What is Life Insurance?

What is life insurance, and why does it matter? Life is unpredictable at times and when you have a family to support, it’s important to know that they’re going to be taken care of, and you don’t have to worry about it no matter what. Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime. 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 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. The payout can cover a wide variety of expenses of the 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 an untimely death occurs. Most people use life insurance to provide money to beneficiaries who would suffer a financial hardship upon the insured’s death. However, for wealthy individuals, the tax advantages of life insurance, including the tax-deferred growth of cash value, tax-free dividends, and tax-free death benefits, can provide additional strategic opportunities. Life insurance helps your life’s moments live on. Whether it keeps paying the mortgage, maintains a current standard of living, pays off debts or pays for college, the life insurance you choose can be there when it’s needed most by your loved ones.

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. Depending on the short- or long-term needs of the person to be insured, the major choice of whether to select temporary or permanent life insurance is important to consider.

• Term– A term policy covers an individual for a limited period of time. Terms are often 10 to 30 years long. These policies do not build any cash value, but if you die within your term limit, the beneficiaries receive the policy’s payout. Term life insurance differs from permanent life insurance in several ways, but tends to best meet the needs of most people. Term life insurance only lasts for a set period of time and pays a death benefit should the policyholder die before the term has expired.
• Permanent– A permanent policy differs from term insurance because it builds cash value over time. The policyholder can borrow against the cash value if they need to. Otherwise, known as “whole life” insurance, a permanent policy costs more than a term policy. While they may cost more, they’re also more flexible. Permanent life insurance stays in effect as long as the policyholder pays the premium. Another key difference involves premiums term life is generally much less expensive compared to permanent life because it does not involve building a cash value.

• Universal insurance– A universal life insurance policy is an offshoot of permanent life insurance. These offer flexible premium options, though they often require lump-sum premium payments instead of installments over each period, With a universal life insurance policy, the cash value will build depending on the policy type.

Premiums, Benefits, and Payout

There are a couple of key terms to be familiar with when it comes to life insurance policies. Depending on the type of policy, an individual must 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 benefit amount is the total value of the policy. If a person has a policy worth $500,000, then the benefit amount is $500,000. Beneficiaries receive the benefit tax-free upon the policyholder’s death. The payout type is the preferred method for beneficiaries to receive their benefits. 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. Therefore, the sooner an individual can obtain a life insurance policy, the better. However, even individuals with health issues may be able to find a fair policy if they shop around. You should determine how much life insurance you need so that you’d don’t overpay for premiums or benefits. Determine how much money your family needs, what debts you’d like to have paid off if you were to die suddenly, and the 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 is fairly priced. Different companies offer different premiums and features. Since life insurance is a competitive industry, companies might be willing to match or beat the prices of a competitor. It’s important to know about life insurance and its responsibilities, as well as the conditions included within the policy. Take ample time to research before making a decision, and being proactive saves a lot of money when it comes to making payments later.