that, it also offers the feature of cash value — that is, a sum of money that builds up as a savings account.

The difference between a Whole policy and a Variable policy is that the latter also offers an investment feature that is not present in the other policies.

You’re probably wondering how this investment feature works. It’s pretty simple, actually.

With a Variable policy, your insurer will give you different options of funds that you can invest in. This way, your cash value can be much higher than a regular cash value policy.

However, it’s important to keep in mind that this is a double-edged sword. The funds of your choosing may earn you a lot of money, but they can also underperform — that is, you can lose most or all of your cash value.

Variable Universal Life Insurance

This type of permanent life insurance policy combines features from two other policies, as suggested by its name: variable life insurance and universal life insurance.

Now, if you don’t remember what each of these policies is, we’ll remind you: a Universal insurance policy gives you flexibility as to the money you pay in premiums and the money your beneficiary receives in death benefit.

As for the Variable policy, it allows you to invest your cash value money, which might be a good or a bad thing.

To sum it up, a Variable Universal Life Insurance policy allows you not only to choose how much you want to pay in premiums — either the minimum value or more than that — but it also lets you invest the cash value that builds up each month into stocks or bonds.

Survivorship Life Insurance

Up to this point, we’ve only discussed insurance policies that cover individual policyholders. However, if you want to purchase a policy with your partner, there’s also an option available for you!

A survivorship life insurance is a type of policy in which two spouses sign a contract and get the insurance coverage together. The catch here is: your beneficiary (or beneficiaries) will only receive the death benefit after both policyholders die.

While there are insurances that pay the death benefit after the first person dies, a Survivorship policy only pays after the second person passes away.

Because of that, this type of life insurance might not be a good option in case you want your family to be able to replace your income after your death.

You’re probably wondering what is the advantage of getting this type of insurance policy, right? Well, it suits a group of policyholders who are in specific situations, a group which you may or may not make part of.

For instance, consider two parents who have a child who needs special care and attention and who cannot work.

If both the parents passed away, how would this child take care of themselves? In this case, a survivorship policy would be ideal to ensure that this child would have some sort of income in the years to come.

Another group of people for whom this policy would be ideal are people who cannot afford to have two individual insurances. A permanent life insurance policy is quite expensive, but a survivorship policy is less expensive, thus it is more suitable for couples on tight budgets.

The reason for this lower price is simple: because this policy only pays the death benefit after both parties pass away, the premiums are less expensive.

However, it’s important to keep in mind that a survivorship policy can become a headache if you and your partner end up getting a divorce.

Another noteworthy piece of information is that, even though the death benefit is only paid after the second person dies, the family can still access the money after the first person’s death.

As a type of permanent life insurance, the Survivorship policy also builds cash value. The alive spouse may access the cash value at any time.

Burial Life Insurance

Finally, another type of permanent policy that is available in the market is Burial life insurance. This policy is often called different names, such as “senior life insurance” or “final expenses insurance”, but they all refer to the same thing:

A policy that is not aimed towards leaving the death benefit to support the beneficiaries, but rather leaving money to cover final expenses.

This policy is usually aimed towards senior citizens over 85, whose dependents no longer rely on their income to survive. Also, seniors might have a harder time trying to get another type of permanent insurance due to their advanced age or health condition.

A Burial policy doesn’t require that the policyholder undergo medical exams and the senior can get coverage after answering just a few questions!

Burial life insurance is ideal for elders who don’t wish their death to become a financial burden on their loved ones. It is easier to get and less expensive than other types of policies, as its death benefit is also lower.

Your beneficiary (or beneficiaries) can use the money to cover any medical costs and funeral expenses.

However, this type of policy has a waiting period and the death benefit is not paid if you pass away during this period. In case you die during the waiting period, your beneficiary will only receive the amount you paid in premiums, plus interest.

On top of that, if you want to pay lower premiums and have a higher death benefit, you’ll have to undergo medical exams and you cannot be terminally ill.

How Much Coverage is Enough for You?

Now that you’re aware of the different types of insurance available, you may have an idea of what is the best option for yourself. However, you might not be sure of how much coverage you should get.

