Understand Life Insurance: Intro, Quotes vs. Rates, Policies & Companies

Intro: What is Life Insurance?

What is Insurance?

Insurance is a financial tool used to protect against a possible loss. Insurance uses the principle of risk pooling - group sharing of loss. Each group member takes on a small loss (premium payments) to insure against an unexpected significant loss (your house burning down, a bad car accident, or the death of the family breadwinner).

How Does Life Insurance Work?

Life Insurance is the financial tool needed to protect your future economic value for your family. Every day, you go to work in the economy and earn money to care for your family’s needs. If something happened to you, your family would lose all your economic value. Life Insurance helps protect your economic value for your family so that they won’t suffer financially if you are not here to provide for them.

What is a Life Insurance Policy?

A life insurance policy is a legal contract between you and an insurance company stating that if you make a regular (small) premium payment, the insurance company will pay out a (significant) benefit to your family if you pass away.

  • The Insurance Company
  • The Policy Owner
  • The Insured
  • The Beneficiary
  • Type of Policy
  • The Death Benefit
  • The Premium Payment

* Unless otherwise stated, the insured is the policy owner. The policy owner is responsible for making the premium payments and is the only person with the authority to change or cancel the policy.

What are the Benefits of Life Insurance?

The life insurance company fully guarantees a life insurance policy after the policy is approved and the insured makes the first premium payment. The policy takes effect as soon as it is approved and paid for. Once in effect, the policy will cover any cause of death except for suicide in the first two years. The Death Benefit is paid out income-tax-free as a lump sum payment, typically within two weeks of receiving a copy of the death certificate. The policy owner can cancel the policy at any time without penalty. The Life Insurance Industry is one of the most regulated industries in the USA.

Do I Need Life Insurance?

If you have anybody in your life that you care about, especially if they are dependent on you, then you probably need life insurance.

  • Get Married
  • Expecting a Child
  • Bought a new home
  • Starting a Business
  • They financially support their elderly parents.

How can Life Insurance Protect my Family?

Life Insurance can never replace the love of a parent or spouse. Still, the only thing worse than losing a loved one is figuring out how you will survive without money. You put a roof over their head, food on their plate, clothes on their backs, and provide the very foundation for their lives. Life Insurance protects your family’s lifestyle and livelihood. Your family’s future is in your hands; let Life Insurance help protect their future.

Moral Obligation for Life Insurance

As the breadwinner, you have taken on the financial responsibility of supporting your family. But what happens if you are not here? Are you not obligated to support your family in death as you were in life? If not, to maintain their standard of living with life’s luxuries, to at least support the necessities of life for them?

For some families, life insurance becomes the most important financial decision ever made because it allows them to maintain their living standards and dignity.

How Much Life Insurance Protection Do I Need?

At Simple Term Life, we devised the money tree principle to determine how much life insurance protection our clients should have. Life Insurance is a very personal choice, and there are no right or wrong answers. Some families will spend less on life insurance and have just enough to ensure the bare essentials are taken care of. Other families go above and beyond and try to ensure that every need and desire will be cared for if the family’s breadwinner were to pass away. The Money Tree Principle will get your family as close to their current living standards and lifestyle as possible.

The Money Tree Principle

Imagine you had a tree in your yard that grew dollar bills instead of leaves. The amount of money this tree produced was very similar to your current income. How much would you insure that tree for in case it died?

This thought experiment will show you how much Life Insurance you should consider for yourself.

Here is the formula we recommend to determine the right amount of life insurance protection you should have for your family’s future: multiply your current income by the years you have left until retirement, then cut that number in half.

  • We recommend this because at least half of your income likely goes to taxes and personal living expenses.

There are many approaches that financial advisors have used to determine the right amount of life insurance.

Multiples of Income vs. Human Life Value vs. Needs Approach

Multiples of Income

Multiples of Income is the simplest formula to use. Get somewhere between 10 - 12 times your income. If you make $50,000, then buy $500,000

Human Life Value

Human Life Value is a more detailed approach than Multiples of Income. Here, we try to figure out what the financial value of your life will be from this point forward. How much money do you make now? How much money will you make in the future? This method is more effective for determining your life insurance needs because it considers your age. The younger you are, the more life insurance you’ll need because your economic value is greater from an income standpoint. At age 30, you’ll have 35 years of income to make up for if you were to die. At age 40, you’ve already made ten years of income, so you’ll only have to make up for 25 years of income loss.

