What every informed consumer needs to know...
Choosing a life insurance policy can be a painful process. There’s a lot of complex terminology involved, with so many different policy options available that it can be very overwhelming. Do you want lifetime coverage? Are you able to afford high premiums? Is it important that your policy have an investment component?
Before settling on a specific life insurance policy, you need to determine your family’s needs, both before and after death. Read on to learn more about the different life insurance options offered today and how to figure out which one is best for you and your family.
To simplify things as much as possible, we can say that there are basically three major categories for life insurance, which are further divided into specific policies that give specific premiums, coverage, and payment terms/periods. There’s term life insurance, whole life insurance, and universal life insurance. Let’s take a closer look at each.
Term Life Insurance: Generally, this refers to life insurance plans that are short-term, or run for a pre-determined number of years (5, 10, 20, etc.). It’s purely a protection plan that pays out a predetermined sum if the insured individual(s) dies during a specific period of time. This type is the most common, and usually the one offered by employers as part of their benefits package. Most of the time, term life is an inexpensive insurance option, as the premium rate is locked in for the duration of the plan. Consider this option if you plan to be debt free when you reach retirement age and you just want coverage until your youngest child finishes college.
Whole Life Insurance: This is the first form of permanent life insurance, and it can be kept for the duration of your life. Monthly premiums are at a set rate, and they must be paid on time. With this type of coverage, most policies offer a tax-protected savings or investment component. As your cash value increases, you have the option to borrow against it, surrender the policy for a payout, or collect dividends on it. The premiums can be quite high, but the cash value benefits can be very useful for policy holders.
Universal Life Insurance: Universal insurance is a bit more complicated. The easiest way to describe it is to say it’s flexible, which is why it’s often called adjustable life insurance. The investment and death benefit portions are separated under this plan, which allows you to change your premiums and benefits to match your current budget. In the event that you run into unexpected financial trouble, you can reduce or stop your premiums and use your accumulated cash value to pay the premiums. Universal life insurance offers the most well-rounded protection to you and your loved ones.
There are two other less common forms of permanent life insurance: variable life and variable universal life. Variable life lets you control your investments, in that you can allocate a certain portion of your cash value to an investment portfolio. Variable universal life is basically the same as universal life insurance, but it allows the policy holder to create sub accounts, similar to mutual fund accounts. Variable and variable universal life insurance plans are considered to be more risky due to the added investment options. There’s no single best plan available, which is why it’s important that you determine your needs prior to researching to figure out which option is right for you and your family.
Additional Plan Riders
Plan riders are add-ons that can be purchased to provide increased coverage or specific types of additional benefits. Each type of insurance will have varying riders, but there are some that are common across multiple insurance types.
Accelerated Benefits: Should the policy holder be diagnosed with a terminal illness, this rider grants early access to death benefits to help with the cost of treating a terminal illness.
Accidental Death Benefit: This rider pay an additional death benefit in the event that the insured dies accidently. Almost all of our Top 10 life insurance providers offer this benefit at an additional cost.
Additional Insured Rider: Extends coverage to an additional person, usually a spouse.
Child Rider: Additional coverage in the event of your child’s death.
Disability Rider: If the policy holder were to suffer some sort of injury that prevents them from working or seeking employment, this rider provides income to pay for expenses.
Final Expenses: This policy covers funeral expenses for the insured.
Guaranteed Insurability Option: This gives the policy holder the ability to guarantee future insurability at standard rates without further proof of insurability or a medical assessment.
Long-Term Care Rider: Covers the cost of long-term care if it’s needed at any point during the policy term.
This is just a sampling of attachments that can be made to your policy. Since these optional features have an impact on the level of life insurance coverage, they should be very important factors for you when purchasing life insurance. Every company will have different riders, and not all will be available for every type of plan. Do your research to figure out if any of these riders may be important to you and/or your family, either now or in the future of your policy term.
The financial strength of an insurance company refers to the overall stability of the company’s finances. Life insurance is essentially a long-term contract that isn’t paid out until much later in life. Because of this, it’s very important that the insurance company you go with has a positive long-term outlook. Otherwise, they may not be able to pay out any outstanding obligations to you and/or your beneficiaries should the company collapse or run into financial troubles.
To determine a company’s financial strength, finance companies such as A.M. Best and S&P compile data and use various sets of criteria to determine overall financial stability. They look closely at things such as credit rating and their ability to meet any outstanding obligations to policy holders. It’s a good rule of thumb to buy only from insurance companies that have high marks from the major ratings agencies.