While this information is more personal and will change depending on your needs and the needs of your family, we can help you find an approximate number.

Which Options to Consider

Before you start calculating the coverage you need, you must decide which policy is appropriate for you. Here are two factors to consider when making this decision:

Length of Coverage

  • If you want/need coverage for a set period of time, you might want to look into Term Life Insurance options.
  • If you want/need your policy coverage to last throughout your whole life, you might want to look into Permanent Life Insurance options.

Budget

  • In case you’re running short on budget, you might consider getting a Term Life Insurance policy, as they are more affordable.
  • If money is not an issue for you, you should go for a Permanent policy. However, keep in mind that you’ll pay higher premiums for the rest of your life. Therefore, ponder if that is something you’ll be able to afford in the long run.

Even though there are plenty of other facts to consider, thinking about the length of coverage and budget are two good ways to get started.

How To Calculate Life Insurance Coverage for Dummies?

Now that you’ve narrowed down your list of options, you can calculate the coverage more easily. There are several rules of thumb that could help you discover how much coverage you need.

In case you’d rather get automated help, there are also lots of free online tools to help with that!

In this article, we’re going to show you two ways of calculating how much insurance coverage you need.

Multiply your income by 10-12 times

One way of calculating coverage is by multiplying your current income by a large number, like 10 or 12. This way, you’ll guarantee that your family will be financially secured for at least a decade after your death.

However, this method is pretty tricky because you won’t be taking into account your family’s debts, expenses, and needs. That is why we recommend using the following method.

Calculate all of your expenses + income

If you want to ensure that all of your beneficiaries will be covered by the insurance, you might want to follow this method.

Whereas the first method only counts in your annual income, this method also considers every expense and debt that your beneficiary may have in the future. Here are some factors to take into account:

  • Income: Multiply your current income by 10 so you can get an estimated number.
  • Expenses: Write down all your basic expenses, such as money spent on food, bills, and extra expenses, such as monthly allowance for your children and money that is spent on things related to entertainment (going to the cinema, junk food, going to the museum/zoo, etc.).
  • Debts: In this section, you should consider your credit card bills, any bank loans you might have, the amount you still have to pay in a mortgage, plus any other debts.
  • College: Do you have children? If the answer is yes, then you should also add college expenses to this equation.
  • Child Support: Raising a child can be quite expensive. Thus, you should consider that you spend, approximately, $15,000/month with your children. Multiply that amount by the number of years left until your child turns 18.
  • Final Expenses: If you’re not purchasing Burial Life insurance, then your policy might not cover your final expenses. You might want to include in this section any possible medical costs your family may have after your death, the costs for arranging a funeral, and the costs of buying a casket.

Useful Tip: Consider that your child/children is/are going to out-of-state private institutions to pursue a 4-year degree. This way, you’ll rest assured that there is enough money for them to afford to go to college.

Once you have all those numbers sorted out, you’ll have an approximate number of how much coverage you need!

Life Insurance Qualification Process 101

At this point, you already know the different types of life insurance and you know how to calculate how much coverage might be necessary for you.

However, you may still be confused regarding the actual process of getting life insurance.

Should you just call an insurance company or an independent agent right now? Or is there still something left for you to do?

There is a reasonable portion of uninsured people who will tell you that they don’t have insurance because the qualification is quite difficult.

Yes, the process may be a little confusing. But don’t worry. We’re here to help you! The process will not be a mystery to you anymore.

In fact, you probably have already completed a few steps in the qualification process. How so? Well, it’s simple: if you have already decided which policy is best for you and you already know how much coverage you need, you already started this process!

The next step is to shop around to ensure that you’ll get the best insurance rates possible. You can get instant free quotes on our website. Once you complete this step, it’s time to apply for life insurance!

Here are some things you should know about the qualification process:

  • You’ll fill in an application form that will ask you about personal info and also ask about your health condition.
  • You’ll have to undergo a medical examination.
  • There are several factors that can affect your premium rates and eligibility.

Once you’ve completed the application form and you’ve got your exam results, an employee at the insurance company will review your documents.

This process can last days or even weeks, and it will determine whether you’re qualified to get an insurance policy.

