Whether you heard it from your insurance agent, an investment specialist or your own mother, you probably know that life insurance is a good thing to have. Despite that being the case, many people still have the question, how does life insurance work? Individuals have a vague understanding that money will be paid if someone dies, but things like whole life insurance policies complicate the matter.
Understanding Term Life Insurance
Probably the most common type of policy, term life insurance covers a predefined period of time. The policy owner may purchase the insurance outright, paying a certain amount of money up front for years of coverage. More commonly, the owner pays for the insurance policy each month. In this case, the policy expires at the agreed upon date or at a time when the owner stops making monthly payments.
Generally, term life insurance is less expensive for an individual than whole life or permanent life insurance. Because the policy expires and the individual has to purchase a new policy, the price cannot be guaranteed. Since life insurance costs depend on factors like age and health, the next time you purchase a term life policy, you may have to pay more for it.
Permanent Life Insurance
This type of policy has a lifetime term, which is usually defined as until the person dies or reaches the age of 100. You can purchase these policies outright or pay over a certain amount of time. The benefit of such a policy is that the person is covered regardless of age, health or other factors.
The majority of permanent life insurance policies are sold because of the cash value aspect intrigues people. I’ve heard term life insurance compared to renting a house whereas permanent is compared to purchasing a residence (in one you build equity and the other you don’t).
Although the returns may be lower than the average rate of return on investments in a traditional market, permanent life insurance is popular because it is low risk (variable life insurance excluded). You purchase a plan for a certain amount of coverage and you make monthly payments over a certain amount of years (typically the entire time the policy is in force). During that time, the policy builds cash value. Once you reach a certain value, you can borrow against the policy or use the dividends to pay for your monthly (or annual) premiums. Some people even purchase whole life insurance for infant children. By the time the kids are college-aged, they have a paid-for life insurance policy and may be able to use cash values to help pay for things like college.
Where To Buy Life Insurance
If your employer offers company sponsored life insurance, this may be the best rate you will get. In these cases, the company either pays part of the premium or uses the number of staff to get bulk discounts on insurance rates.
You can also purchase life insurance through a broker and may be able to reduce overall insurance rates if you bundle home, life and car insurance (or even if you’re healthy). Online life insurance agencies may be able to offer affordable rates, but make sure you only work with a reputable agency that publishes contact information.
Life insurance is a way you can take care of loved ones when you are gone. Parents may want to leave something for their children and spouses will want to ensure their partner is comfortable. When listing minors as beneficiaries on your life insurance plan, remember that you will need an executor to handle the funds. You might want to talk to an attorney about setting up a will in such cases.
Jason is the creator of the free How to Become Rich e-course, and the founder of WorkSaveLive where he educates his readers on how to save money, pay down debt, and build wealth.
1 thought on “Understanding the Basics of Life Insurance”
I’m in the process of buying life insurance right now and it definitely pays to shop around. You can get the same coverage from a different provider for much different rates. And if you’re willing to have an exam there are major savings (provided nothing is wrong with you).