Life insurance provides your beneficiaries with a death benefit payout after your passing, which may help cover funeral costs, debt payments and living expenses among other needs.
Life insurance can be acquired by filling out an application and going through any required underwriting processes, such as an interview or medical exam. Once approved, you’ll need to select beneficiaries and pay premiums.
Definition
Life insurance policies are agreements between an insurer and policyholder (known as an insured), in which upon the insured’s death the death benefit will be distributed among beneficiaries. Premium payments must remain active to maintain coverage – though in certain situations these may be waived, such as terminal illness or critical illness.
The insured can be either an individual or entity such as a trust or charity. Beneficiaries may include spouses, children, relatives, business associates and others whom you nominate to receive some or all of the death benefit upon your passing. Some policies also provide for contingent beneficiaries who would receive it should any primary beneficiaries pass before you do.
What type of life insurance you need depends on your coverage goals. Term life provides temporary protection with lower premiums than permanent policies; whole life provides lifetime coverage with savings components to build cash value over time; unit-linked plans combine life and investment products so you can reap returns from both investments and coverage simultaneously.
Types
Life insurance policies come in various shapes and sizes to address various coverage needs. They generally divide into two groups: term and permanent life (or whole life).
Term life insurance is typically more cost-effective and offers coverage for an agreed-upon term – from one to 30 years, in most cases – giving beneficiaries the payout if you pass away during that period. Permanent life policies tend to cost more, yet can last throughout your entire lifetime as long as premium payments continue and an interest component allows the policy to build cash value over time.
Other types of life insurance coverages include indexed universal life, variable universal life and final expense (burial) policies. If you need help selecting an ideal policy to meet your budget and needs, speak to a financial advisor or life insurance professional for advice. They can help assess your income replacement needs, liabilities and family situation to determine an adequate level of coverage while explaining different policy types to assist in finding what one may best meet them.
Coverage
How much coverage you require depends on your situation; however, it can help to identify financial needs that would be difficult or impossible to cover without you. Life insurance provides peace of mind knowing that should anything unexpected occur, your loved ones will still be financially provided for.
Policy premiums typically provide a lump sum payment (known as a death benefit) upon an insured’s death, as well as building up cash value over time and lending against it if desired. Payment may either be monthly or annually dependent upon which policy type is selected.
Whole life or permanent insurance offers lifelong coverage and accumulates a cash value that can be used to offset future premium costs, making this type of policy particularly appealing for those looking to protect themselves against outliving their savings. These policies typically have higher premiums than term life coverage while universal life or variable universal life offers flexible insurance and investment components with coverage tailored specifically for you.
Premiums
Life insurance premiums are more than just bills; they represent an investment in your family’s financial future. Understanding what drives these costs allows you to select an appropriate policy type, manage costs effectively and avoid coverage lapses.
Mortality is the foundation of your premium calculation. Insurance companies use mortality tables to establish average life expectancies among individuals in your age group and calculate your premium accordingly.
Other factors affecting premiums may include your health and lifestyle choices, with smokers typically paying higher premiums while riskier occupations or hobbies like skydiving can increase them further. Your gender also plays a factor; women typically receive lower premium quotes due to longer life expectancies than men do. Finally, insurance companies are for-profit businesses; some of your premium is used towards profit as well as operating expenses like salaries. In addition, reserves may also be set aside so they can continue making timely claims payments during economic downturns.
Beneficiaries
Beneficiaries are defined as individuals or entities that will receive the death benefit payout of a life insurance policy after its owner (insured). While an individual can have multiple beneficiaries at once, multiple policies can share one beneficiary.
On your life insurance application, you name beneficiaries that will become part of the policy when approved and put into effect by your life insurer. Altering beneficiaries is possible but may require new paperwork and medical clearance from all beneficiaries involved. Beneficiaries do not form part of your life contract but changing them, assigning ownership or borrowing cash value usually require consent from all involved.
Your life insurance policies allow you to name both primary and contingent beneficiaries. Contingency beneficiaries are individuals or entities who will receive your death benefit if the primary beneficiary dies before you do. Communicate with both sets of beneficiaries so they understand your life insurance policies, including where and how they can file a claim. It’s also wise to review them periodically after major life changes such as births, divorces or mortgages/job changes occur.
