Orlando Harmon
Life insurance is a financial safety net for your loved ones when you're no longer around to provide for them. It's a contract with an insurance company that provides a lump-sum payment to beneficiaries upon your death. There are two main types: term life insurance and permanent life insurance. Term life insurance provides temporary coverage for a fixed period, typically 10 to 30 years, and is the more affordable option. Permanent life insurance, on the other hand, lasts a lifetime and includes a cash value component that can be withdrawn or borrowed against. When choosing a life insurance cover, it's essential to consider your financial goals, family situation, budget, and the specific features you need, such as riders and policy length.
| Characteristics | Values |
|---|---|
| Type of Insurance | Term, Whole, Universal, Variable, Group, Mortgage, Credit, Accidental Death and Dismemberment, Joint, Burial, Final Expense |
| Purpose | Covering funeral and burial expenses, paying off remaining debts, making managing day-to-day living expenses less burdensome for those left behind |
| Coverage | Dependent on factors such as age, lifestyle, health, family medical history, occupation, smoker status, length of cover, amount of cover |
| Cost | Dependent on factors such as age, lifestyle, health, family medical history, occupation, smoker status, length of cover, amount of cover |
| Payout | Dependent on factors such as income, number of dependents, years until retirement, standard of living, debts, income, mortgage, education |
| Riders | Accessing a portion of the death benefit while still alive, stopping premium payments if disabled, converting term policy to permanent policy |
| Company Factors | Financial strength, customer complaints, customer satisfaction, available policy types, application process, free-look period |
What You'll Learn
Term vs. permanent life insurance
Term life insurance and permanent life insurance are the two main types of life insurance. Both types aim to protect the financial well-being of your loved ones in the event of your passing, but they differ in terms of coverage length, benefits offered, and premium structure.
Term Life Insurance
Term life insurance provides coverage for a specific period, typically between 10 and 30 years, and sometimes up to 40 years. It is a simple and relatively inexpensive way to get life insurance coverage. If you pass away during the policy term, your beneficiaries will receive a payout. However, term life insurance does not accumulate cash value, and if you outlive the policy, there is no payout or return of premiums. Term life insurance is suitable for those who need short-term coverage or additional protection during specific times and are on a budget.
Permanent Life Insurance
Permanent life insurance, on the other hand, offers lifelong coverage and builds cash value over time. It is designed to provide long-term financial protection and can be used as a tool to build wealth. Permanent life insurance has higher premiums than term life insurance, but it offers more flexibility and additional benefits. The cash value can be accessed during your lifetime for various purposes, such as paying for unexpected emergencies, college tuition, or retirement. Permanent life insurance is ideal for those who need long-term financial protection, want to create an inheritance for their heirs, or prefer stable premiums.
The choice between term and permanent life insurance depends on your unique circumstances and financial goals. Term life insurance is suitable for short-term needs and budget-conscious individuals, while permanent life insurance is designed for long-term financial protection and offers additional benefits, such as cash value accumulation. Consulting with a financial advisor can help you make an informed decision based on your specific needs and budget.
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Whole life insurance
When choosing a whole life insurance policy, it is important to consider the financial strength of the company, customer complaints and satisfaction, the policy features that are important to you, and the application process. You may also want to consult a financial advisor to help you navigate the complexity of selecting a permanent life policy.
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Universal life insurance
When choosing a universal life insurance policy, it is important to consider the financial strength of the insurance company, customer complaints and satisfaction, the application process, and the cost of the policy. It is also important to understand the details of the policy, including any exclusions, and to be aware of the free-look period during which you can cancel the policy for a full refund.
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Variable life insurance
Variable universal life insurance is a hybrid policy that is similar to variable life insurance, but it offers adjustable premiums. This may be a better option for those who don't want to commit to paying the same amount in premiums each month.
Before investing in a variable life insurance policy, it is important to do your research and consult a financial professional to determine if it is the best option for your needs and goals.
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Factors influencing the cost of your premiums
There are several factors that can influence the cost of your life insurance premiums. Here are some key considerations:
- Age: The older you are, the more expensive your policy is likely to be. This is because age increases the risk of developing medical conditions that may affect your life expectancy.
- Lifestyle: An unhealthy lifestyle, such as excessive alcohol consumption or being overweight, can lead to higher premiums. This is because these factors can shorten life expectancy.
- Health: Pre-existing medical conditions can significantly affect the price of your policy. Chronic and serious medical conditions usually result in higher premiums.
- Family medical history: Insurers may inquire about your family's medical history, particularly if your parents or siblings have had serious medical conditions. This can impact your premium as there may be a higher risk of you developing similar conditions.
- Occupation: If you work in a dangerous or high-risk profession, your premiums are likely to be higher compared to someone in a lower-risk job, such as an administrative role.
- Smoking status: Smokers can expect to pay more for life insurance than non-smokers due to the associated health risks. This includes the use of nicotine replacement products and vaping.
- Length of cover: Life insurance policies with longer terms tend to be more expensive than those with shorter terms.
- Amount of cover: The higher the amount of cover you choose, the higher your premiums will generally be.
It is important to answer all questions accurately and honestly when applying for life insurance. Providing false information could affect whether your insurer pays out the claim in full. Additionally, consider the following when choosing a policy:
- Riders or policy features: Life insurance riders provide additional benefits, such as accessing a portion of the death benefit during your lifetime for health-related expenses. Some riders may be included, while others incur extra costs.
- Financial strength of the insurer: Ensure the insurer you choose has strong financial stability and is likely to be able to pay out your death benefit in the future. Check financial strength ratings from independent agencies such as AM Best.
- Customer satisfaction and complaints: Review customer satisfaction rankings, such as the J.D. Power study, and consider the company's National Association of Insurance Commissioners (NAIC) complaint index. A lower complaint index is preferable.
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Frequently asked questions
Life insurance is a contract under which an insurance company agrees to pay a specified amount after the death of an insured party, as long as the premiums are paid current. The payout amount is called a death benefit. Policies give insured people the assurance that their loved ones will have financial protection and peace of mind after their death.
If you have loved ones, such as children, a partner, or other relatives, who depend on your income to cover debts, bills, or living expenses, then it is worth considering taking out life insurance.
A large part of choosing a life insurance policy is determining how much money your dependents will need. The minimum amount of coverage you need may vary depending on factors such as your annual income, debts, and financial goals.