The Needs Approach

The Needs Approach is the most detailed. Instead of multiplying your income by ten or determining the economic value of your life over time, you determine all of your needs.

  • Add up every expense your family has, then multiply by the years you’ll need to meet those expenses if the breadwinner passes away.

Types of Life Insurance Policies

  1. Term Life Insurance
  2. Permanent Life Insurance
  3. Guaranteed-Issue Final-Expense

What is Term Life Insurance?

Term Life is a life insurance policy designed for temporary life insurance needs.

Reasons to Own Term Life Insurance Policies

  1. Income Replacement
  2. Mortgage Protection
  3. Debt Repayment
  4. Dependents
  5. Court Ordered

How Does Term Life Work?

  • A Term Life Insurance policy typically has a term period of 10 - 30 years.
  • The Benefit Amount and Premium payment are guaranteed to stay the same for the term period.
  • Term Life Insurance is the least expensive life insurance option. The longer the term period is guaranteed, the more expensive the policy becomes.
  • After the term period expires, the premium payments increase substantially.
  • Most term insurance can be converted into permanent insurance (universal or whole life), with no questions asked or underwriting required.
  • Term Life Insurance is of tremendous value because policyholders pay pennies on the dollar when comparing premium payments to the death benefit. A 40-year-old man who qualifies for a Standard Rate Class (4th Best) and is looking for a $500,000 10-year level term would pay $40 per month / $480 per year / or $4,800 over ten years.
  • If this client passes away after making just one $40 payment, his family will receive $500,000 income tax-free. That protection would only cost him only $4,800 over the ten years. That’s what we mean by “pennies on the dollar.”

What is Permanent Life Insurance?

Permanent life insurance has many types and options. The three major subcategories are whole life, universal life, and variable life.

Permanent Life Insurance is significantly more expensive than term insurance because the death benefit is usually guaranteed for life and typically offers a savings or investment aspect.

Reasons to Own Permanent Life Insurance Policies

  1. You need coverage that is guaranteed for the rest of your life.
  2. You want to build up tax-free retirement savings.

How Does Permanent Life Work

Whole Life

Whole life insurance is a permanent policy that typically remains in force for the insured’s entire life. The premium payments remain level and required for the policy’s life.

Universal Life

Universal Life is a permanent life insurance policy that offers flexibility. The death benefit, cash values, and premiums can be altered as a policyholder’s circumstances change.

Variable Life

Variable life is a form of permanent life insurance that allows you to invest your cash value into various investment instruments and funds such as stocks, bonds, and mutual funds.

What is Guaranteed-Issue Final-Expense

Guaranteed-Issue Final-Expense are smaller policies with coverage from $5,000 to $25,000. These policies have no underwriting, so everyone qualifies, even if you have health issues. Some of these policies come with a two-year waiting period before they take effect.

Reasons to Own Guaranteed Issue Final Expense

  1. You need final expense coverage.
  2. You do not qualify for a fully underwritten life insurance policy.

What Life Insurance Policy is Right for Me?

If you need temporary coverage, consider a term life insurance policy. Permanent life insurance is better if you need guaranteed coverage for the rest of your life. Guaranteed-Issue Final-Expense policies make sense if prior health issues disqualify you from a fully underwritten life insurance policy.

Simple Term Life has been advising our clients for almost two decades and will happily discuss your life insurance needs so you find the right policy at the lowest price.

Life Insurance Quotes vs. Life Insurance Rates 

Life Insurance Quotes are an estimated cost for a new life insurance policy given before the approval process.

Life Insurance Rates are the approved cost of a life insurance policy after the applicant completes the approval process.

How to get Approved for Life Insurance

To get approved for life insurance, you must complete an application and undergo the underwriting process. Depending on different factors, the underwriting process could be as simple as filling out an application and waiting a few minutes for your approval or a more lengthy process that requires a paramed exam and ordering your medical records by the insurance company.

Life Insurance Underwriting

Fully Underwritten

Fully Underwritten policies are almost always your least expensive option, but they typically take at least 2 - 6 weeks to get approved for your insurance coverage. Fully Underwritten policies will require that you visit with a paramed examiner. Once your exam is completed, the results and your application will be sent to the Underwriter at the Insurance Company. The Underwriter will order your driving record from your State’s Secretary of State, a report from the Prescription Database (Rx Reports), and a report from the Medical Information Bureau (MIB). Based on your health history, the Underwriter may also order medical records from your doctor(s). Once the Underwriter has all the reports and documents requested, the policy usually takes about a week to be approved.

