Life Insurance: What You Need To Know

Life insurance is a legally binding contract between an individual and an insurance company. The insurance company agrees to pay a sum of money to one or more named beneficiaries upon the death of the policyholder. In exchange, the policyholder pays a premium to the insurance company. The purpose of life insurance is to provide financial security to loved ones upon the policyholder's death.

There are two main types of life insurance: term and permanent life insurance. Term life insurance provides coverage for a specific period, typically between 10 and 30 years, while permanent life insurance provides coverage for the entire life of the policyholder. Term life insurance is generally more affordable, but permanent life insurance offers additional benefits such as a cash value component that can be borrowed against or used to pay premiums.

What is a life insurance policy?

A life insurance policy is a legally binding contract between an insurance company and a policyholder, where the insurer agrees to pay a sum of money to one or more named beneficiaries upon the death of the policyholder. The purpose of life insurance is to provide financial security to loved ones after the policyholder's death.

Life insurance policies fall into two main categories: term and permanent. Term life insurance provides coverage for a specific period, typically between 10 and 30 years, and does not accumulate cash value. Permanent life insurance, on the other hand, provides coverage for the entire life of the insured and includes a cash value component that grows over time.

The key terms of a life insurance policy include:

• The insurer: the insurance company selling the policy.
• The policyholder: the person or entity who owns the policy and pays the premiums.
• The insured: the person whose life is insured.
• The death benefit: the amount the insurer will pay when the insured passes away.
• The beneficiaries: the people or entities who will receive the death benefit.
• The policy length: the period during which the insurer agrees to pay the death benefit, which can be a specific term or permanent.
• The premium: the payments needed to keep the policy in effect.
• The cash value: permanent life policies have a cash value component that can be cashed out or borrowed against.

When choosing a life insurance policy, it is important to understand the specific terms, conditions, and coverage offered by the insurer. Factors such as age, gender, health, and lifestyle can affect the cost of premiums and eligibility for coverage. Life insurance is not a requirement, but it can provide financial protection for loved ones in the event of the policyholder's death.

Who can take out a life insurance policy?

Life insurance is a legally binding contract between an insurance company and a policyholder, where the insurer agrees to pay a sum of money to one or more beneficiaries upon the death of the policyholder. The policyholder pays a premium, either regularly or as a lump sum, to the insurer during their lifetime. The purpose of life insurance is to provide financial security to the policyholder's loved ones upon their death.

Life insurance policies can be taken out by anyone, but the policyholder must have the insured individual's permission and prove that they have an "insurable interest" in the insured individual's life. This means that the policyholder must be able to demonstrate that they would suffer financially if the insured person passed away.

• Spouse: Since spouses generally share financial obligations, most spouses would have little difficulty proving insurable interest.
• Former spouse: If there is shared custody of children, former spouses may also have an insurable interest.
• Parent-child: If a parent relies on the financial support and care of an adult child, or vice versa, there is an insurable interest.
• Business partner: An essential employee or business partner may be insured if their loss would have a significant financial impact on the company.
• Siblings or other family members: There may be insurable interest in other family relationships, especially if a member of the family is providing caregiving or financial support.
• Child: Instead of insuring someone you rely on financially, the reasons for taking a life insurance policy out on a child are different. In this case, the child has a known health issue or is at risk of developing one, and the policy guarantees their insurability in the future.

In addition, non-working spouses can also obtain life insurance since their loss would result in a financial burden.

What are the different types of life insurance?

Life insurance is a contract between an insurance company and a policyholder. In exchange for a premium, the insurance company agrees to pay a sum of money to one or more named beneficiaries upon the death of the policyholder. The purpose of life insurance is to help provide financial security to your loved ones upon your death.

There are two broad categories of life insurance: term and permanent. Term life insurance provides coverage for a set number of years, after which the policy expires. Permanent life insurance, on the other hand, does not expire and covers the policyholder for their entire life.

Term Life Insurance

Term life insurance is a good option for those who only need coverage for a certain number of years. It is generally more affordable than permanent life insurance and provides coverage for a set term, such as 10, 15, 20, or 30 years. The premiums for term life insurance are typically locked in for the entire term, making it easier to budget and plan. However, if the policyholder outlives the term, the policy simply expires, and there is no payout to beneficiaries.

Whole Life Insurance

Whole life insurance is a type of permanent life insurance that provides coverage for the policyholder's entire life, as long as they continue to pay the premiums. Whole life insurance also includes a savings component, known as the cash value, which builds over time at a fixed interest rate. This cash value can be borrowed against or withdrawn, and it does not affect the death benefit paid out upon the policyholder's death. Whole life insurance tends to be more expensive than term life insurance due to the lifelong coverage and the savings component.

