Why Do I Need Whole Life Insurance?

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Whole life insurance, while not for everybody, has a few advantages over term life insurance, but only if you can afford it. If money is tight for you, consider researching term life insurance plans on a quote comparison site such as Insurify—just a few minutes is all you need to compare real-time, accurate quotes side by side.

What is Whole Life Insurance?

Life insurance works by paying a death benefit to your designated beneficiaries when you pass away. Term life insurance only guarantees this death benefit for the duration of your selected term (for example, 20 years), after which you and your loved ones are no longer protected by the insurance company. In comparison, whole life policies last your entire life, or until the maturity date, assuming you always pay your premium. Additionally, they build cash you can borrow against, and in some cases, pay dividends. Because whole life policies are generally for special cases, it’s important to understand the key differences between whole and term.

For most people looking to protect their loved ones in case of their premature passing, term life insurance covers the necessary bases. It is much cheaper than whole life insurance, and provides much of the same coverage. However, the affordability comes with one main drawback. Term life insurance policies are only effective for set term lengths and you get no money back once said term ends. That being said, it is possible to convert a term policy into a permanent whole policy if needed.

Whole life insurance might be a good option for you if you are looking for permanent coverage, level premiums, a cash value component, and a guaranteed return on your investment.

Coverage Amounts

Since you can’t predict the future, determining how much life insurance coverage you need can stump even the most prudent consumer.

To get a general idea of how much life insurance you should buy, calculate your long-term financial obligations (your mortgage, your child’s college tuition) and subtract your assets. This is how much money your life insurance policy should cover.

Additionally, don’t forget to consider replacement costs. If one parent stays at home to care for children and run the household, someone else will have to be paid to replace them and cover these responsibilities in the event of your passing.

Consulting a fee-only financial advisor as you shop for policies will greatly increase the chances that you get the right amount of coverage for the best price. If you don’t have the time or money to do that, though, a good rule of thumb is to err on the side of caution and buy a little more coverage than you think you might need.

Different Approval Processes

Simplified Issue

A simplified issue life insurance policy means you get a policy if your answers to certain questions fit the underwriting guidelines of the insurance company. No medical exam is necessary. Typically, you have to answer four or more questions to get a simplified issue life insurance quote. These questions seek to determine your smoking habits, your HIV/AIDS status, whether you have a terminal illness, and whether you reside in a hospital or long-term-care institution.

With these questions, carriers can determine a baseline level of risk, and then price your policy accordingly. However, since insurance companies only get a few self-reported bits of medical information with which to price these policies, they end up taking on more risk, which translates to higher costs for you. If you are relatively healthy, a fully underwritten policy will most likely be cheaper.

Guaranteed Issue

Like simplified issue, guaranteed issue does not require a medical exam. In fact, guaranteed issue policies do require you to answer any medical questions. As the name implies, as long as you pay the premium, you are “guaranteed” a policy. Because the insurer knows nothing about your health, though, the premiums are significantly more expensive than either simplified issue or fully underwritten policies.

A major drawback to guaranteed issue policies is that the full death benefit is not available until the policy has been in place for a certain amount of time, usually a couple years. So, if you buy this type of policy and die within two to three years of purchasing the policy, your beneficiaries will only be given the amount of the premiums paid so far.

Fully Underwritten

The most important thing to note about fully underwritten policies is that they typically provide the cheapest premiums. They also allow you to purchase as much coverage as you like. With simplified issue and guaranteed issue, there will be a limit to how much coverage you can buy.

Insurers use the term “underwriting” to describe the risk-assessment process. To fully assess a person’s risk, insurance companies require you to submit an application, a medical questionnaire, and undergo a medical examination. If you are in generally good health, your risk to these companies will be low, so they can give you lower rates. If you apply for fully underwritten policies and for some reason don’t get accepted for coverage, you can always then look into simplified or guaranteed issue policies afterwards. That being said, these “no medical exam” options should be a last resort.

What are “Riders,” and Do I Add Them to My Policy?

In short, a rider is an addition to a policy that amends the coverage terms in some way. Most riders serve to add coverages for additional costs.

Riders make it so that policyholders can create life insurance policies that meet their specific needs. They are often used to add coverage to an existing policy in lieu of purchasing another separate policy. Not all providers allow for riders, but if yours does, you will have to get in touch with the insurance company to add one.

Common riders include “Guaranteed Insurability,” “Family Income Benefit Rider,” and “Accelerated Death Benefit,” to name a few. Each of these provides unique benefits for very specific situations.

The Importance of Insurer Ratings

When shopping for insurance policies, keep in mind that not all providers are created equal. You have probably heard of insurance companies being referred to as “A-rated” or “B-rated.” If you are in the market to buy life insurance, it’s important to know what this means.

In short, an “A” rating applies to insurance companies that perform at the top of the industry with respect to creditworthiness and general financial stability. Most insurance ratings organizations give ratings ranging from “A,” considered very strong, to “D,” considered very weak. As a consumer, buying insurance from a top-rated company is important, because these companies have the best financial health and are most likely to be around when you and your loved ones need them.

However, all insurance rating organizations use their own unique formulas to determine the levels of financial strength and stability—and therefore grade—each insurance company receives. Standard and Poor’s, for example, has three tiers of “A” grades: AAA, AA, and AA. These are then followed by the “B” and “C” grades.

Though the financial stability of an insurance company should be a top priority when shopping for life insurance, there are other factors to consider as well, such as customer service, value, and customer satisfaction. Companies like J.D. Power take a more holistic approach and examine many factors in addition to creditworthiness. Using their ratings can help you get a better picture of the providers from which you might want to buy.

According to Insurify’s official rankings of life insurance companies, top-rated life insurance companies include:

  • State Farm (Insurify Composite Score of 96)
  • MassMutual (Insurify Composite Score of 94)
  • Guardian Life (Insurify Composite Score of 92)
  • Nationwide (Insurify Composite Score of 85)
  • MetLife (Insurify Composite Score of 84)

How to Compare Prices and Get the Best Policy for You

Buying life insurance used to mean contacting multiple insurance companies, filling out their paperwork, and then getting individual quotes from each one. These days, you can easily compare by getting quotes online through quote comparison sites such as Insurify. In either case, you answer a few questions, and then the comparison site provides quotes from multiple carriers.

Assuming you are relatively healthy, you will get the best price and coverage by going for a fully underwritten policy. If that’s not the case, though, you can always compare simplified and guaranteed issue options.

Conclusion

Though most people will do just fine with term life insurance, some people can receive increased benefits by purchasing whole life insurance policies instead. If you think you fall into this category, consulting a fee-only financial advisor will help ensure you make the decision that best serves your long-term financial interests.

Fee-only financial advisors do not make commissions from insurance sales, so they have no objective or incentive other than to help you make the best decision. Advisors who work for insurance providers, on the other hand, are incentivized to sell you a policy, so you can’t trust that they have your long-term financial well-being in mind.

By doing your research, comparing quotes online, and paying a financial advisor to guide you, you will be well-equipped to find the best life insurance policy for you. Once you do, take a moment to relax knowing that you have secured the financial protection of your loved ones.

Sabrina Perry is a writer with experience in data journalism and a passion for translating complex topics into insightful and engaging stories. She has a degree in neuroscience from University of California, Santa Barbara and can often be found reading books about behavioral economics, decision-making, and personal finance.