Life Insurance: What You Need To Know

Life insurance is a contract between an insurance company and a policyholder, in which the insurance company agrees to pay a sum of money to a designated beneficiary upon the death of the insured person. The policyholder typically pays a premium, either as a lump sum or at regular intervals. The death benefit is usually income tax-free and can be used by the beneficiary to cover expenses such as funeral costs, consumer debt, and mortgage debt. Life insurance can also include a savings component called cash value, which the policyholder can withdraw or borrow against while they are still alive.

Term life insurance

When taking out a term life insurance policy, there is an application process. The insurance company will assess how much of a risk you are to insure. This includes a medical exam to evaluate your health, as well as questions about your occupation, lifestyle, and hobbies. Certain hobbies, such as scuba diving, and dangerous work environments may increase your rates.

You will also need to choose a term length. If you have children, it is recommended to choose a term long enough to see them through college. While longer terms are more expensive, it is generally easier to get insurance while you are younger and in good health.

You will also need to decide on the death benefit amount and name your beneficiaries. This can be your family, or it can be a trust, charitable organisation, or friend.

There are several types of term life insurance policies:

• Level premium: The simplest and most common type of policy, where the premium stays the same for the entire term.
• Yearly renewable term: Covers you for a year at a time, with the option to renew without a medical exam, but at a higher cost.
• Return of premium: Pays back all or a portion of your premiums if you live to the end of the term, but the premiums are much higher.
• Guaranteed issue: Does not require a medical exam and only asks basic health questions. The premiums for this type of policy are much higher.

Whole life insurance

How Whole Life Insurance Works

Benefits of Whole Life Insurance

• Lifetime coverage: It provides coverage for the entire life of the insured, unlike term life insurance, which is limited to a specific number of years.
• Cash value: It allows the policyholder to build cash value, which can be used for loans, withdrawals, or premium payments.
• Guaranteed death benefit: The death benefit amount remains fixed and is guaranteed to be paid out to the beneficiaries.
• Predictable premium payments: The premiums remain consistent and do not typically change over time.
• Tax-free loans: Policy loans are not taxed, providing a tax advantage.

Drawbacks of Whole Life Insurance

Despite its benefits, whole life insurance also has some drawbacks:

• Higher cost: Whole life insurance premiums are usually significantly higher than term life insurance due to the lifelong coverage and cash value component.
• Slower cash value growth: The growth rate of the cash value is fixed and may be slower compared to other policies with variable returns.
• Limited flexibility: Whole life insurance does not allow adjustments to premiums or the death benefit.

The cost of whole life insurance varies based on factors such as age, health history, and the amount of coverage. Older applicants and those with health issues tend to have higher rates. Additionally, whole life insurance is generally more expensive than term life insurance for the same amount of coverage.

Universal life insurance

The cash value in a universal life insurance policy can be withdrawn or borrowed against while the policyholder is alive. However, if the cash value is withdrawn or borrowed against, the death benefit will be reduced by the same amount. Upon the death of the policyholder, the insurance company keeps the account's cash value and pays out only the death benefit to the beneficiaries.

Variable life insurance

The policy has a cash-value account with money that is invested, typically in mutual funds. The cash value of a variable life insurance policy can be invested in asset options, mainly mutual funds. The value of the account will depend on the premiums paid, how the investments perform, and the associated fees and expenses.

The major risk of variable life insurance is that your investments can lose money. Unlike with other types of insurance policies, the insurance company does not guarantee a rate of return.

Variable universal life insurance is a type of permanent coverage with more flexibility than whole life. You can increase your premiums to help boost the policy's cash value or decrease premiums if the cash value can cover the difference. You can also raise or lower the coverage amount as your insurance needs change.

Final expense life insurance

Final expense insurance covers the costs associated with end-of-life medical care, legal and accounting fees, and funeral and burial expenses, which can quickly add up to thousands of dollars. The average funeral can cost $10,000 or more, and the median cost of a funeral is $8,300. The cost of cremation is only 28% less than a traditional funeral.

Final expense insurance policies offer competitive, fixed premiums that do not change over time, and the cash benefit can be used to cover various end-of-life costs. These policies do not require a physical exam for approval, only a brief health questionnaire. Coverage can often be issued within days of applying, and the policy remains in place as long as the premiums are paid. Final expense insurance plans can also build cash value, which can be used to borrow against or as a non-forfeiture benefit.

The two main types of life insurance are term life insurance and permanent life insurance. Term life insurance covers a limited period, such as 10 or 20 years, and is typically the cheapest option. Permanent life insurance covers the insured person's entire life and usually includes a cash value component. Whole life insurance, universal life insurance, and variable universal life insurance are different types of permanent life insurance policies.

Life insurance is a legally binding contract between an insurance company and a policyholder, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. The policyholder pays premiums to keep the coverage active, and the beneficiary receives the policy's death benefit when the insured person dies.

Frequently asked questions