What Can Affect Your Eligibility?

As mentioned previously, there are different factors that will directly affect how much you’ll have to pay in premiums. In some cases, these same factors can even cause the insurer to deny your request.

Here are 8 factors that affect your eligibility and insurance rates:

Policy

Naturally, the type of policy you’re purchasing will affect your expenses. Term life insurance has lower rates than permanent life insurance, for instance.

Age

Because of the risks that are associated with our age, younger people will get the best rates in the market. It’s important to note that older people might even have a harder time getting some life insurance policies.

Location

If you live in areas that are considered riskier, your insurance rates might be higher.

Marital Status

Marital status typically doesn’t affect policy rates. However, if you and your spouse get a Survivorship Life Insurance policy — which is designed for two people —, you may pay lower rates than you would if you purchased two individual policies.

Job

Careers that involve risky activities — such as working in law enforcement or as a firefighter, police, skydivers, truck drivers, private or commercial pilots — can result in higher rates.

Medical History

If your family has a history of genetic diseases — such as cancer or heart conditions —, it will mean that you’re predisposed to also have one of those diseases. Consequently, you will probably have to pay higher rates.

Gender

It is scientifically proven that women live longer and healthier lives than men. Because of that, women tend to be charged lower rates.

Lifestyle

Another important factor that insurers consider is your lifestyle. If you’re an adrenaline junkie who loves adventure — such as skydiving or participating in car races — you’ll have to pay higher rates.

Your driving record will also affect your eligibility and premium rates. Additionally, if you drink on a regular basis and smoke, you’ll also pay more money.

We understand that there are lots of factors that will raise your premium rates. We’re also aware that you won’t be too happy about spending too much money.

However, it’s important to keep in mind that you cannot, under any circumstances, lie or withhold information in your application form. If you do, your insurer can increase your premium rates, and, worse, they can even deny paying the death benefit to your beneficiaries!

Life Insurance Table Ratings

Now that you know which factors can affect your qualification process, it’s time you know that your health condition will determine your life insurance classification, which, in turn, will determine the rates you’ll pay for coverage.

“Yet another term to learn?” This is a thought that may be running through your head right now.

Yes, we know that life insurance has plenty of details and words that you should know.

But we’re here to make your life easier!

This is Life Insurance for Dummies, right? So, don’t be scared!

The classifications within life insurance policies are not that hard to understand. In fact, they’re pretty self-explanatory, as you’ll see.

Life Insurance Classifications

Standard

If your height/weight ratio is not what is considered “ideal”, you might fit into this classification.

When you undergo the medical examination, the doctor might say a thing or two about your health. Or your family has some issues in their medical history.

Either way, if you’re classified as Standard, you’ll pay higher premiums.

Standard Plus

If your weight/height ratio is not within the ideal range, you might fit into this category. Your family doesn’t have any genetic condition history, but you might have higher blood pressure or higher cholesterol levels.

If you’re classified as Standard Plus, you’ll pay lower rates than if you were in the Standard category. Nonetheless, the rates are still high in this classification.

Preferred

This category is for the people who are in good health except for a few conditions, such as high blood pressure.

If you’re classified as Preferred, you’ll pay lower rates than you would if you were Standard or Standard Plus.

Preferred Plus

Now, this category is similar to an exclusive club where only A-listers are allowed inside. A Preferred Plus policyholder is that person who is as healthy as one can be.

Their height/weight ratio is more than ideal. Their family history shows no signs of disease.

If you’re classified as Preferred Plus, you’ll get the best insurance deals in the market!

Preferred & Standard Smoker

These two classifications are reserved for smokers, as their names suggest. Perhaps you’re in great health or maybe you have a minor condition.

However, you’re a smoker, and that’s not a good thing if you want to get insurance.

There’s nowhere to run: smokers will have to pay higher rates, one way or another.

It’s important to keep in mind that the cigarette is the only thing keeping you from paying lower life insurance premiums. Maybe it wouldn’t be so bad if you quit this habit right away, right?

Table Ratings

Now, if you don’t fall into any of the categories we just explained, don’t worry!

