The ABCs of Life Insurance: P–T
By Corey Dahl, Brian Anderson for LifeProHealth.com
Are your prospects confused about perm versus term? Upset that their premiums are high because they’re smokers? Use these simple explainations about permanent life insurance, risk classes and more to help them understand.
To view the rest of the series, see:
The ABCs of Life Insurance: A-E
The ABCs of Life Insurance: F-J
The ABCs of Life Insurance: K-O
The ABCs of Life Insurance: U-Z
Permanent Life Insurance: Also called cash value life insurance, permanent life insurance provides coverage throughout the insured’s lifetime and combines a death benefit with a savings element. Permanent life insurance enjoys favorable tax treatment, and the savings can build cash value, from which the policy owner can borrow or use to meet future goals, such as paying for a child’s college education. The two main types of permanent life insurance are whole life and universal life. The differences between the two lie in the way premiums are paid, how cash value accumulates and how the death benefit is calculated.
Policy Illustration: Material used by agents and insurers to show how a life insurance policy may perform under a variety of conditions and over a number of years.
Quote: The estimated premium amount for a life insurance applicant based on several factors, including the type of policy, coverage amount, length of coverage, age, gender, health and medical history, family history, build and approximate rating class. All quotes are preliminary estimates with final rates determined by insurance company underwriting.
Just the facts
Term life insurers only have to pay when a person dies, so they are more willing to extend cheaper coverage to people who are likely to live longer and potentially beyond the term of the policy. Statistically, women live longer and, therefore, typically receive lower quotes for term life coverage.
Risk Class: In life insurance underwriting, a risk class is a grouping of policyholders with a similar level of risk. Typical underwriting classifications are preferred plus, preferred, standard and substandard, with separate classes for smokers. The better your risk class, the lower your premiums will be. Underwriters determine an applicant’s risk class by considering medical history, overall health, family medical history, income, occupation and lifestyle. As underwriting guidelines vary by insurer, shopping around for quotes from multiple companies can often be beneficial. A challenge to accurate quotes when shopping online is predicting which class you would qualify for, as rates can vary greatly by class.
Rider: A provision of a life insurance policy that is purchased separately from the basic policy and provides additional benefits at additional cost. Riders, such as long-term care, term conversion or accelerated death benefit, help policyholders create insurance products that meet their specific needs.
Survivorship Life: Also called second-to-die insurance, survivorship life insurance covers the lives of two people and pays benefits only after both people have died. It is often used by couples for estate planning purposes, and it is typically cheaper than purchasing a separate policy for each spouse.
Suicide Clause: Life insurance policy provision that specifies proceeds of the policy will not be paid if the insured takes his or her own life within a specified period of time (two years in most states) after the policy’s date of issue.
Term Life Insurance: The most basic form of life insurance, term life covers the policyholder for a specified time period, typically between 10 and 20 years. The premiums and death benefit are fixed for the term. Term policies are normally guaranteed renewable for a specified period of time or up to a certain age, but premiums can escalate sharply. If the policyholder lives past the term, the policy expires with no cash value. Many people use term life policies, which are significantly less expensive than permanent life policies, to cover living expenses for their family, including the cost of a mortgage or raising and educating children in the event they were to die.
(Ten Thirty Five) 1035 Exchange: This refers to a part of the Internal Revenue Code that allows owners to replace a life insurance or annuity contract without creating a taxable event. Individuals avoid capital gains or losses in the first policy as long as the second policy is of greater or equal cost. A 1035 exchange can allow a policyholder to “trade up” to a new policy that fits current and future needs better than the old policy without having to pay tax on the income and/or investment gains earned on the original policy. They are frequently used to help life insurance or annuity owners add long-term care insurance coverage by exchanging a traditional life or annuity contract for a hybrid life/LTC or annuity/LTC contract.
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