The “whats” and “whys” of life insurance
What is life insurance?
Life insurance is a contract wherein you pay an annual fee called a premium, and when you die, your beneficiaries get a lump-sum payment called a “death benefit.” We usually buy an insurance policy to protect the people who depend on our income in case we die.
How is life insurance priced?
By and large, life insurance is priced based on your age and health. More specifically, it’s based on “underwriting classes”: huge numbers of people with your age and health profile. With huge groups of people, insurance companies are able to predict how many will live for how many years. They can’t tell who will live longer, but they can predict the averages really accurately within each class. Underwriting classes with shorter life expectancies pay higher premiums.
What is term life insurance?
Term policies are only in effect for a “term,” or a specific amount of time. Usually we take out term policies because our premiums are less than with permanent life insurance, and we don’t think we’ll need the coverage at the end of the term.
What is permanent insurance?
Permanent insurance is permanent. It’s effective for the rest of your life, as long as you pay the premium. There are different kinds of permanent insurance policies, such as whole life and universal life. Term Lifextender™ is designed to work with universal life.
What is a conversion right?
Most term life policies have a conversion right, a contractual obligation from your insurance carrier that guarantees you the right, for a specified period, to convert your term policy to a permanent policy at the same underwriting class that you were when you bought your term policy.
This is a very valuable right, and something that many people don’t know exists. As you come to the end of your term policy, it’s a good idea to discuss all your options with your life insurance agent.
How is an insurance policy an asset?
An insurance policy may seem like just a piece of paper, but it’s actually an asset that you own, like a house, a car, or a piece of art. Like other assets, it has a value.
Most people know about the “face value.” That’s the amount that your beneficiaries collect as a death benefit.
What many people don’t know is that, as an asset, an insurance policy can also have value while you’re alive. As long as there’s someone willing to buy it, it can be sold.
Why might holding onto my policy be a good idea?
When we’re young and healthy, the amount someone is willing to pay to own our policy is usually nothing – most likely there is no buyer. In that case, holding onto the policy so that our beneficiaries can collect a death benefit makes sense. The older we get, though, and the more our health declines, the more the value of our asset increases, and the more the thought of selling our policy for cash while we’re alive starts to become a more viable and reasonable option.
How does selling a policy work?
If you are able to sell your policy, you get cash, you transfer ownership of the policy to the buyer, and the new owner pays the ongoing premiums to the insurance carrier. When you die, the new owner of the policy collects the death benefit.
What do my age and health have to do with the value of my policy?
Although no one can predict the future, as we age and our health declines, our life expectancy gets shorter. That’s just the way it is.
People who buy policies in the secondary (or “life settlement”) market are investors. They pay more for policies with shorter life expectancies. The theory is that a shorter life expectancy means they’ll likely pay the premium for a shorter amount of time before collecting the death benefit, so they make more money.
The bottom line is, the longer you can affordably keep you policy, not only will your beneficiaries receive the death benefit should you die, but the policy is likely to gain in value in the secondary market.