Ultimate Guide to Life Insurance

The RAVE Guide to Life Insurance

Considering your own mortality is never fun. But it’s never too soon to start planning for the end. Part of that process is purchasing life insurance. With the right policy, you’ll be comforted by the fact your loved ones will be financially protected when your time comes.

According to Policy Genius, a leading online marketplace for the insurance industry,  life insurance policies should cover up to 15x your annual income. Furthermore, 40% of those insured wish they’d purchased a policy at a much younger age. 

With this in mind, there’s no time like the present to purchase coverage of your own.

In this guide, we’ll introduce you to life insurance: who needs it, who may not need it, and how to select a policy that’s right for you. 

With some forethought, end-of-life planning needn’t be a burden. And once those plans are firmly in place, you will enjoy the time you have, focused on the things that are important: friends, family, and the simple joys of living.

What is Life Insurance?

What is Life Insurance?

Car insurance protects your car. Homeowners insurance protects your house. Life insurance covers…your life? And how is that different from regular health insurance?

David Adler is president of the Adler Insurance Group. His business, he explains, is really not that complicated.

“Life insurance is a contract agreement between an insurer and policyholder,” Adler tells RAVE Reviews in an email. Or a guarantee that the insurer will pay a sum of money to the policy’s named beneficiaries when the policyholder dies, he says. 

“In exchange for that ‘death benefit,’” Adler continues, “the policyholder must pay premiums during their lifetime.” 

Jake Tamarkin, CEO of Everyday Life Insurance, gives a hypothetical example.

“Aliya, today, buys a 20-year term policy that provides $500,000 coverage at a monthly cost of $25,” he explains, and she has named her partner Sam as the beneficiary. 

“So, for the next 20 years, so long as she continues to make her $25 premium payment every month, if she passes away, the insurance company will pay Sam $500,000.” 

In other words, if your untimely passing should negatively affect those closest to you, the monthly premium paid by you as part of the life insurance policy will go toward supporting the financial wellbeing of your spouse, children, or even possibly your business partners.

Anyone, really, named in the agreement for whom your debts could become their obligation, or for whom your income is crucial.

“Your death may have significant negative consequences for many important people in your life,” Adler says.  

As can be seen, “Life insurance provides your beneficiaries with financial support to supplement your income in the event of your passing,” Adler continues. “This can greatly help out your family and loved ones in many situations.”

We’ll explain more about those specific situations in our next section.

Do You Need Life Insurance?

Do you need life insurance?

If you’re wondering if life insurance is really necessary, or if life insurance is just another waste of money, ask yourself the following questions:

  • Would your unexpected passing financially burden those closest to you?
  • If you were to die suddenly, would your passing leave your loved ones with debts they can’t pay?

Those monetary obligations can range from personal loans to student debt, and from business agreements to real estate transactions. If you answered yes to any of the above questions, you and those around you would likely benefit from the right life insurance policy. 

Here are some additional points to consider when deciding if a life insurance policy is right for you:

  • Your debts don’t disappear when you die, so don’t saddle your loved ones with your financial obligations in the event of your passing.

Adler, from Adler Insurance Group, explains, “While some debts may be forgiven in the event of your death, many won’t.”

“Your co-signers, joint account holders, and others may end up inheriting your debts after your passing,” he continues. “Life insurance can help pay for those debts to support your beneficiaries.”

  • Life insurance is especially important if your spouse or some other dependent relies on your income. 

Adler goes on to say that if your spouse or children do rely on your income, then your sudden loss, and therefore the sudden loss of income could be devastating to their future. 

“Life insurance provides financial support to supplement that loss of income,” he explains, “so your family will have time to figure out the best next steps. 

  • Without life insurance, your business could possibly fail, negatively impacting your business partners and even your employees.

And for this reason, life insurance is especially important for small business owners to consider. “Business partners and employees depend on you,” Adler adds. 

“Life insurance can provide financial assistance to those individuals in the event of your passing, so your business and employees aren’t left in the wind,” he says.

The last two instances in which individuals should consider purchasing life insurance are if your estate is so large it could be subject to estate taxes, or if your funeral expenses are too much for those left behind. 

Clearly there are many solid reasons supporting the decision to purchase a life insurance policy. But not everyone needs life insurance. We’ll tell you the difference in our next section. 

Who May Not Need Life Insurance?

Even though 54% of American adults have a policy, according to Policy Genius, life insurance is not for everyone.

If no one in your life would be negatively affected by your untimely passing, then it’s probably not necessary to buy life insurance anytime soon, Adler says.

