What Is Life Insurance?
Life insurance is a contract between an individual and an insurance company. That contract is called a life insurance policy. In exchange for timely monthly payments, the insurer provides a death benefit to the named beneficiary or beneficiaries of the policyholder’s choosing upon his or her death.
A lump-sum one-time death-benefit payment may not be paid out if the death is ruled a suicide. Another reason the contract may not be enforced is if the insured does not accurately disclose past and current health conditions and takes part in high-risk behaviors and activities. Some plans require a physical exam, which makes a policy more expensive if you are in poor health. There are different types of life insurance and they are chosen based on the policyholder’s needs and goals.
Term life insurance provides protection for a specified period of time. If the policyholder does not die within that time frame, there is no payout but the policy can usually be renewed. Permanent life insurance products, like whole life insurance and universal life insurance, offer lifetime coverage. Some have a savings component as well, which may pay for college or a mortgage, long after the policyholder is gone. The financial strength of a life insurance company is the most important detail you should consider when taking out a life insurance policy.
How Does Life Insurance Work?
After you buy a life insurance policy, there is usually a waiting period before coverage goes into effect. Keep in mind that benefits may not be paid if certain circumstances are excluded in the policy (example: suicide).
You can choose anyone you’d like to be the beneficiary of a life insurance policy . You may also have more than one beneficiary or you can leave the benefit as a legacy to your business. After you buy life insurance, make sure to tell your beneficiaries about the life insurance policy so they can collect it from the right company when the time comes, without any delay, usually within a couple of weeks after death.
The better health you are in and if you are a non-smoker, the cheaper your life insurance plan will be. You’ll pay less for individual life insurance the healthier you are as opposed to buying a policy from a group plan, which would include people with pre-existing conditions. Some life insurance policies have a cash value, others don’t. Some life insurance policies only cover a specific period of time and others cover you for your entire lifetime. Only buy life insurance from a well-established life insurance company to ensure a timely and adequate payout to beneficiaries. Your location may impact your life insurance policy so let your agent know if you plan to move.
What Does Life Insurance Cover?
Life insurance provides financial protection to a family when a policyholder dies. Most causes of death, including illnesses, accidents or natural causes, are covered by life insurance. Some cases, like suicide, are not covered if the incident happened within the first two years of being a policyholder. In some cases, it’s never covered. Also excluded are hazardous activities and sexually transmitted diseases like HIV or AIDS, drug overdose and other cases. If a beneficiary murders the policyholder or if the application was found to be fraudulent, the death benefit will not be paid out. Read your policy terms carefully to see what other causes of death are not covered.
What Is Term Life Insurance?
Term life insurance, sometimes called term assurance, is a type of coverage that is set for a specific period of time at a fixed rate of payments. Beneficiaries are paid out if the policyholder dies within that period. If the policyholder does not die within the fixed period, the policy can be renewed, but it’ll be a more expensive rate because the policyholder is older. Some policies renew automatically at a higher price.
What Is Whole Life Insurance?
Sometimes called whole of life assurance, ordinary life insurance or straight life insurance, whole life insurance is a permanent form of insurance, meaning that unlike Term Life, the coverage period does not end. It’s a lifelong coverage with no need to renew. The policy remains active as long as required premiums are paid in a timely manner each month. Whole life coverage also has an investment component to it: the policy’s cash value. The cash value of a policy grows tax deferred and at a guaranteed rate, something term life insurance does not offer.
The policyholder can always borrow money against the account or cash out the policy. Whole life insurance is the simplest form of permanent life insurance because the premium remains the same on your policy for as long as the policyholder lives, with a guaranteed death benefit. Some but not all whole life insurance policies earn dividends which are paid out regularly. Universal life insurance is a permanent form of life insurance, meaning that there is no end coverage date and no need to renew.
What Is Final Expense Life Insurance?
Final expense life insurance is a type of whole life insurance, which provides a death benefit to help with costs associated with funerals and other related expenses. Often, these policies are called burial insurance. Death benefits usually pay out between $2,000 and $15,000. Some final expenses you should be covered for include medical bills, burial expenses, loss of income for survivors, unpaid debts and bills, and education expenses like college tuitions.
What Is Permanent Life Insurance?
Permanent life insurance is an umbrella term for life insurance policies that don’t expire as long as payments are made on the policy. Permanent life insurance includes whole life insurance, universal life insurance and variable universal life insurance. Some people use certain kinds of permanent life insurance as a savings account.
There is usually a waiting period after buying a permanent life policy, allowing for cash value to accumulate, before the policyholder can borrow against the value of the policy. If the total unpaid interest on a loan plus the outstanding loan balance exceeds the policy’s cash value, coverage will terminate. Cash value on a permanent life insurance policy is tax-free.
What Is Supplemental Life Insurance?
Supplemental life insurance is often offered by employers at no cost or very low cost. You can also buy supplemental life insurance privately. A supplemental life insurance policy can also complement a whole life or term life insurance policy by expanding coverage to cover your family’s financial needs. It’s important to note that different policies have different coverage terms so find out what is covered and how it’s covered. Ask if the policy only kicks in after other benefits have been used.
What Is Universal Life Insurance?
Universal life insurance is less expensive than whole life insurance but has a similar savings and a cash value with interest-earning growth. The cash value of a universal life insurance policy can grow on a tax deferred basis. You can also transfer money from the cash value to the insurance part any time. There is a guaranteed interest rate for the cash portion of the policy, so you never have to worry about dropping interest rates that can affect the amount of cash on hand. Coverage needs can be altered at any given time with universal life insurance, which is why it’s considered the more flexible of the permanent forms of life insurance.
How Much Is Life Insurance?
A policy is usually priced according to a policyholder’s health and age. Factors like your weight, whether or not you smoke tobacco, your occupation and your family health history may also impact the price of a life insurance policy. Life insurance rates increase as you age but where you live does not factor in the cost. The average price of life insurance for a 25-year-old non-smoker is about $26 a month and $87 a month for a 25-year-old smoker. It’s about $473 for a 65-year-old non smoker and $1,640 for a 65-year-old smoker. To get the best rate, it’s important to compare life insurance quotes .
Is Life Insurance Taxable?
Death benefits from all types of life insurance are income tax-free. Cash value on a permanent life insurance policy is tax-free, which is why many people use life insurance as a savings account.
How Much Life Insurance Do I Need?
The amount of life insurance you buy depends on what your financial goals are. Are you trying to pay for college tuition or several tuitions? Do you only need to cover funeral costs or the remainder on a mortgage? Do you have a legacy to leave to a business? Everyone has different reasons for taking out a life insurance plan. First, figure out what yours is and then work around it with a trusted life insurance agent.
Do I Need Life Insurance?
Most people buy life insurance to protect the standard of living of family members or dependents when they die. Even if you have no children, you will need money put aside to pay for your final expenses, including funeral services. Even people working in the home, and homemakers, should consider buying life insurance. Replacing someone to do household chores and to take care of children can be financially taxing on surviving family members. Young adults who take care of aging parents sometimes buy life insurance so that their parents are taken care of in case they die. Also, buying life insurance instead of mortgage insurance would cover your mortgage debt and protect the interest. You can even take out a life insurance policy on your aging parents and secure their investment as a beneficiary. Some people buy life insurance to secure their own financial wellbeing, with permanent life insurance policies that offer cash values and investments. Others leave their death benefit as a legacy to the business they leave behind. The life insurance offered at work is often insufficient and you could lose that coverage if you lose your job. To get the best rates, compare life insurance rates with SmartFinancial today.