Comparing Plans for Life Insurance

When purchasing life insurance, you’ll want to compare the various plans offered by different companies.

While the concept of life insurance is fairly simple—if you die, the insurance company pays your beneficiary—the choices can be complex. Be sure to compare plans instantly using the FREE quote tool above.

Here’s what you need to know.

Types of Life Insurance

According to the Massachusetts Division of Insurance, there are two general categories of life insurance policies: temporary and permanent. The type you buy will depend on your needs.

Temporary insurance, called term insurance, is insurance that is in place for as long as you pay the premium. If you stop paying the premium, the insurance stops. If you die during the time the policy is active, the insurance company will pay your beneficiary.

Term insurance is the least expensive kind of life insurance.

Permanent insurance is designed to be in force for the rest of your life. Sometimes you will have to pay the premium for the rest of your life, but some policies are designed to pay for themselves after premiums have been paid for a period of time.

Permanent policies often accrue cash value, so even if you cancel the policy before you die, you will get some of your money back.

Life Insurance Terminology

Like any industry, the life insurance business has its own terminology. Understanding these terms will help you to compare policies. Here are some that you should know:

Face amount – the amount of money that will be paid to your beneficiary. A policy with a $250,000 face amount will pay $250,000 to your beneficiary when you die.

Term – in the case of term, or temporary, insurance, the amount of time the policy will be in force. The premium will be the same each year for the duration of the term. Some policies have a term of one year, but will renew each year at a higher premium unless you cancel them. Other policies will have a term of multiple years, usually five, ten, twenty or thirty. Many companies will let you specify the term, so you could take out a sixteen-year term policy, for example.

Insured – the person whose life is insured by the policy. Some policies may have more than one insured, in the case of a joint policy for a couple, or a policy on a parent that includes smaller policies on their children.

Owner – the person who owns the insurance policy and is responsible for paying the premium. The owner is often also the person whose life is insured, but not always. In some cases, it makes more sense for spouses to own each other’s policies, for example. Insurable interest – You can only own a policy on someone for whom you have an ‘insurable interest,’ which means that you would be affected financially in some way if that person were to die. Spouses, children, grandchildren, dependent parents or siblings and business associates have insurable interest. You do not have insurable interest in a stranger.

Beneficiary – the person who will receive payment when the insured dies. A beneficiary can be your spouse, your children, your grandchildren, a friend, or anyone else you designate. A beneficiary can be a person or an entity, such as a trust. In addition to naming a beneficiary for your life insurance policy, you can also name a contingent beneficiary, who would receive the proceeds from your policy if the beneficiary dies before you do.

Death benefit – the amount of money your beneficiary gets. This is often the same as the face value, but not always. If you have a permanent life insurance policy that has accrued cash value, the death benefit may be higher than the face value. If you have a permanent policy against which you have taken a loan, the death benefit may be lower than the face value. Death benefits pass directly to the beneficiary upon death without having to go through probate, and are often free of Federal income tax when they are paid.

Rider – a feature that can be added on to your life insurance policy, often at an additional charge.

Common riders include:

• A waiver of premium rider, which will pay your premium in the event that you become disabled.
• A guaranteed insurability rider that allows you to increase the amount of insurance coverage you have without having to show that you are medically qualified for insurance.
• A term conversion rider which lets you convert your term insurance policy to a permanent policy, without having to go through the medical questionnaire and examination process.

Insurance companies sometimes use different names for the same rider, so make sure you are comparing like riders when you are comparing policies.

Underwriting – the process that insurance companies use to assess your risk and price your policy. When you apply for a life insurance policy, you will be asked a series of questions about your current health, your family and medical history and your lifestyle. The insurance company may request your medical records from your doctor, and they may send a nurse to your home to take your height, weight, blood pressure and a blood sample.

Comparing Policies

Once you understand these terms, you’ll be ready to compare different policies. There are a few things you’ll want to be aware of.

If you are looking at permanent life insurance policies, know that there are several different kinds.

They include whole life, universal life and variable life insurance polices. Make sure you are comparing the same type of policy across different companies.

Whole life is the most expensive kind of life insurance. As the name implies, it is designed to insure you for your whole life.

You will pay the same premium each year, but in the early years, your cost of insurance is lower, so the cost is averaged over your lifetime when the premium is determined.

Whole life insurance policies sometimes pay dividends. Those dividends can be used to pay part of the premium, reducing your premium; they can be used to purchase additional insurance, increasing the death benefit of your policy; or they can be paid to you in cash.

The amount that is paid in dividends is determined each year by the insurance company and is based on how well the company performed the previous year. Since dividends can vary, they should not be relied upon to pay your premium or increase your death benefit.

Universal life insurance is permanent insurance, with some flexibility in the premiums. Since the cost to insure you goes up over time, the early premium payments are more than the cost of insurance.

The excess money is used to generate cash value in the policy. In some cases, you can reduce the amount of your premium payment if there is enough cash in the policy to make up the difference. Be careful, however, that you maintain enough cash in the policy to continue the coverage.

Variable life insurance is similar to universal insurance, except that the money generated by excess premium payments is invested in either fixed or variable assets, like money market accounts or mutual funds.

The cash value in the policy can fluctuate depending on the performance of these assets.

The death benefit can also be affected by the performance of these investments. In a worst case scenario, if the investments perform poorly, they may not be enough to sustain the policy and you will have to pay higher premiums to keep the policy in force.

As you can see, there’s a lot to know about life insurance! Understanding your options will help you to better compare the policies offered by different companies, and to select the best insurance policy for your needs.

Once you find the best policy, you will enjoy the peace of mind that comes with knowing that your family is protected. Be sure to use the FREE quote tool located below to start your search for insurance.