Are you looking for a simple definition of life insurance? I bet you are, and you’re not alone! Shopping around for a policy to cover your family is overwhelming.
After all, there are a LOT of options and it’s confusing if you aren’t informed about the market.
That’s why Policy Architects is here! My goal is to create a comprehensive site that helps people sift through all the information that’s out there.
Once you have a firm foundation under your belt, you’re in a much better position to articulate what you want to your agent.
Life insurance means MANY things to people. But there is a simple definition of life insurance that leads to some more complicated subjects and I’m going to share that info with you RIGHT now.
...But First a Few Words About Policy Architects and ME!
My name is James Heidebrecht and I’m the founder of Policy Architects! We’re a personalized life insurance agency that serves the needs of Canadians looking for the most affordable rates WITH the most comprehensive coverage.
We aren’t a call center. As independent agents, we are free to work with the best life insurance companies available and will select the insurer that works for your personal circumstances.
The thing is, not all life insurance companies are created equal. Which means you need a seasoned independent agent to walk you through your options. This means saving and those savings over your term can reach into 10’s of thousands of dollars.
Ok So Here It Is: A Simple Definition of Life Insurance
This is what you came for after all!
I'm going to add a little colour and interest along the way:
Life Insurance Starts with a Contract
Life insurance is a contract that you enter into with an insurer. This is why it’s so important for you to work with an independent agent. As with all legal documents, you need to know what you are getting into BEFORE you sign on the dotted line.
These contracts are complicated and they outline EXACTLY what the expectations are of you AND the company. So you MUST understand what those terms are.
Coverage in Exchange for Premiums
In this contract (otherwise known as the policy), the life insurance company will lay out how much coverage they provide in exchange for your premium payments. This coverage is called a death benefit. This is the money your beneficiary receives should you die during your term.
For traditional life insurance, you’ll take part in a medical exam that determines what these premium payments are. Premiums vary radically depending on your age and health. This is yet another reason to speak to Policy Architects TODAY.
Your Beneficiaries Inherit the Money Tax Free
So who are the beneficiaries? It’s the person, people or charitable organization you select to inherit the money that’s paid out should you die during your term.
This payout typically is provided in a lump sum, but this is not always the case. Most insurance companies have a compassionate terminal illness benefit in the event you are diagnosed by a doctor as having less than 2 years to live. In this situation, the insurance company will pay out an advance on the death benefit so you and your beneficiaries have some money before you pass away.
Another wonderful perk for life insurance? The death benefits are provided to your beneficiary TAX FREE.
Now That You Have a Simple Definition of Life Insurance You Need Some MORE Information to Make the Right Choice!
Sure this is some great information, but I bet there are a number of you that already knew this. If you’re looking for a Simple Definition of Life Insurance I am here to tell you that life insurance is anything BUT simple.
This is why it’s so frustrating to wade through all the information out there. If you’ve gone to a life insurance website my guess is you were assaulted by lots of mumbo jumbo and life insurance jargon. Each company has their own selection of products so it can get a little crazy my friends.
Even life insurance agents have a hard time keeping up with the ever-changing product list. That’s why you need to understand some more terminology BEFORE you truly have a Simple Definition of Life Insurance.
There are TWO Main Types of Life Insurance
No Simple Definition of Life Insurance would be complete without letting you know you have some choices to make.
Sadly a lot of people go into this blind and rely on an agent to fill them in on what’s available. That’s great – but only if you have an honest agent. Some are tied to the life insurance companies they represent and frankly, this creates a conflict of interest.
How can you possibly advise someone about their options if you have a horse in the race? No captured agent is going to tell you to go to another insurer because they can better serve your needs.
In fact, some agents will sell you a policy that is completely wrong for your circumstances because they get a better commission.
OUCH! I would like to say this never happens but it does.
So let me explain what I mean right now. Let's start with the most common and affordable type of life insurance - Term.
Term Life Insurance
For me, this is the bee’s knees. It works for most people, most of the time. Term life insurance is affordable and flexible. It offers temporary coverage that protects you for the number of years or “term” you select. For the most part, my clients pick 10, 20 and 30 year terms, but you may customize this to meet your particular needs.
The most common reason people buy term life insurance is to cover the loss of an income.
At the end of your term, coverage is terminated but typically you can convert your policy to a permanent policy before that point within certain limits.
Permanent Life Insurance
Hmm well, term doesn’t cover you ’til the day you die and this poses a problem for some people. That’s where permanent life insurance comes into the equation.
This also means that the premiums are substantially more expensive than term. This is because as long as you pay your premiums the life insurance company WILL have to pay out death benefits.
Cash value is also typically part and parcel of a permanent life insurance policy. This is when a portion of your premiums are set aside and accumulate. You as the policyholder can borrow against these funds or withdraw them to use as you like. The cash value can also simply be left for your beneficiary. The thing is cash value takes quite some time to build up. This won’t happen overnight.
That’s not all – permanent life insurance is VERY COMPLICATED on top of that. It’s not for someone who wants to set it and forget it.