There’s still hope for you. Insurers often offer additional classifications to fit people who don’t have the Standard nor the Preferred profile. These classifications are known as “table ratings”.

Table ratings are commonly used in two different systems: Table 1-10 and Table A-J.

However, they’re basically the same. Each number (or letter) represents an additional 25% above the Standard classification rates, starting at Standard + 25%.

Sounds confusing?

We’ll illustrate it to you!

TABLE PREMIUM RATE
Table 1 (or Table A) Standard + 25%
Table 2 (or Table B) Standard + 50%
Table 3 (or Table C) Standard + 75%
Table 4 (or Table D) Standard + 100%
Table 5 (or Table E) Standard + 125%
Table 6 (or Table F) Standard + 150%
Table 7 (or Table G) Standard + 175%
Table 8 (or Table H) Standard + 200%
Table 9 (or Table I) Standard + 225%
Table 10 (or Table J) Standard + 250%

An example:

Let’s imagine that you’re a 35 years old male. Your insurer charges $30 for a Standard Level Term Life Insurance that will cover you for 20 years. However, you have a health condition that places you right into Table 6 (or Table F).

Because of that, you’ll have to pay the Standard rate ($30, in this example) + 150% ($45). Thus, instead of paying $30, the premium rate you’ll have to pay is $75!

Why Age is Important in Life Insurance?

You probably noticed that age plays a crucial role in life insurance. Each policy and each classification pays a lot of attention to your age, and the money you’ll spend will depend on that as well.

We’ve mentioned before that younger, healthier people will pay the lower rates.

At that point, you most likely wondered how come age is so important for insurers?

Well, it’s quite simple, actually: the biggest risk for an insurer offering term life insurance, for instance, is the death of a policyholder right after the waiting period is over.

Why is that?

Let’s say that you purchase a 20-year term policy with a death benefit of $500,000. At the moment you purchased the policy, your insurer designated a 3-year waiting period before it went into effect.

During the 4th year of your coverage, you pass away. Now, your insurer has to pay $500,000 dollars to your beneficiary, even though you only paid 4 years’ worth of premium.

See what insurers have to go through? That is why age is important in life insurance. The more you age, the greater are the risks of dying. Insurers cannot risk losing money, thus they charge higher rates (around 8% to 10%) for each year of your life.

For instance, a 35 years old person will pay a rate somewhere between 8-10% higher than a 34 years old person.

On top of that, once you age past 70, it gets harder to get insurance. Not to mention that the rates will be much higher if you try to get a policy at age 71, for instance.

That is why it is important to purchase a life insurance policy as early as possible.

Life Insurance With Serious Health Issues

If there’s one thing we’ve mentioned in almost every topic thus far, that thing is health.

Health in life insurance is so important that it can even make you pay over 250% than the regular rate, in some extreme cases!

Worst yet, insurance companies may even deny your application form if you have a serious condition.

If you do have a health issue that may hinder your eligibility, don’t worry. There is one type of insurance policy that we haven’t discussed yet.

This type is aimed at people who have serious health issues and who would probably have a hard time getting an insurer to accept their insurance request. This policy is called Guaranteed Acceptance Life Insurance.

A Guaranteed Acceptance policy allows you to get insurance without undergoing any type of medical examination. As its name suggests, everyone who applies to this policy gets accepted.

Additionally, this policy doesn’t have that waiting period in which your beneficiaries don’t receive the death benefit.

However, the tricky part of this type of policy is that it is really expensive. Even more expensive than a permanent life insurance policy, in fact.

A Guaranteed Acceptance policy is ideal for seniors whose age doesn’t allow them to qualify for any other type of life insurance. It’s also ideal for people with chronic or terminal diseases.

Conclusion

Finally, you’ve managed to read our Life Insurance for Dummies to its full extension. Now, you’re much more knowledgeable regarding life insurance than you were when you first opened this text.

At this point, you already understand the importance of having life insurance. You’re aware that it is the best way of leaving your dependents financially secured in case you pass away.

Perhaps, you have even decided which policy is the best for you. If you’ve already calculated how much coverage you need and you’re ready to start the application process, don’t hesitate to contact us!