Everything you need to know about Life Insurance

By Justin Maxwell of Big Life Financial

Basics of Life Insurance

If you have ever seen the 1993 movie Groundhog Day you might be familiar with a scene in which Phil, the main character played by Bill Murray, encounters an old “friend” on the street. This “friend” happens to be a life insurance agent. During the scene, Ned the “friend,” is portrayed by giving an overzealous, over-pushy, life insurance pitch. Perhaps you too have encountered that “friend” who pitches you with fears of death, a better way to invest, or any other of the slightly unethical tactics used today. Contrary to that scene and perhaps even counter to your experience with life insurance I want to provide you with the basic and essential information concerning life insurance, thus empowering you to make the decision that is best for you and your family.

Before we dive into the different types of life insurance and which ones should you be considering.

It is important to remember that life insurance companies are businesses and that they are trying to make a profit. If they didn’t make a profit they would not be able to provide the death benefits and honestly they would not exist.

It is also important to remember that they have strict rules to stay in business. For every dollar of cash value (savings account component of life insurance) they have to have that same amount of money available in cash. Not even banks have these strict of rules. In addition, like the FDIC backs and protects your money in a bank, life insurance companies have similar type of insurance to protect your money/death benefit. I would recommend that you choose life insurance companies that has been around for a long time (100 plus years) and are worth well over a billion dollars, this will provide even more peace of mind.

Life Insurance is simply an insurance that will pay out if/when you pass away.

It will help pay for your loss, not only the end of life expenses like a funeral or settling of debt, but also the income potential that was missed by your death. To get this death benefit you pay a premium each month, quarter or year and the life insurance company will in turn pay a death benefit if/when you pass away.

There are two main types of life insurance — term and permanent.

Term Life Insurance

When you purchase a term life insurance policy you will pay a premium payment for set time period. That time frame could be 10 years, 15 years, 20 years, or even 30 years. If at any point during your established time frame you pass away the life insurance company will pay your beneficiaries a death benefit. However, if you pass away after that agreed time frame your beneficiaries will not receive a death benefit. Thus, your only choices for term insurance is how long you want to have it verse having a variety of different products to choose from like the permanent offers. Typically, you would use term insurance until approximately age 65/retirement.

Permanent Life Insurance

Permanent insurance is just like the name implies, it is permanent. It will pay a death benefit no matter how long it takes you to pass away. Unlike term which didn’t have products to choose from, permanent life insurance has a variety of products and features. Within each of these products there are a ton of different features and ways to set each one up, however, that is beyond the scope of this article. If you are wanting to learn about all the features and the variety of ways to set these policies up I would highly recommend reading books, listening to podcasts, speaking with life insurance professionals, and doing as much research as possible. It’s my experience that if you jump into these products with the wrong agent you will be disappointed or feel swindled. I know I am painting a fairly dark picture here, but I would still highly recommend using these products, but only after YOU have learned about specific strategies that fit into your investor ID and your situation. If you are at a point in your life where you want to learn more about these strategies, I would gladly help to point you in the right direction.

To this point I have outlined the basics of what life insurance options you have to choose from, but thus far I have not provided any insight into which product you should be buying or why you should even consider it a necessity. I will now answer those questions and provide you with clarity on what products you should be considering, why you should be considering them, and how much they will cover.

Life insurance death benefits are calculated a few ways, but two easy ways to calculate how much you can potentially qualify. The first method is to times your annual salary by six to ten. This will produce a number but typically it’s going to be lower. The second way does its best to take into account what is called your human life value or how much value you will create in the world. To calculate this, you multiple your salary by the number of years you have left until retirement. Both of these ways will give you an idea of how much money the life insurance company will probably cover in the event of your death.

It is important to have life insurance because if you pass away there are debts to pay, funeral expenses to pay, mortgage/rent payments to pay, food to put on the table, sports to pay for, etc. If you are gone the paying of those things still goes on. By not having life insurance you put your spouse, your kids, and others in a hard spot they have to scrap by and probably go into debt themselves just to keep going. On the other hand, if you have life insurance you give them the time to regroup, find a job that makes more, go back to school or go to school for the first time to increase their income, and most importantly keep food on the table. It can provide peace of mind that your family will be taken care of if you happen to pass.

If you have dependents of any kind: spouse/partner, children, step-children, or even if you are caring for an aging parent you should be making a term life insurance policy a priority. Term policies can be very affordable, typically less than $100 a month, many times even less than $50 a month and some companies less than $20 a month. Even though they are very affordable they provide hundreds of thousands even millions of dollars’ worth of coverage. If you don’t have one make the choice to get one today.

One of the companies (there are others as well) that I write insurance for is currently waiving the health check for people that qualify because of COVID-19. This makes the process much quicker and less time intensive on your end. Choosing to get a term policy now is easier than ever.

The number one priority is definitely term insurance because it’s so affordable and provides a lot of coverage, but if you are at a point in your life where the four items listed below are met, then you should start investigating the role permanent insurance can play in helping you store wealth and grow wealth.

You have all bad debt paid off (consumer, over 7-8% interest, etc.)
You have an emergency fund of at least 3 months
You are saving money each month
You already have a term policy

Term insurance can only be used if you die, permanent can be used while you are living in addition to being used when you die. Remember to deeply investigate the products first.

Last thing to consider, there is something called convertible term insurance. Let’s say that today you are not in a position to consider permanent life insurance, but you want it to be a part of your future plan. You can purchase a convertible term policy today, which is still just as affordable as normal term insurance, but then convert it to a permanent policy when you are ready. The reason this is beneficial is because you won’t have to requalify or redo a health check you are simply converting your term policy to a permanent policy. If you don’t have convertible term you would have to requalify and get a new policy.

The purpose of this article was to arm you with the basics of life insurance. We reviewed what life insurance is and how much you could potentially qualify for. We discussed the types of life insurance policies and the basics of how they work. Finally, we outlined why life insurance is a necessity and what types of policies you should be using at different times of your life. I now invite you to take action, call an agent and get a term policy or if you are ready, start the conversation on the best permanent policy for you. I would love to help you, but it’s more important that you act so if you want to use an agent in your area please choose to do that instead of nothing. Remember life insurance provides not only peace of mind, but financial protection and potentially even financial freedom.

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As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.