What is Life Insurance?

Life can be unpredictable at times and when you have a family to support, it’s important to ensure that they’re going to be taken care of, even in the case of an unfortunate event. Due to the fact that families need to have a support system or safety net, many individuals choose to invest in life insurance policies. There are several different types to choose from, and depending on an individual’s circumstances, it’s good to be informed about which type of policy and which benefit amount best fits their needs.

The Basics of Life Insurance

In its simplest definition, life insurance is a contract that an individual signs with an insurance company where the individual pays a certain monetary installment either monthly or yearly. In exchange, the insurance policy becomes a payout upon the individual’s death, creating a safety net for his or her loved ones. It can be used to cover a wide variety of things once the payout is collected, being that it now belongs to the individual’s beneficiaries.

Why Do People Choose Life Insurance?

Life is never a guarantee. Unfortunate circumstances can arise that are out of our control, and when individuals have families that they care for, they want to be certain that these people will be financially taken care of if untimely death occurs.

Different Types of Life Insurance

There are three main types of life insurance that an individual can sign a contract for. Each has slightly different conditions that apply.

Term insurance– A term life insurance policy covers an individual for a limited period of time, somewhere between 10 and 30 years typically. These policies do not build any cash value, but if you die within your term limit, the individual or individuals that are listed as beneficiaries receive the policy’s payout.
Permanent insurance– A permanent life insurance policy differs from term insurance being that it builds cash value over time, which the policyholder can borrow against if needed. Otherwise known as “whole life” insurance, a permanent policy is going to cost more than a term policy, but they’re more flexible.
Universal insurance– A universal life insurance policy is an offshoot of permanent life insurance. These are composed of flexible premium options, though they often require lump-sum premium payments instead of installments over each period.

Premiums, Benefits, and Payout

There are a couple of key terms to be familiar with when it comes to life insurance policies. Depending on what sort of policy is involved, an individual will be expected to pay installments to keep their policy active. These payments are called premiums, and they can either be paid in a lump sum (one full payment per year) or in scheduled payments (one payment per month that is equal to 1/12 of the premium amount). The value of the life insurance policy is known as the benefit amount. If a person has a policy worth $500,000 then the benefit amount is $500,000. This benefit is usually granted to beneficiaries tax-free upon the policyholder’s death. The way that beneficiaries prefer to receive their benefits is called the payout type. For example, payouts can be granted in a lump sum payment, in scheduled installments, asset accounts, or annuities.

Application Tips

Individuals who are seeking out life insurance policies should carefully research their policy options before agreeing to sign a contract. Depending on the policy type, insurance company, and the individual’s health or age, there may be a range of prices one can expect to pay for a policy. Being approved for a policy with a fair rate is easier for individuals who are young and healthy, so the sooner an individual can obtain a life insurance policy, the better. However, it’s good to remember that even individuals with health issues may be able to find a fair policy if they shop around. It’s also important to determine how much life insurance is actually needed so that the premiums are not too high for too large of a benefit amount. Determine how much money your family needs, what debts you’d like to have paid off if you were to die suddenly, and take into account unique circumstances that apply to your family (college tuition, medical care, etc). Shopping around is also a great way to be certain that the policy fairly-priced. Different companies will offer different premiums and features, and because life insurance is a competitive industry, companies might make more of an effort to match or beat the prices of a competitor. It’s important to be well-informed about life insurance and the responsibilities it carries, as well as the conditions that are included within the policy. Take ample time to research before making a decision, but being proactive about life insurance can help save significant sums of money when it comes to making payments later in life.