“Think critically for a moment about the important individuals in your life,” he adds.  “Would any of them be financially harmed by your death? If not, then you likely don’t need to purchase a life insurance policy.

But if you have decided a life insurance policy is for you, policies fall into two broad categories. We’ll explain more about the two primary types of life insurance in our next section.

What Are the Types of Life Insurance?

What Are the Types of Life Insurance

The two most common types of life insurance policies are term life insurance and permanent, sometimes called whole life, insurance. Here’s what you need to know about these two types of coverage:

Term life insurance is the most simple and easiest to understand kind of life insurance policy. It covers your life for only a set amount of time, typically 10, 20, or 30 years.

If you should die within that period of time, the policy will pay out a dividend to your beneficiaries. If you don’t pass within that time frame, the policy expires. 

How long will you need the policy? 

How long will you need life insurance?

For example, will your children still  be dependents at the end of those 30 years, or will they have income of their own? 

It’s also important to buy a policy that only covers income replacement and possibly the cost of funeral services. 

Buy a policy that’s too large, or that lasts for longer than you may need the coverage, and you could be wasting money.

Sandra Scanni of the Barnum Financial Group had this to say about term life insurance. 

“If an individual raising a family with a mortgage and young children is concerned about their expenses increasing, a term policy would suit them best as it’s the most cost-effective insurance tool,” Scanni tells RAVE Reviews in an email.

On the other hand, for someone with a high net worth who favors flexibility in premiums and face value, establishing an insurance trust might be the best option. 

“For someone in need of a permanent life insurance solution with the potential to yield dividends,” she says, “a whole life policy would very likely be the best option.”

Amplifying what Scanni had to say, permanent, or whole life insurance policies are a bit more complicated than a term life policy. 

As the name implies, these types of policies provide lifelong coverage. What’s more, there’s an investment component. Money paid into the policy is held in a tax-deferred account, gaining dividends. Money can be borrowed against these policies, or they can be given up in exchange for cash. 

Drawbacks being in those two circumstances are that any money not repaid on a loan made against the policy reduces the death benefit, or if the policy is surrendered, coverage will end. 

Though life insurance policies like these are a bit more involved than term life insurance, they hold many advantages, including the following:

  • Your premiums pay dividends, or the cash value of the account grows over time and at a guaranteed rate. 
  • All benefits are guaranteed, for life.
  • Benefits remain consistent for the duration of your lifespan.

How can I decide between term life or whole life insurance?

Whole life insurance vs Term life insurance

Term life insurance is right for you if:

  • Your budget is limited.
  • You only need coverage for a specific period of time (just until your kids are out of the house, for example).
  • You’d rather invest your money on your own, outside of a whole life insurance policy.

The good news is, many term life can be converted to a whole life insurance policy. Check the fine print of your term life policy for more information.

Whole life insurance is a better choice for you if:

  • Your inheritance might be subject to estate taxes ($11.7 million for an individual, $23.4 million per couple. Specific states vary).
  • You have a lifelong dependent, such as a child or spouse with disabilities. In this case you may want to consult an attorney about setting up a trust, funded by your whole life insurance policy.
  • You need to draw on your retirement savings, but you’d  still like to leave an inheritance.

Further incentive for choosing permanent life insurance could be if you are a business owner with one heir interested in taking over the business, but another who is not. 

That child could be named beneficiary of the policy, while the company could be left to your other child. These two things could very well be of similar value, and this is a common approach to keeping inheritances fair and equitable. 

What are some additional types of life insurance?

What are some additional types of life insurance?

Universal life insurance. Sometimes called adjustable life insurance, universal life insurance is a lot like a whole life policy but with some added flexibility. 

With universal life, premiums can be adjusted to suit the needs of the policyholder, and so, too, can the death benefit. For these reasons, premiums tend to be a bit lower with a universal life insurance policy. Like a whole life policy, these policies also offer a savings component. 

Variable life insurance. Variable life insurance policies have a strong investment component. With variable life insurance, there is a cash value account, which can be invested in several other sub-accounts, such as:

  • Mutual funds
  • Stocks
  • Bonds

The benefit of this type of policy is that because of the enhanced investment component, the value of the account can grow much faster.

But like anything related to investment, there is risk. Should your mutual funds, stocks, or bonds not do well, you could lose some money. Most accounts, however, let you set a floor on the value of the account. 

Variable universal life insurance. Combining aspects of variable and universal life insurance, the final type of life policy is, naturally enough, called variable universal life insurance.