However, understanding the ratings can be tricky. Each company uses a different scoring system, but the ratings they assign are intentionally vexing. For example, many consumers are quick to assume that an insurer with an A+ rating from Fitch is the best score possible. I mean, why wouldn’t you think that? But the reality is that there are four scores higher than A+: AA-, AA, AA+, and AAA. Take some time to review the scoring criteria before placing too much value on what seems to be an excellent score, because oftentimes a score that looks impressive on paper really just translates to “good.”
Cost & Beneficiary Assistance
The cost for life insurance fluctuates greatly depending on the policy holder’s gender, health, age and even geographic location. Weight and smoking are also huge factors. A fit non-smoker is going to have much lower premiums than an obese chronic smoker. This will all vary based on the policy/plan you select. The least expensive plans will likely be term insurance policies, as there is no cash value or investment aspect.
Ballpark estimates are difficult to nail down, because there’s so much variance in the level of coverage that all depends on the policy holder. For example, a healthy 40-year-old man might pay $350 per year with a fixed annual premium on a term policy. A healthy 50-year-old man purchasing the exact same policy might pay over $1,000 per year. That 40-year-old purchasing a universal life policy might pay $3,000 a year, because a portion of that is going into the investment component of the policy. Shop around to see what sort of premiums are available to you, but keep in mind that how much you pay will come down to your health history and the amount of coverage you want.
Beneficiary assistance is another major factor when purchasing life insurance, because your beneficiaries are the ones who will see the benefits after your death. Nearly all of the Top 10 companies offer both lump sum and scheduled payouts of death benefits to beneficiaries, which gives you and your loved ones some flexibility as to how the benefits pay out. Most companies also have financial planners available to help your beneficiaries manage the benefits. More uncommon are services such as grief counseling and one-on-one claim advisors, which may be very useful for some families. Inquire about these types of beneficiary services with each insurance provider you’re researching.
When choosing a life insurance policy, you should also consider the customer service record of the insurance company. As we’ve outlined, life insurance can be complicated and difficult to understand. This is why it’s important that providers make it as easy as possible for their customers.
If you have just taken out a life insurance policy, you usually have 30 days in which you cancel at no extra charge. For most of the Top 10 companies, outside of that initial period all you have to do is write your provider and tell them why you wish to cancel. Usually you will be allowed to cancel with no additional cost. You will stop paying your monthly premiums, and the coverage will no longer apply. However, check the terms and conditions of your policy to make sure this is the case. Keep in mind that you probably will not be entitled to any refunds of premiums payments already made.
Life insurance for a smoker is more expensive. But many insurance companies now allow policy holders that are former smokers to apply for non-smoker rates, after a certain amount of time has passed. Usually this amount of time is a year, and a medical examination would be required to determine that you are in fact no longer a smoker. In addition, companies will also often provide some financial and retirement planning assistance to help you set up your policies at no additional cost.
Some companies also offer life insurance policies that do not require a medical exam, however this usually means a higher premium, and you may need to pay the premiums for a certain amount of time before you are eligible for full payout. This is most common with group policies, but inquire with your insurance provider if and when it is offered.
Most companies now offer an online customer portal, which you can use to submit and track any claims you currently have open. You can also use the portal to communicate with a representative regarding any questions or concerns you may have. Figure out which method of communication you’re most comfortable with, and be sure during your research process to determine which companies make it easy to manage your life insurance policy using your preferred method of communication.
With so many life insurance options to choose from, browsing reviews from consumers who have experience with these insurance companies can be a great way to help you choose a plan. Here are some things to look for when reading reviews.
- Statistical Significance: The number of reviews posted affects the significance of the overall rating. If there are only a few reviews, the overall rating is going to mean a lot less than if there are hundreds of reviews. The more reviews there are, the more accurate and useful that overall score is going to be for helping you select a life insurance plan.
- Word Sentiment: Take some time to scan some reviews for specific words that stand out. Look at the words being used; do they seem more positive or negative? In addition to star ratings, scanning for certain words can be a great way to get a sense of how satisfied or dissatisfied customers are with the insurance companies you are researching.
- Customer Care: If the insurance company has an opportunity to respond to feedback from consumers, do they? Is there an effort being made to resolve individual complaints? When a company reaches out to customers whether the review is good or bad, this is a great indicator that they will value your business as well if you choose to purchase a plan. If the company does not respond directly to feedback, do reviewers mention how responsive the company was to their suggestions or complaints?
- Learn from other people’s mistakes: If you see negative comments about a life insurance plan or provider, think about how the problem could have been avoided. For instance, if the issue was because someone didn’t fully understand the policy, take the time to review the contract before signing. If the problem was clearly the fault of the insurance company, and they made no effort to resolve the issue, this could be a sign to keep looking.