Life Insurance 101

Life insurance companies sell their products almost exclusively through agents. Today even your local bank can have the capability to sell you a life insurance policy. However, in order to do so, they must be licensed.  Most competitive insurance products are sold through agents like Southwestern Benefit Designers, who are independent agents. Independent agents are free to represent several companies and can select products from a variety of companies to package a program most suited to your individual needs. Some companies use what is referred to as "captive" agents, who can only represent one company. Southwestern Benefit Designers is an independent agency working with top rated companies to give you access to only the best companies with the most competitive rates.

Life insurance is a form of insurance that pays a beneficiary in the event of someone’s death. At the time of purchase you buy a specific amount of coverage for a specific length of time. Should you die during the term of the policy, your beneficiary will receive the specific amount that the coverage stipulates in the policy documents.

There are two basic types of life insurance. Term Insurance and Permanent Insurance also called Whole Life or Universal Life and a new type of insurance is emerging in the United States called "Critical Illness Insurance".

Term insurance is sometimes referred to as temporary insurance. It provides coverage for a person against death for a specific time, the term. Term coverage can be issued for 1, 5, 10, 15 20 and some new policies can even extend to 30 years. If death occurs during the term, the policy pays a cash benefit to the beneficiary. If death occurs after the expiration of the policy (after the term), no cash benefits are paid out.

Term insurance is the most easily understood, straight forward type of insurance. This is quite different than "permanent insurance" since term insurance has no investment value and most of your premium dollar goes to pay for coverage. Term policies are quite flexible in that you can decide a term that’s right for you. Some clients prefer to be covered until retirement, while others insure themselves until their children are out of college. The one common length that all would agree to is to provide coverage until your youngest child is 18.

Whole life or universal life is often called permanent insurance. This type of policy never expires, providing you pay the premiums. It provides coverage the same way that term insurance does, but in addition it also provides an investment component. Part of the premiums that are paid cover the cost of insurance and another part of the premium goes toward an investment account. The investment portion can be held in stocks, bonds or an interest bearing account.

In my opinion, and this may not be the opinion of your agent, young families that have large financial obligations may fare far better with term insurance.  When I'm investing for growth, I place my money in a Mutual Funds, Money Market accounts, stocks, or traditional savings vehicles. This type of discretionary income investment is likely to generate returns at least similar and in many cases much better than life insurance. The exception to this would be for people who have an estate that exceeds $500,000 and who wish to shelter their assets from estate taxes. Another example may be for younger families who may have just finished school and feel the need for both or who plan to hold the policy for 20, 30 or more years.

Critical Illness Insurance

Critical illness insurance pays out a lump sum on the diagnosis of a "serious disease".  These conditions can include:  cancer, heart attack, stroke, Alzheimer's disease, heart bypass surgery and angioplasty.  Some policies also pay out on loss of sight, hearing and/or paralysis.  You can take out critical illness coverage separately or as part of a term insurance or permanent insurance policy.

Because of advances in medicine, suffering from a permanent disability may be far more probable in today’s society than actually dying prematurely. This fact alone should make investigating a good quality disability policy a priority.

The purpose of disability insurance is to replace your income in the event you become disabled and were unable to work. Today many employers provide some form of disability insurance but you need to review the employer options very carefully. In many cases supplementing the employer provided policy is a wise investment.

As with other types of insurance, premiums are determined by a combination of age, sex, income and your occupation. The typical coverage amount will range from 50% to 70% of your monthly income.

There are also additional riders or options that can be purchased with some disability policies, don’t be afraid to ask for additional information on these from your agent.

The most common riders include:

• Cost of Living riders, also known as COLA. As the cost of living increases so does the coverage amount.

• Guaranteed Renewable policies. This prevents the insurance company from canceling your policy, except for non payment of premiums.

• Residual Rider. Most insurance companies will determine that you are either well enough to return to work, or your not. If you’ve ever been out of work, even if it is for the flu, you know that there are times when you feel you could probably do part of the work, or work part-time and ease back into full time. With the residual rider it allows you to work part-time and receive part-time pay and part disability payment

The riders mentioned above can be quite costly to add to a policy. However, if the situation warrants, investigating them on the front end is always better for the consumer than trying to add them at a later date.

Long Term Care Insurance

This is one of the fastest growing healthcare products available today.  The purpose of long term care insurance is to provide protection to you if you or your spouse were to be admitted to a nursing home.  Long term care insurance provides protection in the event of such a loss or event.

Business Insurance

Many businesses provide his or her employees with health insurance, life insurance and even disability insurance.  The benefits to the employer for such an offering include:

• Employer sponsored benefits helps retain employees 
• Many group sponsored programs are less costly and provide broader coverage than individual policies

A business might also need more specialized life insurance products to protect the interests of the business, such as Key Man Insurance or Buy-Sell agreements.

Key Man Insurance

This type of policy is purchased to protect the business from the financial loss that might occur when a very "Key" employee or corporate officer dies.  The paid benefit is available to allow the business to continue until this person can be replaced.

Buy-Sell Agreements

For corporations or partnerships who have minimal owners can purchase a buy/sell agreement to protect for the uninterrupted continuation of the business.  These agreements provide a pre-agreed price for each share and an arrangement that the share must be sold to the remaining owners or partners.    The life insurance is purchased to provide the necessary funds to "buyout" the rights of the deceased owner or survivor.

Copyright © 2005 Southwestern Benefit Designers. All rights reserved.   Last revised October 12, 2005