These types of policies offer the advantages of an investment component, with an adjustable death benefit and premium, similar to universal life insurance. 

Have we convinced you that a life insurance policy is the right choice for you? The next question to ask is, how much life insurance should you purchase.

We’ll help you answer that question in our next section.

How Much Life Insurance Do I Need?

How much life insurance do I need?

The right amount of life insurance for your needs will always be an estimate. One approach is to simply multiply your annual income by the approximate number of years you have left before retirement.

Some insurance professionals, on the other hand, recommend purchasing a policy that’s about 10X your annual salary. This approach doesn’t take into account variables such as the cost of college for a dependent, however. 

The last and perhaps most effective approach to calculate the amount of life insurance you need is the DIME calculation, or debt, income, mortgage, and education.

Here’s how it works:

  • Debt. The first step in the DIME calculation is to add up all your debt, as well as the approximate cost of your funeral. 
  • Income. Then DIME calculation then takes your income and multiplies it by the number of years before your youngest child reaches the age of 18, or graduates high school. 
  • Mortgage. Any remaining balance on a mortgage should also be included in the DIME calculation. 
  • Education. And last, to take into account how many children you have and how many plan on attending college. It is generally recommended to estimate about $100K per child for tuition, room and board, and other expenses. 

Once you’ve estimated all of the above, it’s time to add it all together and then you will have roughly the amount of life insurance you need. 

The resulting number from the DIME calculation will likely need to be adjusted slightly based on a few additional factors — work with an insurance industry professional to understand how to further customize the policy to your unique needs. 

But generally speaking, when it comes to answering how much life insurance you need, the DIME calculation will get you close.

Once you estimate how much life insurance you need, what are the upfront costs, and how much is the premium? That answer is coming up next.

How Much is Life Insurance? 

Ho much does life insurance cost?

The actual cost of your life insurance will vary depending on a number of factors. On the low end, it will cost much less on a monthly basis than the cost of filling up your car with gas once every few weeks. 

On the upper end, it may cost you a few hundred dollars per month. And the younger you are when you purchase any kind of life insurance policy, the more affordable it will be.

To get a better idea of what a life insurance policy might have on your bottom line, consider the following factors:

  • Your age and gender
  • History of health issues in your family and with yourself.
  • What you do for a living. The more dangerous your job, the more expensive the policy.
  • Any risky hobbies you may enjoy (skydiving, anyone?)
  • Your average life expectancy.

And last, the type of insurance policy you choose. 

The cost of a term life policy, for example, will change every time the policy expires. Whole life policies can sometimes be as much as 10X as expensive as term life, however.

How Do I Buy Life Insurance? 

buying life insurance

With some sense of who may or may not need life insurance, a few of the different kinds of policies, and some idea of what those policies may cost, the next step is to close the deal. There are two primary ways to buy insurance, online, or in-person. 

In this section, we’ll tell you what you need to know about each approach.

Is it OK to Buy Life Insurance Online?

Buying life insurance online may be more convenient, completing the process on your time and from the comfort of your own home. Picking up a policy online isn’t necessarily any cheaper, though, than buying insurance through an agent. Here’s why:

Buying life insurance online may mean you’re buying directly from the company. This can sometimes be a bit cheaper and easier than working with an agent. Then again, you’re only seeing the policies offered by that specific company, and possibly missing out on a better deal offered through a different insurer. 

Something notable about buying an insurance policy straight from the company is that you may be able to get a guaranteed issue policy, without any medical checkup. 

But Jake Tamarkin, from Everyday Life, says online platforms that don’t require health exams, and have prospective customers simply fill out a form before offering what otherwise seems like an instant life insurance policy, are only selling you one option.

“And it’s likely to be a more expensive choice than a policy tailored to fit your needs,” he says.

Tamarkin continues, “Sometimes too much choice is not a good thing: insurance policy aggregators may feel like a good option but they are not taking into account your specific circumstances and showing you options that you can afford and for which you’ll likely get approved. 

“That’s the kind of information an insurance agent will provide, and in that sense, working with an agent could save you some money in the long run. 

Should I Use an Agent to Buy Life Insurance?

Should I use an agent to buy life insurance?

Buying life insurance from an insurance agent or a broker offers some advantages, even though the process may be slower, and you will pay a little extra for the service.

First, you should check that any agent or broker you work with has the following credentials.

  • CFP, or a certified financial planner
  • ChFC, or chartered financial consultant
  • CLU, or a chartered life underwriter
  • FSCP or a financial services certified professional

Anyone who has shopped for life insurance before may have seen the LUTCF, or life underwriter training council fellow designation, but that has been replaced by the FSCP. 

