According to statistics, 41 million Americans know the importance of life insurance but don't have it. This is a small figure as most people are young, healthy, and have dependents.
Life insurance is about protecting your loved ones' financial needs in the event of death.
In this discussion, we'll explain how life insurance works, why you should take it, and tips when choosing the right policy for you.
What is Life Insurance
A life insurance policy is a contract between you and the insurer to offer you coverage. It offers a death benefit to your beneficiary in the event of your death.
Upon passing away, your beneficiary will file a claim with your insurer and be paid the death benefit. Your beneficiary may often be your spouse, child, or an appointee.
Your insurance application must disclose your medical history, including underlying health conditions and high-risk issues that can affect enforcing of the contract.
It's important to note that your life insurance policy will be enforced as long as you pay regular premiums. Lump-sum payments are also accepted.
Types of Life Insurance
There are two types of life insurance, term, and permanent life insurance.
1. Term Life Insurance
As the name suggests, term insurance lasts for a specific period of time and will only pay the death benefit if the insured dies before the term expires.
Thus, if you outlive the term, you or your beneficiaries will not get the death benefit.
Most people prefer this policy because the premiums are lower than permanent life insurance.
2. Permanent Life Insurance
Permanent life insurance stays in force as long as you pay your premiums and outlive the insurer's lifespan.
The policy has a savings component known as the cash value; hence the premiums are higher than term insurance.
How Does Life Insurance Work
The two main parts of a life insurance policy are the premium and death benefit. There is also a monetary value element to permanent life insurance, known as the cash value.
Premiums are the amounts you pay to keep your policy running. Your insurance company will pay the death benefit upon your passing, depending on your life insurance.
The death benefit, however, will only be given if your premium payments are current.
Your life expectancy, medical history, gender, high-risk hobbies, age, and workplace dangers are all variables that can affect the premiums. If the death benefit is substantial or the insurer views you as a high-risk individual, you will pay hefty premiums. In addition, permanent life insurance policies can have high premiums since they build up cash value.
b) Death Benefit
The face value of the life insurance policy that the insurer pays your beneficiaries upon your passing is known as the death benefit.
You are free to select the preferred death benefit amount based on the anticipated future needs of your dependents. A number of factors, including age, risk, health, and workplace risks, are taken into account by your insurer when determining if there is an insurable interest and whether you qualify for the coverage.
c) Cash Value
The cash value is a prominent component of permanent life insurance. It's a saving component during your life, and the cash will accumulate based on tax deferment.
Some insurance companies may restrict withdrawals based on money usage and allow you to take a loan against the savings. You can also use the cash value to buy additional insurance or pay premiums.
Worth noting, the cash value remains after your death and will be paid to your beneficiaries after deducting outstanding loans, charges, or debts to the policy.
Steps to Take in Determining the Cost of Life Insurance
The price of life insurance depends on several variables. While some factors may be out of your control, you can still take steps to lower the cost of your life insurance.
For instance, ill health may result in higher monthly premiums, but you can ask your insurer to review your coverage if you can control the underlying condition by changing your lifestyle.
1. Establish how much life insurance you need
Before you sign up for a life insurance policy, draw up possible expenses in the event of death. Think about all your debts, including mortgage, student, auto, and business loans.
Consider any income sources available and whether the cash flows will be sufficient to meet your loved one's needs.
Most insurance agents have online tools to help you calculate the death benefit against potential expenses.
2. Establish the factors that affect the premiums
After deciding on how much insurance you need, the next step is to discuss your options with an insurance agent.
Here, you'll answer several questions regarding;
● Lifestyle habits
● Health conditions
● Family health history
● Driving record.
Age goes hand in hand with life expectancy, which insurance companies use to determine insurance costs. Usually, a younger person has a higher life expectancy, and thus the premiums will be lower than a senior citizen.
Regarding gender, research shows that women live longer, so their insurance rates will be lower.
If you have a poor lifestyle consisting of unhealthy diets, smoking, or drinking alcohol, your provider will impose higher premiums. Your insurance will require a comprehensive medical examination to establish if any underlying conditions may increase risk.
Lastly, people with fewer violations of driving rules are perceived to have lower risks and hence will pay lower premiums.
3. Compare different quotes
After establishing the factors that may influence the cost of your life insurance, the next step is to compare quotes from different insurance providers.
Prices can differ; therefore, it's important to look at different policies holistically and choose one that meets your needs.
If you can afford it, permanent life insurance is the best policy because of the saving component, plus the cash value is guaranteed as long as you pay your premiums.
Why You Need Life Insurance
As noted in this text, life insurance offers your beneficiaries financial support in the event of death.
But a question arises as to whether you need life insurance?
In answering this question, we'll highlight the different classes of people who may require life insurance.
● A parent with little children can apply for life insurance to support the children's education and well-being.
● A parent whose children require lifelong special attention and have special needs can take life insurance to provide financial support even in the future.
● People with joint properties like spouses in a marriage may take life insurance to pay off a mortgage or other costs if one dies.
● Older citizens willing to leave financial support to their adult children.
● Young adults who want to benefit from the cash value component of permanent life insurance.
● Wealthy individuals who'd like a lower tax burden.
● Business persons who would like to provide financial support to their employees in the event of demise.
● People with pre-existing medical conditions.
It's important to remember that the insurance provider assesses each case differently. Therefore, you should read the policy document, ask questions, and know the extent of risk coverage.
Tips When Choosing The Best Life Insurance Policy
These tips will come in handy when choosing a life insurance policy or provider.
● Research different options through the internet and read reviews. Look at the company's history in settling claims and examine whether it's a reputable firm.
● Calculate the expenses that will need to be paid upon death in determining whether your chosen option will cover those.
● If you have a spouse and children, look at the impact of you not being there and how they can get financial support.
● If you're a young person, you can consider permanent life insurance as a hedge against risks and uncertainties. It's also a good way to invest and get returns.
Important Terminologies in Life Insurance
You'll often be bombarded with a basket of terminologies that may confuse you more if you're a beginner.
Terms like premiums, death benefit, or cash value may already be familiar. Here are some other terms you need to know:
Sometimes your life insurance policy may not offer sufficient coverage to accommodate your needs.
A rider is an extra or additional policy that lets you modify your policy. It's purely optional and may increase your monthly premium.
Examples of common riders include;
● Accidental death benefit
● Premium waivers
● Accelerated death benefits in case of a diagnosis of a terminal illness.
● Guaranteed insurability allows you to access the life insurance policy without medical underwriting.
b) Loan against a policy
You can get a loan against your savings under a permanent life insurance policy.
The advantage of this facility is that the repayment terms may be flexible, and unlike banks, they don't consider the credit score. Besides, the interest paid increases your overall cash value.
Nonetheless, loans against policies normally reduce the death benefit. As noted, your insurance provider will first deduct the loans owed to the policy before honoring claims to your beneficiaries.
c) Funding your retirement
Thanks to the cash value component, you can fund your retirement with permanent life insurance. According to a study, retiring today is happening at an earlier age than in 2000. Thus, if you join the policy early, you can enjoy the payouts at your retirement age.
Life Insurance policies provide a death benefit to your beneficiaries upon death. The most popular option is the term life insurance policy because it's affordable for most people. However, it has a time limit and may not be useful if you outlive the policy term.
Even though it’s a bit on the pricey side, the permanent life insurance policy is a great option. As mentioned earlier, it features the death benefit and cash value or savings accumulated over time.
Lastly, if you're young and healthy, you can supplement your retirement benefits by choosing permanent life policies.
With this all said, it's important to talk to a qualified financial advisor before choosing an insurance policy for you and your family.