Why Do You Have to Be So Complicated: Simple Definition of Life Insurance
Yep. This is where a lot of confusion comes in. Permanent life insurance isn’t a simple product there are a number of “types” of products and life insurance companies customize their own offerings.
In a nutshell, there’s a LOT of room to pick the WRONG product and spend a lot of money doing so.
So let’s take a look at the basics now! Why don’t we start with the best-known variety!
Whole Life Insurance
This is what most people think of when I mention permanent life insurance. Whole life, also known as cash value life insurance, protects you until the day you die, so there is a guaranteed death benefit as long as you pay your premiums on time.
These policies have a cash value accumulation feature which appeals to a lot of clients. This component really depends on the type of whole life policy you purchase.
Functionally your premiums are divided between paying for the cost of your insurance and deposits into a policy investment account. So over the years, any money you pay above and beyond the insurance costs accumulates in your cash value account.
The rub is, in the early years of your policy not a whole heck of a lot is building up in your cash value account. Not to mention the fact that you’re paying for commissions and administrative costs. But that’s not all…
…you also run the risk of paying a lot of money for nothing if you default on your payments. Way too many people get into these policies, find them too costly and give them up. That’s no fun especially when your premiums cost a bomb.
IMHO unless you’re someone with a lot of expendable income I wouldn’t suggest a whole life policy. That being said, a lot of agents do. because these policies are attached to some pretty sweet commissions.
NOTE: I do have one addendum. Final expense life insurance is typically whole life and I do recommend it. It’s affordable and helps many families protect their loved ones from extortionate funeral costs.
Damon Gonzalez: The insurance company is expecting the premium you commit to each year, and they aren’t very flexible. Your policy could lapse if you lose your job and can’t make premium payments anymore. It is important to keep in mind that you are paying for life insurance, and the cost of insurance will be a drag on your overall performance. When Is Whole Life Insurance a Good Investment Strategy? NerdWallet
Universal Life Insurance
Universal life insurance is another form of permanent protection that offers coverage until the day you die. It’s appealing to those who want to leave their family something when they pass away no matter what.
…BUT unlike whole life insurance, universal life is flexible and slightly more affordable. These policies also have a cash value accumulation feature similar to whole life but more flexible and as such, more complicated. This type of insurance allows you to adjust your death benefit over time as your needs and situation change. You’re also the one who decides how any cash accumulated in your policy is invested. Similar to an RRSP or 401K, you choose the mix of assets you want your money to go into whether it be bond, equity or money market funds. As result, these policies aren’t guaranteed and you’re assuming some risk. Along with this risk is a higher potential for compounded growth.
You may have also heard it called Variable Universal Life Insurance, especially in the US. Either way, you’re exposed to the ups and downs of the market and as such, you have to keep your eyes on this product. However, It does have a place in the life insurance world and can be very useful in certain situations. Read more about whether Univeral Life is right for you in my article here.
Last-To-Die Life Insurance Policies
If you’re married or live with a partner, this might be something to consider.
The life insurance company enters into a contract with you and another policyholder – typically a husband and a wife. The death benefit pays out only when the second policyholder passes away.
This sort of policy is perfect for people who want to leave something for their children or grandchildren. The best part? These policies are cheaper than insuring both lives separately.
So What's the Story Morning Glory? The Truth is There's NO Simple Definition of Life Insurance
Yes, you heard me right, there’s no Simple Definition of Life Insurance! Sure I can give you the basics, but there’s no way for me to give you a sound bite answer. That’s why you should always speak to an independent life insurance agent, even if you’ve done all of your legwork.
We’ll do a financial analysis to determine what sort of life insurance works for you. Let’s put it this way someone who is making $50K annually looking to replace their income for 30 years is looking for a very different product that someone with a vast estate that’s trying to protect their assets from the taxman. No to mention all the people who fall in between.
There are so many options, companies, coverage amounts and terms to think about. All of this and we haven’t even talked about Guaranteed Issue! This really is a process!
That's Where Policy Architects Can Help
At Policy Architects we’re well aware that there is no simple definition of life insurance. Our agents work every day to keep up with this fast-paced business and that’s no easy feat.
I’m writing these articles to help people be better prepared for meeting their agent. No one should go into this process blind. I mean would you buy a car without checking out the reviews? This is a BIG purchase and the future of your family may depend on you making the right choice.
Did you know there a lot of people who buy high priced whole life policies that are completely inappropriate for them?
…and a lot of those people simply cut their losses long before their beneficiaries get a dime! Check this out!
For those with permanent policies, which may have a cash value long before the death of the insured, some 25% of policyholders stop making premium payments within the first three years of owning the policies; within 10 years, 40% have let the policies lapse. 10 Things Life Insurers Won’t Tell You, MarketWatch
All the more reason to call Policy Architects today. We’ll find you the RIGHT policy at the RIGHT price. We want lifetime clients NOT a simple commission.
Remember we’ve got your back! Call us today! 1-888-501-9583!