How To
Tips for choosing the right life insurance in the United States
Insurance is for most of us incredibly complex… but it is also a great protection against the unknown! Life insurance is one of them and it is a very useful assistance tool in the event of a problem for the whole family. So what is life insurance in the United States and how does it work?
What is life insurance in the United States exactly?
Life insurance – family protection (Photo credit: agastecheg – Freeimages.com)
Life insurance is a contract established between a subscriber (you) and an insurance company. You agree to pay for an insurance policy regularly and the insurer agrees to pay a sum of money to your named beneficiaries if you die during the term of the contract. Premiums can be paid monthly, semi-annually or annually for the life of the policy.
Like car insurance, life insurance can be extremely simple or very complex. It depends on the choices you make when choosing from the types of fonts on the market and the options available to you. The term of this insurance can be as short as one year or as long as a lifetime…
How to buy US life insurance?
In the United States, there are three ways to buy life insurance: directly from an insurance company, through a local independent insurance agent, or through a independent online broker. Many people also buy life insurance through their company when they have agreements with certain companies or brokers. In 2016, there were nearly 800 insurers specializing in life insurance contracts in the United States.
Which life insurance to choose?
The choice of life insurance is made according to your personal situation, that is to say, according to your needs, your age, your assets, your objectives, etc. In the United States, there are mainly five types of life insurance contracts.
The “ Term Life Insurance” contract covers the policyholder for a fixed number of years (from 1 to 30 years). The premiums are fixed and the cover is defined in advance. There is no concept of savings (or “cash value”) as in other contracts, and in this case, no remuneration on the premiums paid. “ Term Life Insurance” are “pure” insurance products. On the other hand, the premiums are generally lower than in other contracts. Please note that the amount of the premium is only fixed for the duration of the contract. If the policy expires and you want to renew it, you will pay a higher premium because you are older at the time of renewal and may be in poorer health.
Within this category of life insurance, there are three kinds of contracts: “Level Term” (premiums and “death benefit” are the same throughout the contract); “Annual Renewable Term” (same “death benefit” during the contract, but renewal of the latter every year with premium increases); “Decreasing Term” (the “death benefit” decreases each year and the premiums remain the same).
All other types of life insurance fall under Permanent Life Insurance. As the name suggests, the policy is valid from the day you buy it until the day you die. There are several types of “ Term Life Insurance”.
The ” Whole Life ” contract is the most classic and provides protection for the whole life. The premiums paid are fixed. It has a “cash value” savings component (part of the premiums is remunerated with a minimum rate guaranteed by the company), but the policyholder has no control over how the money is invested. For tax purposes, interest earnings are not taxable during the term of the contract. The “payout” (amount paid at the end of the contract) is determined from the outset. This contract guarantees that a fixed sum of money will be paid to the family upon the death of the insured.
Like Whole Life, Universal Life provides lifetime protection and gains value over time through its cash value component. But conversely, it is flexible in terms of the scope of protection, premiums and “payout”, or rather “variable” given the fact that you can vary the premiums.
The “ Variable Life ” contract gives the subscriber control over how their savings are invested (stocks, bonds, mutual funds, etc.). The rate of investment return not only affects the cash value of the policy but increases or decreases the amount of the final death benefit. With this policy, the premiums are fixed.
The “Universal Life Variable” contract combines the flexibility of “ Universal Life” and “Variable Life”. It allows you to control your investments, the premiums are flexible, the amount of the final death benefit and the surrender value depend on the performance of the investments. The “cash value” is therefore not remunerated at a given rate, but according to the investment choices on the financial markets. You, therefore, have control over your investments and remuneration.
How much does life insurance cost in the USA?
Insurance rates (Photo credit: John Hughes – Freeimages.com)
Life insurance pricing is based on many criteria related to life expectancies such as age, gender, use of nicotine, medical or family health history (heart disease or cancer), dangerous hobbies practised (scuba diving, planned trip to high-risk areas) and even driving record or credit history!
This information is verified by the companies by having a very complete questionnaire completed and/or by obtaining the medical files of the customers from the doctors, by having medical examinations (blood, urine, electrocardiogram), by consulting the list of current medications ( or previous ones) using prescription databases etc…
The most important factors that affect price are age, gender, and pre-existing medical conditions. Older people will generally pay more, as will men. Heart problems, high blood pressure, mental illness, or a family history of heart disease or cancer will increase insurance premiums. Insurers also charge higher rates to people who participate in “dangerous” hobbies, and smokers can expect to pay twice as high rates as non-smokers.
All of this information is used to determine how much the insurer should charge for a life insurance policy…or if they should decline it! As you will have understood, the cost of life insurance is specific to each person and therefore very variable.
Please note: in the United States, the contents of life insurance are not identical throughout the territory. Regulations, risks, customer profiles, etc. differ from one State to another and by extension… the premiums also. In addition, the American market is traditionally less regulated than in some countries, which leaves insurers more freedom in terms of content and especially prices.
So the trick in life insurance is to find a balance between being overinsured and underinsured. Paying too much in premiums can be just as financially detrimental as paying too little! The goal is still the financial security of your family…
Given the complexity of life insurance, the advice of a professional is essential to find the right solution and above all to optimize the costs in relation to the promised benefits.
