How Does Life Insurance Work – Overview
Life insurance is one of the most common aspects of many people’s long-term financial planning. Buying a life insurance policy is an excellent way to protect your loved ones with significant financial support in case you meet an untimely death. For instance, a life insurance policy helps your partner cover mortgage payments and even regular bills and funds your child’s college education.
However, buying a life insurance policy is a major financial decision and thus needs to be made after careful consideration of all its aspects. In this article, we have covered the basics of life insurance, its different types, and how life insurance works.
What Is Life Insurance?
Life insurance is a type of contract of insurance. When you buy a life insurance policy, you agree to pay a fixed monthly premium to maintain insurance coverage. In case of your death, the insurance company will pay out a death benefit to the person(s) you nominated as the policy’s beneficiaries. You can also find life insurance policies that provide life and death benefits.
A living benefit clause lets you access the policy’s death benefit while you are still alive. This policy is beneficial when you are terminally ill and need finances to pay for medical care.
According to insurance experts, the following points should be considered before deciding to buy a life insurance policy:
- The extent of coverage you need
- If a term life or permanent life policy is more suitable
- How much premium can you pay
- If you want to add new riders/benefits
- Differences between life insurance policy rates from different providers
Regarding coverage amount, you should know that a term life insurance policy offers coverage for a fixed term period, while a permanent life insurance policy offers coverage for as long as you keep paying a premium. Among these, term life insurance is significantly less expensive, but permanent life insurance can offer additional benefits.
The cost of life insurance premiums will mostly depend on the type of policy, the amount fixed for the death benefit, the riders you choose to include, and the overall state of your health. When you buy a life insurance policy, you may even be asked to complete a paramedical exam as part of the underwriting process.
What Does Life Insurance Policy Cover?
The death benefits and other coverage mainly depend on the type of life insurance policy you purchase. A life insurance policy mainly helps to fill the financial gap posed by the death of a family’s breadwinner and helps cover financial obligations, such as mortgage and rent costs, funeral and burial expenses, tuition, personal debts, and much more.
Most people who buy life insurance policies do so intending to provide their family and loved ones with a safeguard against financial hardship in the event of their own untimely death. People even buy life insurance policies as an inheritance to leave to their children, grandchildren, extended family, and even non-profit organizations.
Whole or universal life insurance policies even allow policyholders to access their benefit funds while alive. You may be able to borrow against the life insurance policy and pay for the mortgage or child’s tuition as long as you continue making the premium payments. If you cannot pay off a loan, then a universal life insurance policy provides an excellent solution for the repayment of loans.
Generally, life insurance policies cover natural and accidental deaths, including homicide. However, strict conditions must be met before your beneficiaries can receive their benefits.
Term Life Insurance
Term life insurance policies are designed to provide coverage for a fixed period of time and can usually be bought in 15, 20 or 30-year durations. However, these time periods can vary, depending on the insurance providers. Though the benefits of this insurance policy are not provided when it ends, even if you have paid all the premiums, they are usually more affordable than permanent life insurance policies.
Term life insurance is also useful for providing financial protection to your spouse and family.
Permanent Life Insurance
You can buy permanent life insurance policies in two types – universal and whole. Every permanent life insurance has a death benefit and a cash value account. This type of insurance allows you to borrow against the life insurance policy. If you cannot pay back, the policy’s beneficiaries will receive a smaller payout. Some of these insurance policies can even pay dividends on your earnings, which can effectively be used to pay higher premiums compared to term life insurance policies.
How Much Does a Life Insurance Policy Cost?
A life insurance policy’s cost depends on several factors, such as the type of insurance, the insurance company you buy it from, and your overall health status.
So, for instance, if you are overall healthy, you can buy a 20-year life insurance policy for as low as US$ 30 per month and set a half-million-dollar death benefit. However, though term life insurance is less expensive than whole/universal life insurance, any insurance policy will become more expensive as you age.
Generally, universal or whole life insurance can cost as high as US$ 125 or more than US$ 200 per month, depending on your age, health status, and death benefit amount.
How to Choose a Life Insurance Beneficiary?
When buying a life insurance policy, nominating one or more beneficiaries is necessary. These individuals, you want to receive the death benefit of your life insurance policy in case they die.
For instance, a life insurance beneficiary can be:
- Adult Child
- Business Partner
- Charitable organization
You can also choose a main (primary) beneficiary or multiple contingent beneficiaries. A contingent beneficiary receives death benefits from your life insurance policy if the primary beneficiary passes away.
Life insurance policies are excellent ways to form financial protection for your loved ones in case you happen to die unexpectedly. This insurance policy can be for a fixed period of time or continue for as long as you pay the monthly premium amount. Life insurance policies are a great way to allay unexpected financial burden from your loved ones, in case you, the breadwinner, meets an untimely death.
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