Life Insurance 101
Life insurance is important. It shouldn’t be confusing. That’s why we want to help you understand exactly what it is, how it works, and why it’s necessary.
Questions & Answers
Q: Why do I need life insurance?
A: If you have a spouse, children, or other family members who depend on you, life insurance can be an easy way to make sure money is available to help them cover expenses after you’re gone.
Q: How does life insurance work?
A: Life insurance is designed to provide money to the people who mean the most to you when you are no longer there. When applying for insurance, you often need to provide information about your health and finances. This information may be collected online through data sources with your permission or through phone calls and/or a visit with a medical professional. The insurance company reviews this information to decide whether they can approve your application. This process is called underwriting. Once you are approved, your coverage can begin. And as long as you remain eligible and keep your payments up to date, the life insurance company will pay a benefit to the person you name as your beneficiary when you die. This money is usually tax free.
Q: How much life insurance do I need?
A: Experts recommend you have at least 10 times your annual salary in place through life insurance and/or savings.1 You should have enough life insurance to cover your debts and the daily expenses for those you love.
Q: How much does life insurance cost?
A: The cost of life insurance is determined by many factors, including your age, gender, and health. Year after year, people greatly overestimate the cost of life insurance and cite perceived expense as the biggest barrier to purchasing coverage.2 So, life insurance may cost less than you think. To learn the true cost, be sure to talk with an insurance agent.
Q: What is “term” life insurance?
A: Term life insurance is a form of insurance that provides financial protection for a set period of time—a term—such as 1, 10, or 20 years. If you die before the term is up, your beneficiary receives the death benefit, usually tax free. That benefit can be used however needed, without restrictions. Term life insurance is one of the more popular ways to provide a financial safety net for loved ones. Group term life insurance, like the coverage offered through the AVMA LIFE Trust,3 can offer key advantages, which are explained below.
Q: What are the advantages of buying through my association?
A: Group insurance from an association is portable, so you can keep it no matter where you work. Plus, your group negotiates with insurance companies to include benefits that reflect your group’s unique needs. On the other hand, employer-provided life insurance usually only covers part of your income. And, if you leave your job, your coverage often ends.
Eligible AVMA members have access to Family Group Life (Annual Renewable Term), 10-Year Level Term Life Insurance, and 20-Year Level Term Life Insurance. Click each link listed below to learn about each type of coverage, including features, costs, eligibility, renewability, exclusions, limitations, and how to apply.
- Family Group Life (Annual Renewable Term)
- 10-Year Level Term Life Insurance
- 20-Year Level Term Life Insurance
Q: Can I apply for term life insurance for my family?
A: Yes. Typically, your family can apply for coverage.
Q: What information do I need to apply for term life insurance?
A: You’ll be asked to provide information about the person being insured. The initial application may require a social security number, driver’s license, and health details such as family history, diagnosed medical conditions, and prescription doses.
Q: Do I need a medical exam to apply for term life insurance?
A: Not always. You may be asked to answer health questions online, by phone, or have a medical exam. The exam is at the insurance company’s expense and is scheduled at your convenience.
Q: Could my life insurance application be denied?
A: Yes. Applications are reviewed for insurability based on age, health, and other information you provide or give permission to obtain. In some cases, the insurance company will decide not to offer insurance.
Q: How long does it take for my insurance to go into effect?
A: Typically, you should receive a decision about your application within 5–10 days after your required materials are received. Some applications may take longer if more information is required, such as a physician’s statements.
Q: Are there restrictions on how the death benefit payment can be used?
A: No. The money your beneficiary receives can be used however needed. It could help replace lost income, cover funeral bills, pay off a mortgage, and even fund college.
Insurance Terminology
Accelerated death benefit
A portion of a life insurance death benefit that can be paid to the insured person while living if the policy includes this feature. The purpose is to help with costs associated with severe chronic or terminal illness.
Please note that receipt of Accelerated Death Benefits may affect your eligibility for public assistance programs and may be taxable. Prior to applying to receive such benefits, you should consult with the appropriate social services agency and seek the advice of a qualified tax advisor.
Beneficiary
The person(s) or trust named to receive payment of an insurance death benefit.
Claim
Notification to the insurance company to receive payment of an insurance benefit. Typically, a form is provided requiring details needed to process the claim.
Death benefit
Money paid when an insured person dies.
Exclusion
Conditions or terms not covered by insurance.
Term life insurance
Life insurance that lasts for a set time period or term. At the end of the term, the life insurance either ends or converts to a new term.
Group term life insurance
A type of term life insurance offered through a group such as an employer or association. Employer insurance typically offers a fixed benefit set as portion of the employee’s salary and often ends when their employment ends. Associations offer amounts the individual can choose and can be kept across jobs.
Level term life insurance
Insurance in which payments are designed to remain the same, or level, for the initial term of coverage. Thereafter, premiums increase annually until coverage ends at a specific age.
Premium
The cost of insurance that is due in periodical payments of an insured’s choosing such as monthly, quarterly, semi-annually, or annually. Premium costs can vary based on the applicant’s attained age, gender, coverage amount, health status, and tobacco/nicotine usage on the date coverage is issued and can increase as they grow older.
Underwriting
The process used to decide if and at what rate class an applicant will be offered insurance and the cost. This process can include health and financial assessments.
Rate Class/Risk Class
The categories of health and other factors of an applicant which impact insurance offered and the cost.
1“How Much Life Insurance Should You Have?” Investopedia, 24 April 2023.
2“2023 Insurance Barometer Study.” LIMRA, 2023.
3Underwritten by New York Life Insurance Company (NY, NY 10010) on group policy form GMR.
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