Life Insurance for Dummies

Know the Basics

I would like to share some information about getting life insurance and how to allow different insurance agents to compete for your business. This hub is not about finding car insurance, home insurance, or health insurance; it is geared specifically for life insurance. You will also find this hub written for people who have a limited amount of knowledge concerning life insurance, written in everyday language, avoiding a lot of jargon mainly understood by professionals in the insurance industry.

While insurance agents are not like used car salesmen and cannot fluctuate on their rates just to get your business, insurance companies do have somewhat different rates and benefits depending on the insurance company itself—what they specialize in, their member’s benefits, their terms and agreements.  It is beneficial to “shop around,” find out what each company specializes in, in order to see if one company will better meet your needs and fit your unique set of circumstances.

 I am not an agent, have never owned an insurance license, and cannot give you professional advice on life insurance; however, I do have experience working for life agents and have behind the scenes knowledge that I wish to share with you in order to point you in the right direction so that you may find the right life insurance for you. 

Many people feel most comfortable walking into a business, where they meet face-to-face with an insurance agent.  Others understand our changing times and are comfortable finding an agent online.  Either way, there are a few areas of insurance you should first become acquainted with before speaking with an agent—the difference between Term Life Insurance and Whole Life Insurance, and to know the basics of graded plan insurance.

Term Life Insurance

The monthly premiums (or payments) for Term Insurance is usually cheaper than Whole Life Insurance premiums. There is a reason for that. Term Insurance is just that—it’s for a term, a specific amount of time—20 years, 30 years, etc. If you buy a Term Life Insurance policy for a 20 year term, pay your monthly premiums for 20 years, and live past the 20 years, you are no longer covered. The first day of the 20th year, you no longer have insurance.

Term insurance is not a bad policy, you just need to know from the beginning that it only lasts for a certain amount of time.  As opposed to Whole Life Insurance, Term Life coverage amounts are usually much higher than Whole Life coverage.  If you are wanting a life insurance policy to help pay for large debts when you pass away (for instance your mortgage) Term Life Insurance is the way to go.

Some companies have what's called "Return of Premium."  Let's say you purchase a 30-year Term policy with Return of Premium.  Your monthly premiums (monthly payments) are going to be more expensive with the Return of Premium, but the upside is that if you live past 30 years, your insurance company will pay you back every dime you've paid them during those 30 years.  It is also sometimes called "free insurance."  You're taking a gamble by paying extra each month that you'll live longer than 30 years, and the insurance company is taking a gamble that you won't.  It's a neat concept if you ask me.

Whole Life Insurance

Term Life Insurance lasts for a specific time; Whole Life Insurance, however, stays with you for your whole life. This insurance is sometimes called “burial insurance” and “final expense insurance.” It is meant to be used to cover your funeral and burial costs, plus whatever else you wish to use it for. It pays up when the insured passes away and some insurance companies pay when the insured turns 100 years old.  The average Whole Life policy coverage is $10,000.  (Much lower than Term Insurance.)  

Graded Plans

Another term you should understand when looking for life insurance is what’s called a “Graded Plan.”  Insurance companies categorize people into graded plan coverage when there are health issues or weight issues based on their application requirements.  If you apply for insurance and are approved for a graded plan, that usually means if you pass away within the first few years of purchasing your policy, your beneficiary will not receive the full amount of your insurance.  Different companies have different specifics but generally speaking most companies will pay 25% of your coverage amount if you pass during the first year, 50% if you pass during the second year, and 100% if you pass away there after.  With graded plans, your monthly payments may also vary from year to year.  This isn’t usually true of Whole Life and Term Life plans. 

  • Example:  Mary buys a graded life insurance policy with a $40,000 coverage if she passes away.  
  • If Mary dies within the first year, her beneficiary will receive $10,000.  
  • If Mary dies within the second year, $20,000.  
  • If Mary passes after the 3rd year, $40,000.

 Each company is different so before you apply for a life insurance policy, you should ask not only if it’s a graded plan, but also what the percentages are during the first few years.

Not all insurance companies have the same requirements for graded plans so, again, it’s worth it to shop around.  When an insurance agent gives you a life insurance quote, ask whether it’s for Term or Whole Life and ask if it’s a graded plan or not.  You will sound like you know what you’re talking about and you want to know exactly what you’re getting.

In Conclusion

As a review, when speaking with an insurance agent or agents, among other things, you will be able to ask with confidence:

  • Are you referring to Term Life or Whole Life?
  • Is this a graded plan? If so, tell me the specifics.
  • Does your company offer Return of Premium?

There are so many other complex terms and conditions to life insurance but having a basic understanding of these will help you get started in your search for the best insurance company and policy that is right for you.

If you are planning to visit an insurance business in your area or planning to sign up for insurance online, before you do, there are plenty of sites online to receive free life insurance quotes. In the next article (found here), I will tell you a little about how to receive free quotes so that you have something with which to compare.

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