The term “life insurance” can send a shiver down even the most resilient spine. It doesn't matter that it's a product that guarantees coverage and protection of loved ones. For all the goodness life insurance provides, it means the insured must confront a chillingly inevitable prospect: his or her own mortality.
In fact, more than 118 million adults in the United States age 18 and above don't have any life insurance coverage, more than half the adult population (52 percent). That compares with 2011, when 51 percent of U.S. adults were uninsured, according to a Genworth Financial survey of 25,000 adults.
Experts agree that life insurance is more than just paying the bills when time is up. It's about providing stability for family members left behind.
“Life insurance is love insurance,” said Steve Leimberg, publisher of Leimberg Information Services, a Havertown, Pa., publisher and co-author of “Tools and Techniques of Life Insurance Planning.” “When a breadwinner dies, an adequate amount of life insurance is typically the major thing that determines whether his or her survivors will live with dignity or despair.”
It's still a tantalizing process, but understanding the basics is a good start. Here are some important bullet points about life insurance to know going in:
Life insurance policies can be divided into two major categories: term and permanent. Term policies are so named because they provide for a set number of years, typically 10, 20 or 30. It does not have an investment component; it's paid for at the insured's death, and only if the insured dies before the term of the contract runs out. “No lifetime payments are possible with term contracts,” Leimberg said.
Permanent — or whole — life insurance is kept as long as the insured lives and the policy owner wants to keep it in force by paying premiums. It builds up cash values that can be borrowed by the policy owner or received upon releasing the insurer from its obligation to keep the policy in force, according to Leimberg. The interest rate in a permanent policy is fixed. There are different versions of term and permanent policies, such as universal life, variable life, guaranteed level term insurance, return of premium term insurance — that are usually defined by cost.
Which to pick?
Whether term or permanent life insurance is best for you is determined by a number of factors, most important: What can you afford and what do you need it to do?
Term insurance is the less expensive option, usually only a few hundred dollars depending on health or other variables. It's best applied to short-term problems, such as paying off a mortgage or other temporary debt at death.
Permanent insurance is more complex and more expensive. Unlike term policies, it provides more than a death benefit. A portion of the premium funds a separate, tax-free investment fund.
It's not the type of life insurance that matters, but the dollar amount, said Jack Hungelmann of Edina, Minn., author of “Insurance for Dummies” and proprietor of Jack Hungelmann Risk Management & Insurance, an independent insurance agency. “When you die, your family isn't going to care about the policy,” he said. “All they want to know is how much money they're going to get.”
Hungelmann also notes that one of the downsides to cash value policies is that holders end up paying a lot in the beginning so that rates stay level as he or she ages. “It's good when you're older, but it's tough when you're young,” he said. “Some people I've met are uninsured because they can't afford to buy all the life insurance they need with that type of policy.”
Life insurance isn't as easy as picking up the phone. You have to qualify.
“They're going to ask you questions about your lifestyle, like 'Are you going to jump out of airplanes?' ” said Theodore Affleck, an independent life insurance consultant with 37 years in the business. “If so, they might not consider you fit.”
Expect questions about personal medical history, family health and employment, too. After an assessment, candidates are placed into a risk-classification: super-preferred, preferred, standard and sub-standard.
“A preferred person will have a lower premium than a sub-standard,” Affleck said. He also said that women will have lower premiums than men since they tend to live longer, that an overweight person will have a higher premium than a marathon runner, and so on.
Smoking is also a significant factor; nonsmokers are almost guaranteed a lower premium than smokers, Leimberg said.
Despite the complicated process of applying and qualifying, experts stress that life insurance is still an important part of any family plan.
“There are usually far too many inappropriate, unsuitable replacements,” Affleck said.
And don't just buy it “because it's the adult thing to do,” Hungelmann said. Make sure it's done for the right reasons. He advises going back to that idea of family: “You don't buy car insurance when you don't have a car. Don't buy life insurance when you don't have someone to care for.”