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why do I need life insurance
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Definitions of Terms



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Why do I need life insurance?

How much life insurance do I need?
What type of life insurance do I need?
     Our advice...
Medical Underwriting or Simplified Issue?
     Our advice...
     What about Online Non-medical Instant Term?

One of the first steps recommended by financial planners is the purchase of life insurance. Life insurance allows a measure of security for the family by preparing, at least economically, in the case of the death of the insured.

How much life insurance do I need?

Since each family is different the amount needed is different for each family. A very basic rule given by some advisors is to multiply your annual salary by 9 and then by the number of years you need to provide for your family, such as the number of years until the children are finished with college, or years until your retirement, etc. For a more detailed analysis we recommend you use the GFA Life Insurance Needs Calculator.

Another thing to keep in mind is other areas where you may need to prepare, such as for disability insurance, emergency funds, health insurance, saving for retirement, etc. If purchasing the maximum amount of life insurance means that you will not be able to provide any protection in these other areas, you may want to spread your funds to provide at least some protection to each of the areas and increase your amount of life insurance or length of term at a later date.

Which type of life insurance should I get?

There are two main types of life insurance, Temporary (Term Life) and Permanent (Traditional Whole Life). All other types are derivatives of the two.

TEMPORARY LIFE INSURANCE

Term Life Insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of a specific period, which can be from one to 30 years. The premium rates increase at each renewal date. Many policies require that evidence of insurability be furnished at renewal for you to qualify for the lowest available rates.

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PERMANENT LIFE INSURANCE

Permanent life insurance or cash-value insurance is life insurance designed to offer protection for the lifetime (i.e. permanent insurance) of the insured. It is cash-value insurance because it provides a savings or accumulation element (cash value) to the policyowner (not necessarily the insured).

Traditional Whole Life provides for lifetime protection if a stated fixed level premium is paid. It assumes that the insured will die before the age of 100 and that premiums will be paid for the whole of life, to age 100. If any insured lives to the age of 100, or to whatever age that the policy matures, the insurance company will pay the insured the face amount of the policy and the insurance policy terminates. Whole life was the first type of permanent life insurance and other than as burial insurance few companies still offer it. It has for the most part been replaced by universal life insurance which is a more flexible form of permanent life insurance.

Universal Life (UL) also provides permanent coverage for life if a minimum cash value remains in the policy. It offers adjustable death benefits and flexible premiums that can be varied with changing needs. Typically universal life insurance may offer a higher coverage than traditional whole life for the same cost. It should also be noted that dividends are not guaranteed under traditional whole life and are at the discretion of the insurer.

Variable Universal Life (VUL) is a flexible premium whole life policy where changes in the policy's cash values and death benefits are directly related to the investment performance of an underlying pool of assets. However regardless of the investment performance the death benefit will never decrease below a guaranteed amount, usually the initial face amount. This policy is somewhat similar to purchasing term and mutual funds within the same policy.

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Our advice...

Term life is the popular choice for most people for many reasons. First, you pay only for the coverage you want. If your main concern is providing for your family while your children are young, then a 10 or 20-year term policy may be what you want. If you want to provide protection until your spouse reaches retirement age or until your retirement age, then just purchase the appropriate term length that serves your purpose.

Experts have often been divided as to whether insurance should be used as a savings vehicle (as in cash value life policies) since the potential for growth is usually less than that of other financial products; however the recent instability of the market and the resulting large losses of savings has caused some of these to think twice about a firm stance in this regard. We suggest taking a balanced view; that of dividing your means of saving between a life policy (backed by a finanically solid insurance company) and a retirement plan based in mutual funds or annuities. Whatever you decide, just don't go another day without some insurance, if at all possible.

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Medical Underwriting or Simplified Issue?

Underwriting is the process the insurance company takes to determine if the persons health or lifestyle presents an acceptable risk for the type of insurance and amount of insurance desired by the insured. It also helps to determine the rate which may be offered to the insured for the policy.

Medically Underwritten insurance usually requires a paramed or a medical exam. DMV (Department of Motor Vehicles) reports and MIB (Medical Information Bureau) reports are also requested. Medical records may be requested from your primary care physician as well as any other physicians that are treating you or have treated you in the past.

Simplified Issue or Non-medical Insurance (also sometimes referred to as burial insurance) is distinguished by not requiring a medical exam or paramed. Instead the potential insured must answer detailed questions regarding sickness, disorders, family history, and lifestyle. If the applicant answers yes to any of the questions, meaning they have a condition listed in the question or they participate in one of the high risk activities listed, the applicant may be automatically turned down for the simplified issue policy. If the applicant denieds having any of the factors listed, the insurance company may order a report from a fraud detection service, usually the MIB (Medical Information Bureau) and other sources.

Our advice...

Medically underwritten insurance is usually the best way to go since you can usually get a lower rate and a greater amount of coverage than is offered by simplified issue. Unfortunately, the inconvenience of taking a medical exam or paramed is why many people go uninsured. If you are likely to put off getting life insurance for this reason or if your current budget restricts you from purchasing a permanent life policy, then it may be best to get a simplified issue policy... at least for now. You can always purchase additional insurance at a later date. If you have no major health problems and your family history and life style are acceptable you may qualify for online non-medical instant term life, (also known as ExpressTerm or Instant Term Life Insurance). The entire process may be completed online without a visit from an agent and may take as little as 15 minutes. Up to $250,000 of coverage may be purchased. For more information or to apply...

Online Non-medical Instant Term

ExpressTerm life insurance (also known as Instant Term) is a simplified issue policy, but unlike other simplified issue policies, the provider has the ability to perform instant underwriting online. Currently just a few providers offer this, although it is sure to catch on quickly. Simply request a quote by answering a few basic questions. If the premium is acceptable complete the application, sign electronically, and pay by credit card. Alternatively, you can request the application be sent to you by mail and pay by check.

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