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I will try and simplify this as if I were sitting face to face with you. I will explain, in my own words, what insurance is, how it is rated and what happens to your dollars.

What is insurance? – All insurance is a risk transfer. In exchange for a premium, we will cover your ___________ (except for Health Insurance/Dental/Vision or Home Warranties). – Basically, insurance in its simplest form is “We will cover this in exchange for that amount of money”. It is not a way to become richer or to get into a better financial position than you were in before you insured. Therefore, Health Insurance, Dental, Vision or Warranty Plans are NOT Insurance.  

How is life insurance rated? – In Life Insurance you are rated based on your age and health or lack thereof. The insurance company takes a calculated risk in exchange for a certain amount of premium. – The older and sicker you are, the more you will pay or the more restrictive the policy will be. Why, you ask? Because insurance companies are in the business of making money! So, they will not turn you away if they can make some money off you regardless how small. Which means that even if you are sick or older, they will still provide you a policy but, it will be very restrictive and geared to favor the insurance company (I’ll explain more in detail further down).

What happens when you pay your Life Insurance bill? – In reality it can be very complex to explain but in its simplest form, each dollar you pay gets invested by the Life Insurance company. Each dollar you pay will be doubled, tripled or quadrupled based on the Life Insurance company investment. Therefore, the insurance company will rather refund you premiums instead of paying you the claim.

If I am sick or older, can I still get Life Insurance?– Yes. However, the Life Insurance contract will be worded to favor the life insurance first up until the point where the life insurance company has doubled, tripled or quadrupled each dollar you paid.  

How does life insurance for older people work?– Most life insurance policies for older folks will be written on a Universal Life contract and it will have verbiage that will break down the claim payout into 4 brackets. 

Bracket 1 – Within the first years of the policy period the claim payout will only equal a percentage of premiums paid . For example: You pay $50 per mo. x  34 mos = $1,700. The payout could be 50%-90% of the $1,700 you paid into the policy. 

Bracket 2 – After a certain number of years then the payout will become a percentage of the total death benefit. For example: The death benefit purchased was $5,000. At years 3+, the payout could only be 50% of the death benefit.  

Bracket 3 – Once the policy has been in effect for a certain number of years, the death benefit will be fully paid out after the insured person passes away. However, at this point you will see that all your payments will likely add up to equal close to the death benefit you purchased. 

Bracket 4 – At this final stage of the Final Expense, Whole Life or Older American Life Insurance policy, the premiums paid will begin to surpass the death benefit purchased. Some might argue that at this point you are being charged a hefty fee by the insurance company to save your money. For example: You purchased a $5,000 death benefit and you paid into it $50 per mo. for 8.5 years, which equals to $5,050 of premiums. You pass away now, your family will receive $5,000 out of the $5,050 paid. You cancel it, you lose what’s there or only walk away with a small cash value equal to 10% or so of what you paid into it, if any. 

Should older folks buy life insurance? – If you can pay enough into a life policy for the returns to make sense, yes, purchase life insurance. If you cannot pay enough, then you are better off saving money.
Life Insurance should be advertised as “If you help us, we help you”. This way the average person can understand it. Because if the insurance company cannot make money off you, then you will not make money off the insurance company. – The morale here is to start early. Start early in purchasing life insurance and or saving for what will happen to us all. 

post written by: Domingo Ramos, Insurance Broker, proudly licensed to transact insurance in California, Oregon, Washington, Nevada, Texas and Michigan. –

Domingo Ramos 2020

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