Regardless, with any of these credentials in place, you know you’ll receive quality service from the agent or broker you are working with.

What are the two different kinds of life insurance agents?

  • Captive Agents. Captive agents represent only one company. 
  • Independent Agents. Independent agents, on the other hand, represent a mix of companies. Working with an independent agent may reflect the full scope of what’s available on the market. 

No matter what kind of agent you work with, it’s important to understand they’re interests lie in representing insurance companies.

An ethical agent won’t sell you a policy you don’t need, but it’s important to remember that agents work for the companies they represent, rather than just the interests of the consumer.

The only interest of an insurance broker, on the other hand, is you, the consumer, remaining independent from any kind of insurance company.

In this regard, they may present the deal that’s best for you, your life goals and financial needs, and your specific healthcare outlook.

Even if you do choose to work with an agent or broker, it’s always a good idea to do a little homework online before meeting face to face. That way you’ll be familiar with what’s available on the market, which will help you make the most informed decision possible. 

And Tamarkin, from Everyday Life, says the prices you are quoted are not necessarily final.

“If you have a complicated story when it comes to your health, lifestyle or family history, then try to look at the price quotes you are getting as a range,” Tamarkin continues.

“Policies are priced by rate classes, usually 3–5, so take a look at the next rate class down and see what it would cost,” Tamarkin adds. 

“It’s a bit of a pain to complete a life insurance application, and you can cut down on the unpleasant surprises by being as candid as possible and running through different scenarios when obtaining quotes,” he says.

And never forget, insurers don’t have to accept your business, Tamarkin continues, so if you think there is any possibility your application could get declined, talk to a smart and trustworthy agent before applying. 

This is important because declined applications, and the reasons why those applications were rejected, are shared among insurance companies.

“A good independent agent sells products from more than one insurance company, so they should be able to evaluate your situation and steer you toward an insurance company who is likely to approve you at the quoted price,” Tamarkin says.

Tamarkin has some additional advice when deciding between the actual insurance company:

“Insurance companies are heavily regulated and it’s extremely rare for one to go under,” he says. 

Instead, when deciding between insurance companies first check their financial strength rating, as determined by A.M. Best, an independent ratings agency.

“Their ratings follow a scale similar to school grades, and we generally recommend A- or better,” Tamarkin continues. 

Next, check the company’s Better Business Bureau (BBB) rating for customer service, he says. 

“BBB follows a similar grading system, and no reason to work with anyone who isn’t getting an A.” 

Instead of worrying so much about the insurance company, take more care when selecting the agent or agents you will be working with, Tamarkin continues.

That’s because unlike investment advisors, Tamarkin cautions, insurance agents in most states are not legally required to act in your best interest. 

“Also, frankly, it’s not very hard to become a licensed agent,” he says. “So take their advice with a grain of salt and do your homework.”

Tamarkin continues, “Red flags include if they want to sell you a product that either isn’t easy to understand, or they start touting its investment potential—don’t confuse insurance products and investment products, they are two different things and it is an extraordinarily rare case that it makes sense to try to combine them.” 

The Ultimate Guide to Life Insurance: Conclusion

Conclusion to ultimate guide to life insurance

In this guide we defined life insurance, who needs it, and who may not need it.

We covered different types of health insurance, including whole life and term life, and how to know which policy might be best for you. We also provided tips and pointers for estimating how much insurance you may need, how much it all may cost, and how, and from whom it’s best to buy it.

We’ll conclude with a few parting words of wisdom.

Life insurance is not an investment account, nor is it a retirement plan.

Purchasing a life insurance policy should be seen as a means to provide a death benefit to your dependents, spouse, or business partners. It is not a means to plan for retirement, nor should it be treated primarily as an investment opportunity.

It’s never too soon to buy life insurance

Even if you’re young and healthy, or if you don’t yet have any dependents, buying life insurance when you’re young can save you money. So when considering life insurance, it may be better to ask yourself, “what are my plans for the future?,” rather than just your current life scenario. 

Always tell the truth

You’ll inevitably be asked a lot of personal health-related questions while shopping for a life insurance policy, and you may even need to undergo a health examination, this process is called underwriting.

Be sure to disclose any and all health-related issues you may be facing, or that you have faced in the past. Then and only then will you receive the best policy for you and your loved ones. 

With these final bits of information you’ll be ready to enter the life insurance marketplace as a truly informed consumer. Remember, there’s no time like the present to start planning for the future.