What does life insurance do, who needs it, and why is it important?
What is life insurance? Why do you need it, and what makes it so important?
If you ask most people, they will tell you they know what life insurance is, but they may not be able to explain it clearly. There is more than one type of life insurance, and each one uses terms that may not be familiar to the average person. Understanding what life insurance is, what the various types and variations are, and how it works to protect you and your family is crucial.
A Simple Definition
Life insurance gives your family a lump sum payout of money when you die so they won’t suffer financially after you’ve passed away. This coverage helps them maintain their standard of living and continue to pay bills and make purchases despite losing your income. It is one of the best ways to protect your loved ones if you are no longer there to care for them. There are some facets of life insurance you should understand before purchasing a policy, including:
- How a life insurance policy works
- How it protects your family
- Why you should buy a life insurance policy
How Life Insurance Policies Work
Understanding life insurance hinges on understanding the four essential components of any policy:
The Policyholder – This is the individual who bought the life insurance policy. In most cases, the policyholder is also the person who is insured, although there are situations when a policyholder might purchase life insurance to cover someone else.
The Death Benefit – This is how much money the policy is worth if the covered individual passes away. It is paid to the Beneficiary. Once you pay your first life insurance premium, the death benefit is available in full once the policyholder or covered person dies. There are a few situations when a death benefit might not be paid, although these situations are rare. These include:
- If the covered individual lives longer than the term (length) of the policy.
- The policy is canceled or the premiums are not paid.
- The covered individual passes away before the policy has been in place for two years AND the insurance provider discovers that the application was fraudulent in some way.
The Beneficiary – The person or people who receive the death benefit when the covered individual passes away. Sometimes there are multiple beneficiaries on one insurance policy.
Premiums – This is the amount the policyholder pays each month or each year to pay for the insurance coverage. A policy is said to be “in force” if the premiums are paid on time. If the premiums are not up-to-date, the policy may lapse or be canceled by the insurance provider.
Applying for Life Insurance
You can apply for life insurance online or through a life insurance agent. It usually takes one to two months to apply for a policy and have it issued. It is relatively easy to do online if you follow these simple steps:
Get Policy Quotes – Life insurance companies will give you free quotes based on the information you provide. You can then compare policies and find the best fit for your needs and budget. At SimpleLife, you can compare policies from more than a dozen highly-rated life insurance providers.
Select the Right Policy – Compare features like the cost of premiums, the value of death benefits, the quality of customer service, and the requirements for application.
Apply for the Policy – You’ll have to fill out an insurance application online or talk to a licensed agent on the phone. Whether you complete the application online or over the phone, you will answer questions regarding your income and health.
Get a Medical Exam – In many, but not all cases, you will need to see a doctor for a physical exam. The insurance company will usually send a medical professional to your house, apartment, or office at a time and date convenient for you.
Answer a Few Questions – An insurance professional will interview you over the phone to get answers to basic questions about your health and habits.
Get Approval – An insurance underwriter will review your application and medical information to determine how much your premiums will be. In most cases, your premium should be close to the same amount as the quotes you received earlier.
Sign on the Dotted Line – If, after reviewing the policy, you want to purchase the life insurance, sign the paperwork, and return it with your initial premium payment. Once you have done this, your life insurance policy will be in force.
Get Reliable Insurance Quotes here.
What Types of Life Insurance Are Available?
Although there are many different kinds of policies available depending on the type of coverage, the price, and any limitations, they break down into two main types: Term Life and Permanent Life.
Term life insurance is only in effect for a specific period of time or term. When the term date is reached, the policy is no longer valid. Term insurance is the least expensive kind of life insurance because you are only paying for a pre-determined amount of time. Most people get term life to provide a death benefit to beneficiaries and cover their debts if they pass away.
Permanent life insurance lasts as long as you live, provided you keep paying the premiums. One benefit of Permanent Life is that it accumulates a cash value over time. You can borrow money against the cash value of the policy, but this makes the premiums more expensive. There are also fees involved with using the cash value of the policy. There are several types of permanent coverage, including Variable, Universal, and Whole Life. Some policies combine elements of these, called Variable Universal policies. The most popular kind of permanent life insurance is Whole Life. It has a cash value and will never expire. A licensed insurance professional can help you choose the best option for your family.
Learn more about Term Life and Permanent Life or Whole Life here.
Is Life Insurance Expensive?
The cost of life insurance can seem high. Still, it offers financial protection for your family when you pass away. LIMRA, an insurance and investment industry professional development organization, estimates that a quarter-million-dollar life insurance policy for a man of 30 who doesn’t smoke is about $160 annually. This price is affected by several factors, including health, medical history, where the individual lives, lifestyle, and finances. The amount of coverage and the type of policy will also affect the cost. Each life insurance provider uses different metrics to determine premium rates, so you should always compare the rates of several companies to ensure you are getting life insurance you can afford.
Go here to learn more about life insurance costs
The Plusses of Owning Life Insurance
There are several reasons why investing in a life insurance policy is a good idea. It should be included in any kind of financial plan for you and your family’s future. Among the benefits are:
An Affordable Guarantee for the Future – For less than $50 a month, a 30-year-old individual can ensure that his family will be able to pay off debts, go to college and keep their home if he dies. There are very few other ways to protect their financial futures that are so inexpensive.
Tax-Free Benefits – When the death benefit pays after the policyholder or covered individual has passed away; the beneficiaries do not have to pay taxes on these funds. Your family will receive the face value of the policy without having to put away a chunk of it to pay income tax on it.
A Savings Vehicle – Whole life insurance can be a sort of savings plan if you aren’t good at putting aside money for a rainy day. When you pay the premium each month for a whole life policy, a portion of it can be a form of savings that you can draw against over time. Before choosing life insurance as a way to save money, however, you should talk to a financial planner.
Why Should You Get Life Insurance?
Nothing in life is guaranteed. You could die from an unexpected illness or be killed in an accident at any time. If you are the main wage earner in your family, you could leave them in a difficult financial situation if you pass away and leave them without the money needed to pay off debts and continue living in the same manner. Life insurance provides them with the funds required to:
- Pay for your final care and funeral expenses
- Pay off debts and continue paying for needed services, food and clothing
- Pay for college or continuing schooling
- Keep the family home and vehicles
- Protect future retirement plans
- Ensure your beneficiaries can continue getting health care
Does Everybody Need Life Insurance?
The short answer is “no.” While most people do need life insurance to protect their spouse, partner or family, there may be times when it isn’t necessary:
- If you are a young, single person with no dependents and no one relying on your income, you may not need to buy health insurance. Even if you don’t need it, however, you can buy insurance now so that you can get a lower premium rate. You may also want to name an organization such as a charity or university as the beneficiary of a life insurance policy.
- If you have significant savings that will cover all your debts as well as future expenses for your dependents, you could use this is a form of insurance.
- If you do not have any loans or debts, you may not need life insurance. You may want to consider future expenses such as college or the cost of a nursing home for your parents, however, when weighing whether you need insurance.
If you don’t fit into the above categories, you need to look into purchasing a life insurance policy to protect your loved ones’ financial futures and happiness. If something happens to you, you don’t want them to have to worry about how they will survive. You don’t want them to have to give up their dreams for the future. Buying life insurance is a simple, effective way to give them the gift of a secure financial future after you are gone. SimpleLife can help you get there.
Learn More About When You Need Life Insurance here.
SimpleLifes’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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