Universal Life Insurance

Universal life insurance is another type of permanent life insurance that offers more flexibility than whole life. Policyholders can adjust their death benefit and premium payments within certain limits. Universal life insurance also has a savings component that grows based on market interest rates, which means the interest rate is not fixed. The savings component can eventually grow large enough to cover the cost of premiums, resulting in a zero-cost policy.

Variable Life Insurance

Variable life insurance is a riskier type of permanent life insurance that combines a fixed death benefit with a variable cash value component. The cash value is tied to investment accounts, such as bonds and mutual funds, and can rise or fall based on the performance of these investments. Variable life insurance offers the potential for higher returns but also carries higher fees and costs than other types of life insurance.

Final Expense Life Insurance

Also known as funeral or burial insurance, final expense insurance is a type of whole life insurance with a smaller death benefit designed to cover end-of-life expenses such as funeral costs, medical bills, or outstanding debt. These policies are typically easier for older or less healthy individuals to qualify for and often do not require a medical exam.

In addition to these main types, there are also other variations of life insurance, such as group life insurance, mortgage life insurance, credit life insurance, and accidental death and dismemberment insurance. The best type of life insurance depends on individual needs and budget, and it is important to carefully consider the coverage length, complexity, coverage amount, and other features when choosing a policy.

What are the benefits of life insurance?

Life insurance is a contract between an insurance company and a policyholder. In exchange for a premium, the insurance company agrees to pay a sum of money to one or more named beneficiaries upon the death of the policyholder. The purpose of life insurance is to provide financial security to your loved ones upon your death.

Financial Security for Loved Ones

Life insurance provides financial security for your loved ones after you pass away. The death benefit from a life insurance policy can help cover living expenses, pay off debts, and handle final expenses such as funeral and medical costs. It can also help replace lost income, ensuring your dependents can maintain their standard of living.

Tax-Free Payouts

In most cases, life insurance payouts are not subject to federal income taxes. This means your beneficiaries will receive the full sum without having to worry about additional tax liabilities.

Coverage for Chronic and Terminal Illnesses

Some life insurance policies offer living benefits, providing financial resources if you are diagnosed with a covered chronic, critical, or terminal illness. This can be extremely valuable in helping to cover medical expenses and other costs associated with serious illnesses.

Supplementing Retirement Savings

Certain types of life insurance policies, such as whole, universal, and variable life insurance, accumulate cash value over time. This cash value can supplement your retirement savings and be used to meet various financial goals, such as funding a child's education or establishing an emergency fund.

Peace of Mind

Life insurance provides peace of mind, knowing that your loved ones will be taken care of financially in the event of your death. It offers assurance that you have provided a legacy and financial protection for your family.

How do I buy life insurance?

Life insurance is a contract between an insurance company and a policyholder. In exchange for a premium, the insurance company agrees to pay a sum of money to one or more named beneficiaries upon the death of the policyholder. The purpose of life insurance is to help provide financial security to your loved ones upon your death.

Determine if you need life insurance

For many policyholders, life insurance is a necessity because they have dependents, such as children or elderly parents, that they provide for. Others purchase life insurance to ease the financial burden of their death on their surviving family members.

Decide how you want to buy life insurance

Depending on where you live, you'll likely have three options when it comes to buying life insurance:

• An independent local insurance agent
• An independent online broker
• Going directly to an insurance company

Know what to look for when buying life insurance

When shopping independently, be sure to research the life insurance companies. Key things to look for in an insurer before purchasing a life policy include:

• Knowledgeable customer service
• Trustworthy agents
• Great consumer reviews
• Financial stability

Figure out which type of life insurance you need

There are two main types of life insurance: term life and permanent life. Term life insurance will typically cover you for a set period, usually somewhere between 10 and 30 years, while permanent life insurance covers you for life if the premiums are paid. Term life insurance is generally more affordable than permanent life insurance.

Determine how much of a death benefit you need

Consider the amount you want to provide your beneficiaries upon your passing. This is called your death benefit or coverage amount. Your first step in selecting a death benefit amount is to plan for your funeral and estate costs. You might opt for final expense insurance to cover those costs, but remember to consider other factors as well, including your income, debt, and short- and long-term expenses.

Fill out and submit your application

Most applications require the following health information:

• Any past or current medical conditions
• A detailed family medical history
• Details about your lifestyle, including whether you smoke, how often you drink and exercise, as well as any risky hobbies you enjoy, like skydiving or rock climbing

You'll also name your beneficiary as part of the application process. This is the person who'll receive your policy's death benefit if you die while the policy is active.

Prepare for your life insurance medical exam

After applying, you may need to get a medical exam. Your insurer will let you know during the quoting or application process if you need to schedule a medical exam.

Review and buy your policy

Once your application and medical exam are complete, your insurer may take anywhere from a few days to a few weeks to review all your information. If approved, they'll send you a complete breakdown of your policy details, including the rate you'll pay if you decide to buy the policy. If everything looks good, you can sign on the dotted line and complete the purchase.

Frequently asked questions