Simplified-Issue No-Exam

Simplified-Issue No-Exam policies are approved without requiring the paramed exam. These policies get approved within a few minutes to a few days. In the past, these policies would usually cost more, but thanks to black box underwriting, some companies will offer their best rates even without a medical exam to confirm an applicant’s health status.

Though the exam is optional, these policies are otherwise fully underwritten. The insurance company will order your driving record, Rx, and MIB reports.

Guaranteed Issue

A guaranteed issue policy can be approved if you meet the age requirement, which varies from company to company. These applications do not ask any health or lifestyle questions. The only requirement will be filling out the application with your agent. Since the policy is approved immediately, a payment method will be required.

Most Guaranteed Issue policies have a graded death benefit, meaning the full coverage amount will not take effect until 24 - 36 months. If the insured dies before the policy benefit kicks in, the beneficiary will get back all the premium payments made plus an additional percentage that varies from company to company.

The benefit amount is limited from $5,000 - $25,000.

Understanding The Underwriting Process

Life Insurance Underwriting is the process insurance companies use to determine an applicant’s risk of dying prematurely.

Underwriting assigns an applicant a risk level known as the rate class. The applicant’s health, lifestyle, occupation, and family history help determine the rate class.

Each life insurance company publishes its underwriting guidelines explaining how they access all the risks they consider.

How is the Cost of Life Insurance Determined?

  • Life insurance costs are based on age, gender, and the approved rate class. 
  • Every company has about 20 different rate classes: twelve non-nicotine and six nicotine. These are usually referred to as smoker and nonsmoker rates. 
  • All rates and rate classes are published with the life insurance state commissionaire. 
  • The qualifications for each rate class are published in the company’s underwriting guidelines.

Rate Classes Explained

Preferred Plus is the very best rates class. This rate class is for those few individuals that have almost zero risk. Roughly about 20% of people will qualify.

Preferred is the second-best rate class. This rate class is for individuals with excellent health and minimal risk. Roughly 20% of people will qualify for this rate class.

Standard Plus is the third-best rate class. This rate class is for individuals at a better-than-average risk but who do not qualify for a preferred risk.

Standard is the fourth-best rate class. This rate class is for individuals that are of average risk. The majority of applicants will fit into this guideline.

Substandard are rate classes known as table rates. Substandard rates are for people who are a below-average risk.

Table rates are listed from A - H or 1 - 8, depending on the company.

For most companies, each table is 25% more expensive than Standard. So Table A (table 1) is 125% times standard. Table B (table 2) is 150% more than Standard. Table C (table 3) is 175% more than Standard. Etc.

Tobacco Rates

Tobacco users are considered a greater risk to insurance companies because their average lifespan is not as long as nonsmokers, everything else being equal. The good news is that some companies specialize in this risk, and their rates are much lower than most of their competitors.

Preferred Tobacco - Risk is similar to Preferred non-tobacco rates, but the individual uses tobacco.

Standard Tobacco - Risk is similar to Standard non-tobacco rates, but the individual uses tobacco.

SubStandard Tobacco - The person is less than the average risk and uses tobacco.

Life Insurance Approval

When the Underwriter has finished the Underwriting Process, there will be one of 5 possible outcomes.

Approved as Applied for

Your policy is approved at the rates you and your life insurance advisor previously discussed. 

Approved Better than applied for

Your policy is approved better than applied for. The cost of your policy will be less than the quotes you received during your application.

Approved Other than applied for

Your policy was approved, but the rates will be higher than what you were initially quoted during your application.

Postponed

The insurance company can not approve the policy at this time. A postponement typically happens when the insurance company either did not get all the information they requested in a timely manner or requires the applicant to go for further medical evaluation before they approve the policy.

Declined

The Insurance company declines to offer life insurance protection. When your policy is declined, you may still have options. It is best to contact your life insurance advisor as soon as possible to discuss your options.

How to get Approved at the Best Rate

How to find the Best Life Insurance Rates

  • Every Life Insurance Company publishes rates, rate classes, and underwriting guidelines with your state’s life insurance commissionaire.
  • Your Licensed Advisor uses state-of-the-art software that tracks the rates for all 40+ companies we work with based on your age, gender, and the company’s published underwriting guidelines.
  • We customize the quotes based on your criteria to narrow down the company that will offer you the lowest rate.

Who is the Best Life Insurance Company? 

Life Insurance companies are not one-size-fits-all. Every company has different marketing objectives and accepts different types of risks. The best company for you might not be the best company for your spouse.

