Understanding Your Life Insurance Policy
Many Americans go without life insurance because they don’t realize its importance. Many more purchase a life insurance policy but do not understand how it works.
It’s important to know the basics of life insurance when shopping for coverage. You don’t need to dissect every sentence in the fine print—that’s our job as life insurance agents—but you want to have some awareness of what you’re buying, so you can gain the peace of mind that life insurance is meant to provide.
Otherwise, you might end up with a policy that doesn’t meet your needs, or worse, causes headaches down the road.
In this article, we will give a list of terms and tips that will help you better understand life insurance.
Here’s what we'll cover in this post:
Quick Article Guide
Here’s what we'll cover in this post:
Get Familiar with These Terms
Looking for a quick and straightforward life insurance glossary? You’ve come to the right place. Here are the types and components of life insurance you absolutely need to know:
Term Life Insurance
A term life insurance policy lasts for a set number of years (your term). Terms are generally available in 5-year increments ranging from 5 to 30 years. Term life is generally the most affordable type of life insurance. Learn more about term life insurance here.
Permanent Life Insurance
As the name suggests, permanent life insurance lasts for your entire life. There are many different types of permanent life insurance, all of which fall under one of two categories: universal life insurance, or whole life insurance.
Face Amount/Death Benefit
The sum of money that the insurance company will pay to your beneficiary upon your death.
The person, such as your spouse or heir, who will receive the death benefit after you die. You can also name a contingent beneficiary, who would receive the death benefit if the beneficiary dies before you.
The category the insurer places you in based on your health. Most life insurance companies have 16 possible rate categories. Your rate class will determine your premium.
The payments you will make to keep your policy. Premiums can be paid monthly, quarterly, once a year, or twice a year. Just like with any other type of insurance, if you fail to pay your premium, you lose your coverage.
An investment component attached to a permanent life insurance policy. More on this shortly, but we highly recommend steering clear of cash accumulation policies because of the risk that your investment could perform poorly and ultimately cause you to have to forfeit your policy due to high, unexpected, out-of-pocket costs.
Once you know the anatomy of a life insurance policy, you can begin to think more critically. Here are a few pointers:
Select a Term That Will Cover Your Debt
If you’re searching for term life insurance, be sure to align your policy with your debts and expenses. Do you have a mortgage? Will you be sending your kids to college? Would your spouse need income replacement if you were to die? Do you have business debt?
These are all questions to ask when deciding how much coverage you need. You can use JRC’s term life insurance calculator to come to a ballpark figure.
Consider Term Laddering
Ideally, the older you get, the more you pay off your debts. Term laddering (also called term layering or term staggering) is a strategy where you stack two or more term life insurance policies to cover debts that will diminish over time (such as your mortgage).
Try our term laddering calculator to see if this might work for you. There are also cases where we ladder a term life policy with a permanent policy, so the insured has more coverage when they need it most, with remaining coverage for the rest of their life after the term policy expires.
You have probably seen the commercials from big-box insurance companies encouraging you to combine all of your insurance with them. While this can work well for home and auto insurance, there is no such thing as discounted life insurance.
Rates are standardized and regulated at the state level, so when a company advertises life insurance at a “discounted” price as part of a bundle deal, what they’re really doing is applying a discount on auto or home insurance to upsell you.
Work with an Independent Agent
Speaking of big-box insurers, one of the simplest pieces of advice we can give you is to work with an independent life insurance agency like JRC. Why? Because life insurance is our specialty, and since we don’t answer to any one company as our employer, we can shop all carriers to find you the best rates. Still not convinced?
This article explains in greater detail. We don’t mean to speak poorly about our country’s top insurers. We have a great deal of respect for the many people they employ and insure. However, life insurance simply isn’t their top priority or area of expertise.
Take a Medical Exam
If you have a serious health issue or need a fast approval, getting life insurance without a medical exam can be beneficial to you. However, if you feel you are in decent health, it’s best to take a medical exam.
This allows the insurance company to assess the level of risk they are taking, which in turn enables them to offer better rates, assuming the medical exam confirms you are indeed in good health. For more info on why you should take a medical exam for life insurance, click here.
Business Owners Need Additional Types of Life Insurance
Are you a small business owner? If so, buying personal life insurance is a chance for you to also learn about business life insurance and create several layers of protection at once. The types of business life insurance include key person policies, buy-sell agreements, and other “outside the box” strategies.
Remember, your personal life insurance does not cover your business. Without proper life insurance, the effects of your, or a key staff member’s, death could be crippling to your business. One of the benefits of working with JRC is that we can help you address all of your life insurance needs.
Now for the things you don’t want to do when buying life insurance, which include:
Buying an Accidental Death Only Policy
Sometimes, people purchase life insurance through a bank or credit union, not realizing that the policy only covers accidental death. This means that if you have a heart attack, your policy does not pay out. Realistically, natural death is far more likely than accidental death, so we generally recommend against policies that only cover accidental death.
Buying a Cash Accumulation Policy without Understanding the Risk
Some life insurance agents will try to sell you the latest “hot product” in life insurance, which usually involves some type of cash accumulation. Before you buy a cash accumulation policy, you need to understand that there is a market risk that your cash value investment could perform poorly.
If this happens, your cash value could dwindle—without you knowing—until you are eventually in an unfavorable situation. This article is a must-read for anyone buying life insurance.
Rushing the Process
Whether you’re buying life insurance to supplement your pension, secure a small business loan, or simply protect your family, start shopping well before the need arises. Six months is a great time frame to have set aside for applying, comparing policies, getting approved, and making a final decision you can feel confident about. It should go without saying that waiting until you have a health scare to buy life insurance is not a good plan.
Not Reviewing Your Policy Annually
Life insurance isn’t something you necessarily need to monitor closely like you do with your bank account and investments, but you should always review your policy annually. Life changes, and your life insurance policy should change with it. For example, if you have recently paid off a large debt, you can consider reducing the amount of coverage in your life insurance policy.
Assuming a Health Issue Means You’re Uninsurable
We’re not here to sell you false information and say that anyone can buy life insurance. There are indeed people who are too high of a risk for insurers to cover at an affordable price point. However, many moderate to serious health conditions are not the deal breakers you might think them to be. You’ll be surprised when you read our article on 13 serious health problems that don’t rule out life insurance.
The time to start understanding your life insurance policy isn’t after you have purchased coverage; it’s during the process of buying life insurance. JRC Insurance Group can walk you through each step of finding and securing quality, reliable life insurance coverage.
By shopping 63 top-rated carriers, we are able to find the best rates, especially for those who have health issues and might be viewed unfavorably by big-box providers. Call us toll-free at 855-247-9555, or get a free quote online by clicking the button below.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.