Life Insurance: What You Need To Know

Life insurance is a contract between an individual and an insurance company, where the individual makes regular payments (premiums) and the company pays out a sum of money (a death benefit) to the individual's beneficiaries upon their death. The purpose of life insurance is to provide financial protection and peace of mind for loved ones after the insured person passes away. It is designed to replace lost income, pay off debts, and cover expenses such as funeral costs and college tuition. There are two main types of life insurance: term life insurance, which covers a fixed period, and permanent life insurance, which lasts until the end of the insured person's life. When deciding whether to buy life insurance, it is important to consider financial dependents, potential debts and taxes, and alternative sources of income such as savings accounts.

Term vs. permanent life insurance

Term life insurance and permanent life insurance are the two main types of life insurance. Term life insurance is temporary and lasts for a specific amount of time, typically between one and 30 years, or until a particular age. Permanent life insurance, on the other hand, lasts for the entirety of the insured person's life, provided they keep up with premium payments.

Term life insurance is generally more affordable than permanent life insurance, especially when purchased early in life. It is a straightforward and flexible option, as it allows the insured to choose the term of coverage. However, term life insurance policies do not carry any cash value, meaning there are no savings that can be accessed by the policyholder over time. Once the policy term ends, the coverage also ends, and the premiums paid are not refunded.

Permanent life insurance, which includes whole life, universal life, and variable life insurance, offers long-term or permanent coverage. It tends to be more expensive than term life insurance, but it carries a savings or investment component called the cash value. This cash value grows tax-deferred and can be withdrawn or borrowed against while the insured is still alive. However, doing so can decrease the amount of the policy's death benefit if those funds are not repaid.

When deciding between term and permanent life insurance, it is important to consider one's assets, the needs of their loved ones, and their budget. Term life insurance is suitable for those who need short-term coverage or additional protection during specific times, such as when starting a family or paying off debts. Permanent life insurance, on the other hand, is ideal for those who need long-term financial protection, want to create an inheritance for their heirs, or want a tax-advantaged way to save for future expenses.

What affects life insurance costs?

Many factors influence the cost of life insurance premiums. While some of these factors are beyond your control, you can manage other criteria to potentially lower the cost before and even after applying. Here are the most common factors that affect life insurance costs:

• Age: The younger you are, the lower your premiums will be since life expectancy is the biggest determinant of risk for the insurance company.
• Gender: Women generally pay lower rates than men of the same age because women statistically live longer.
• Smoking: People who smoke are at risk for many health issues that could shorten their lives and increase risk-based premiums.
• Health: Medical exams screen for health conditions such as heart disease, diabetes, and cancer, as well as related medical metrics that can indicate health risks. Poor health can lead to higher premiums.
• Lifestyle: Dangerous occupations and hobbies can make premiums much more expensive.
• Family medical history: If there is a history of major diseases in your immediate family, your risk of developing certain conditions is much higher, which can increase premiums.
• Driving record: A history of moving violations or drunk driving can dramatically increase the cost of life insurance premiums.
• Type of policy: Term life insurance is generally cheaper than permanent life insurance, which remains in force throughout the insured's life unless premiums are not paid or the policy is surrendered.
• Coverage amount: The higher the coverage amount, the higher the premiums will be.

It's important to note that life insurance costs can vary significantly between different insurance providers, so it's recommended to compare quotes from multiple companies to find the best coverage for your needs at a price that suits your budget.

How life insurance works

Life insurance is a contract between you and an insurance company. In exchange for premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death.

Life insurance works by providing your beneficiaries with a death benefit payout if you die, but only if your policy is in force when you pass away—meaning you have paid the required premiums while you’re alive. The death benefit can be used for any purpose your beneficiaries choose.

Before you enter into a life insurance contract, the life insurance company will determine your required premiums. There are several factors that affect life insurance quotes, including:

• Health and medical history
• Coverage amount you choose
• Type of life insurance (such as term life vs. whole life)

The younger and healthier you are, the better your quotes will be.

Term Life Insurance

Term life insurance covers you for a period of time chosen at purchase, such as 10, 20 or 30 years. If you die during the covered period, the policy will pay your beneficiaries the amount stated in the policy. If you don’t die during that time, no one gets paid.

Term life is popular because it offers large payouts at a lower cost than permanent life. It also provides coverage for a set number of years.

Permanent Life Insurance

Permanent life insurance policies typically cover you until death, assuming you pay your premiums. Whole life is the most well-known type of permanent insurance, but there are other flavours, including universal life, indexed universal life and variable life.

Permanent life insurance policies build cash value as they age. A portion of the premium payments is added to the cash value, which can earn interest.

The cash value of whole life insurance policies grows at a fixed rate, while the cash value within universal policies can fluctuate.

You can use the cash value of your life insurance while you’re still alive. You can borrow from it, make withdrawals or just use the interest payments to cover the premium later in life. If you no longer need coverage, you can even give up the policy and get the cash surrender value in return.

Riders and policy changes

Riders are add-ons to a life insurance policy that allow you to customise your coverage. They are usually available for purchase, but some policies include certain riders in their base premium. The availability of riders depends on the provider. The policyholder typically pays an additional premium for each rider or a fee to exercise it.

• Accidental Death Benefit Rider: Provides additional life insurance coverage if the insured person's death is accidental.
• Waiver of Premium Rider: Relieves the policyholder from making premium payments if the insured becomes disabled and unable to work.
• Disability Income Rider: Pays a monthly income if the policyholder becomes unable to work for a certain period (usually several months) due to a serious illness or injury.
• Accelerated Death Benefit Rider: Allows the insured person to collect a portion or all of the death benefit while still living if they are diagnosed with a terminal illness.
• Long-Term Care Rider: A type of accelerated death benefit that can be used to pay for nursing home, assisted living, or in-home care when the insured requires help with activities of daily living, such as bathing, eating, and using the toilet.
• Guaranteed Insurability Rider: Lets the policyholder buy additional insurance at a later date without a medical review.

In addition to riders, policyholders may also have the option to make other policy changes. For example, permanent life insurance policies often accumulate cash value over time, which the policyholder can borrow against. Policy loans can be a way to access cash, but it's important to note that they can reduce the death benefit if not repaid.

It's important to carefully review the terms and conditions of any life insurance policy, including the riders and potential policy changes, to ensure you understand the coverage and any associated costs or restrictions.

Qualifying for life insurance

Insurers evaluate each life insurance applicant on a case-by-case basis and there are hundreds of insurers to choose from, so almost anyone can find an affordable policy that at least partially meets their needs. Many life insurance companies sell multiple types and sizes of policies, and some specialise in meeting specific needs, such as policies for people with chronic health conditions. There are also brokers who can help applicants find the insurance they need, free of charge.

In general, the older and less healthy you are, the harder it will be to qualify for life insurance, and certain lifestyle choices, such as using tobacco or engaging in risky hobbies like skydiving, can make it harder to qualify or lead to higher rates.

Some types of life insurance don't require medical information, but no-exam policies generally have much higher premiums and involve an initial waiting period before the death benefit is available.

Frequently asked questions