How to find the Best Life Insurance Company

  1. Ensure the life insurance company is licensed to do business in your state. - All companies Simple Term Life works with are licensed to do business in every state.  
  2. Ensure the company has an excellent rating with rating agencies like AM Best. - Simple Term Life only works with excellent-rated companies. 
  3. Find the insurance company that will offer you the right policy at the lowest rate. - Simple Term Life shops dozens of companies to save you time and money. 

12 Top-Rated Life Insurance Companies 

  • AIG
  • Assurity
  • Banner Life
  • John Hancock
  • Lincoln National Life
  • National Life Group
  • North American
  • Pacific Life
  • Protective Life
  • Prudential 
  • SBLI 
  • Symetra 

What are Life Insurance Riders?

  • A life insurance policy rider is an addition to your life insurance policy that adds additional benefits to make your policy more flexible.
  • Riders can be free or come with an increase to your premium payments.

Top Life Insurance Policy Riders

  1. Accelerated Death Benefit
  2. Child
  3. Waiver of Premium
  4. Accidental Death
  5. Long Term Care
  6. Additional Purchase Option
  7. Disability
  8. Unemployment

History of Life Insurance

100 bc: Roman military leader, Caius Marius, created a burial club among his troops so that when his soldiers died unexpectedly, other members would pay for burial expenses. Similar clubs started, eventually leading to clubs paying stipends to the deceased surviving family members.

1653 - Italian banker, Lorenzo de Tonti, creates the Tontine annuity system in Paris, France. Investors would pay a sum of money into the annuity. Each investor then received an annual dividend paid out on their capital. As each investor died, their share would be divided among the surviving investors and paid out as higher dividends. The annual payments continued until there was only one survivor left.

1662 - John Graunt finds predictable patterns of longevity and death in certain groups of people.

1693 - Edmond Halley creates the first mortality table linking life insurance premiums with the average life spans of certain groups of people.

1706 - In London, William Talbot and Sir Thomas Allen created the Amicable Society for Perpetual Assurance, the first Life Insurance Company. Amicable Society started with 2000 members, and their first policy had an age range from 12 - 55.

1759 - The first life insurance company was created in the United States. The Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers was created in Philadelphia and New York City.

Today - There are over 2000 Life Insurance Companies, over 290,000,000 (290 million) policies in force with over $10,000,000,000,000 ($10 Trillion) in protection, the insurance companies bring in over $124,000,000,000 ($124 Billion) in premiums and have over $1,000,000,000 ($1 Trillion) in reserves to pay out on benefits.

Life Insurance Glossary

Accelerated Death Benefit Rider

— Benefits available before the insured’s death are available in some life insurance policies. These benefits are usually available only due to terminal or catastrophic illness, long-term care, or confinement to a nursing home.

Accidental Death Benefit Rider

— Sometimes referred to as “double indemnity,” this policy add-on provides for the payment of an additional benefit in the event of death due to an accident.

Automatic Premium Loan

— A provision in some life insurance policies designed to provide policyholders with added flexibility by automatically “borrowing” from a policy’s cash value (if sufficient) to keep the policy in force even if the premium due has not been received by the end of the grace period.

Beneficiary

— The person or entity receiving the death benefit at the insured’s death.

Cash Value

— the amount of money accumulated by a life insurance policy as the policy matures and available to be borrowed while the policy is in force or paid to the policyholder when the policy is canceled.

Convertible Clause

— a policy clause that gives the policyholder the right to convert term insurance to whole life insurance.

Death Benefit

– The total cash payment made to the beneficiary upon the insured’s death.

Decreasing Term

— term insurance in which the face value decreases on a specified schedule. This type of policy is often used for insuring home mortgages.

Disability Waiver Rider

— a policy rider that waives premiums if the policyholder becomes permanently disabled or unable to work.

Dividend

— the money paid back to the policyholder at the end of a year if an insurance company has collected more premiums than necessary to meet its expenses, death benefits, and reserve build-up.

Estate

— The total value of a decedent’s assets at the time of death. Such assets may be passed directly to a beneficiary via a will or held in trust for the beneficiary.

Estate Planning

— the process of planning to protect wealth from taxes and other costs and to distribute assets and income after death.

Evidence of Insurability

— The presentation to a prospective insurer of an applicant’s current and historical medical status. Usually, this is a disclosure of health history via a questionnaire (although other evidence may be requested) to an insurer to determine the appropriate premium to charge for the risk the insurer expects to accept.

Face Value

— the amount of money a life insurance policy pays if the insured dies.

Grace Period

— A designated period of time following each premium due date in which an overdue premium may be paid without loss of coverage.

Guaranteed Insurability Rider

— a policy rider that allows the policyholder to purchase stated amounts of additional life insurance at specified times without passing a physical exam.

Guardian

— A person or persons named to care for minor children until they reach the age of majority. A will is the best way to ensure that the person or persons whom you wish to have care for your minor children are legally empowered to do so in the event of your death.

In-Force

— “In-force” policies are active contracts that will pay out if the insured passes away. The opposite of in-force is a lapsed policy.

Insurability

— An assessment of the applicant’s health status is used in determining the appropriate premium commensurate with the insurer’s risk. There are three basic categories of insurability: preferred, standard, and rated. Preferred applicants are those whose health is above-average. Standard applicants are of normal health status. Rated applicants are those whose health is below average. (e.g.., those who have had cancer or a heart attack, etc.).

Insured

— The person covered by life insurance.

Lapsed Policy

— A policy that has been terminated and is no longer in-force due to non-payment of premium.

Maturity

— The date upon which the face amount of a life insurance policy is paid to the policyholder (if not previously invoked due to the insured’s death).

Mortality Table

— a mathematical table indicating the average length of life for a group of persons at any particular age.

Non-Forfeiture Values

— The value of a policy if canceled, either in cash or in another form of insurance.

Nonparticipating Life Insurance

— coverage that is calculated as closely as possible to actual cost so that no dividends are paid to policyholders.

Owner

– The person or entity who owns the insurance policy. The owner may or may not be the insured. The owner can designate the beneficiary and is responsible for paying premiums.

Premium

– The amount billed to the owner of an insurance policy (usually monthly, quarterly, or annually) by the insurance company.

Participating Life Insurance

— coverage that pays dividends to policyholders.

Policy

— The actual terms of a contract of life insurance.

Policy Loan

— a loan made to a policyholder for part of the policy’s cash value.

Premium

— the amount of money paid by the policyholder at regular intervals to keep the policy in force.

Probate

 — The legal certification process of a decedent’s written instructions regarding the disposition of his or her estate.

Proceeds

 — the money the beneficiary receives upon filing a claim after the policyholder’s death.

Reinstatement

 — The restoration of a lapsed policy to in-force status. The company may require evidence of insurability (and, if health status has changed, may deny reinstatement) and will always require payment of the total amount of past due premium.

Renewable Clause

— a policy clause that allows the policyholder to renew coverage for another period without a medical examination.

Rider

— a clause that, when added to the policy, expands or restricts its benefits or excludes certain conditions from coverage.

Surrender

— The cancellation of an in-force policy by the policy owner. The policy owner receives the full cash/non-forfeiture value, and the insurer is no longer obligated to pay the death benefit.

Term Insurance

— a policy that pays a death benefit to survivors but doesn’t accumulate a cash value.

Trust

— A trust is a legal entity established by one person to benefit other people. The person establishing the trust is usually called the “grantor.” Those receiving income from, or the assets of, a trust are called “beneficiaries.” The assets of a trust are managed or overseen by a “trustee” – whose responsibility is to act only in the interests of the beneficiaries.

Underwriting

— The process of grouping applicants for insurance by characteristics such as age, gender, health occupation, and lifestyle or hobbies. People with similar characteristics are assigned a similar level of risk – and premium amounts are determined accordingly.

Universal Life Insurance

— a flexible policy that lets the policyholder vary the premium payments and the face value of the policy.

Variable Life Insurance

— a policy in which the death benefits and cash value depend on the investment performance of one or more separate accounts.

Whole Life Insurance

— a policy that builds a cash value and gives protection through the policyholder’s lifetime as long as premiums are paid.

Key Terms:


  • Insured

    The person who the life insurance protection is on.

  • Beneficiary

    The person or people who will receive the benefit amount if the insured were to die.

  • Policy Owner

    The person who owns the life insurance policy. This can be the insured, the beneficiary, or a third party like a trust.

  • Life Insurance Company

    The companies which issue life insurance policies.

  • Policy

    The contract between the policy owner and the insurance company which lays out the terms of the agreement.

  • In Force

    Your policy is active and you are now covered.

  • Face Amount

    The amount of money paid to the beneficiary if the insured were to die. Also, know as the benefit amount or death benefit.

  • Premium Payment

    The amount of money paid by the policy owner to the insurance company to keep the policy in force.