Life insurance is an integral part of your overall financial strategy. It’s because a life insurance policy can help your loved ones maintain a secure financial future after your death. In addition to providing financial security to your family by replacing your income, it also covers your final expenses.
Throughout this post, we’re going to discuss different aspects of life insurance. Read on to learn about life insurance types, how it works, and what these types can do for you!
What is Life Insurance?
Life Insurance is a type of insurance in which the insurer guarantees to pay a specified amount to a beneficiary following the death of a policyholder. In order to keep the policy active, life insurance policies require policyholders to pay a premium, either monthly or annually. If the insured person dies while the policy is in effect, the policy proceeds will be paid to the beneficiary.
Key Terms To Understand Life Insurance
Life insurance is a complicated topic, so you will obviously come across some unfamiliar terms. For a better understanding of life insurance policy, you’ll need to know about the following terms:
- Life Insurers: Insurers are insurance companies that issue insurance policies and pay out claims in exchange for premiums.
- The Policyholder or Insured: A policyholder or insured is an individual who owns an insurance policy and whose life is covered by a life insurance policy. Usually, the policyholder and insured are the same, but they can also be different.
- Life Insurance Premiums: Premiums are the payments policyholder makes to the life insurance company in exchange for insurance coverage. Premiums are usually paid monthly or annually.
- Death Benefit: The amount that an insurance company will pay to the beneficiary when an insured passes away. Typically, after an insured dies, their beneficiaries make a claim with the insurer to receive death benefits.
- Cash Value: Permanent life insurance policies accumulate cash value over time which can be withdrawn or borrowed against while you’re alive. Conversely, term life policies have no cash value component.
- Life Insurance Beneficiary: A beneficiary is an individual who will receive your death benefit upon your death. At the time of purchase of a life insurance policy, the policyholder chooses the beneficiary. You can designate your parents, spouse, or child as a beneficiary.
Life Insurance Types
Generally, there are two main categories of life insurance. All life insurance types fall under these two categories:
- Term Life Insurance
- Permanent Life Insurance
1. Term Life Insurance
Term life insurance provides coverage for a limited period at a fixed rate. After the expiration of that period, the policyholder’s insurance coverage ends. A death benefit is payable to beneficiaries only if the policyholder dies during the term. A term insurance policy stops providing coverage if you don’t die within the specified timeframe. The policyholder would then need to obtain further coverage with different payments or conditions. Among all types of insurance, term insurance is by far the most affordable option available.
A term insurance policy may consist of the following four types:
- Level Term Life Insurance
- Decreasing Term Life Insurance
- Convertible Term Life Insurance
- Renewable Term Life Insurance
2. Permanent Life Insurance
A life insurance policy that covers the whole life of the insured is known as permanent life insurance. This policy provides lifetime coverage until the policy lapses due to the nonpayment of premiums. It usually includes death benefits and cash value, also known as cash surrender value or surrender value. As the owner of the policy, you have the option of withdrawing money, borrowing from the cash value, or surrendering the policy to receive the surrender value. A permanent insurance policy is more expensive than term insurance because it covers your entire life.
There are two major types of permanent insurance:
- Whole Life Insurance
- Universal Life Insurance
- Indexed Universal
- Variable Universal
What are the Benefits of Life Insurance?
Unfortunately, many people aren’t aware of the need for life insurance to protect their families during difficult times. Having life insurance offers a variety of features and protections.
Let’s take a closer look at some of the benefits of life insurance:
- Paying Final Costs
One of the main benefits of life insurance is that it can help cover your final costs. These may include funeral or burial costs, medical bills, and estate settlement expenses.
- Replace Your Income
When you die, your life insurance can assist in replacing your income. Your beneficiaries could use the money to pay for essential expenses, including rent and groceries.
- Children’s Education
Approximately 95% of parents finance their children’s education. For parents, saving for children’s education is their highest priority. Life insurance helps you secure the educational milestones of your children after your death.
- Paying of Debts
When you have a life insurance policy, your beneficiaries can use this money to pay your debts instead of borrowing or using their own credit. For example, they can use your death benefit to pay off your card debt or car loans.
- Taxfree Payouts
Life insurance offers tax advantages because it generally provides tax-free death benefits. Beneficiaries of death benefits don’t have to pay income tax since death payouts are not considered income by the government.
- Health Issues
Almost everyone spends a significant amount of their income on health care. Any critical illness will likely prevent you from earning income during the treatment period. Dealing with such a situation can be stressful for you and your family. The right life insurance plan can also protect you financially during a severe illness, letting you focus on healing and regaining your health.
- Retirement Savings
In addition to providing death benefits, some types of life insurance can accumulate cash value. The cash value will help with expenses like car and home down payments during your retirement years.
- Peace of mind
A person’s role in their family can’t be compensated for by money. However, if your family is financially dependent upon you, purchasing life insurance will give you peace of mind by providing your family with financial security when you die.
Which Factors Affect Your Life Insurance Costs?
Many people hesitate to purchase insurance because they think it is too expensive, but that’s not true! Following is a brief list of the most significant factors that affect life insurance premiums:
Your age is one of the most significant factors in life insurance underwriting. When determining a policyholder’s premium, insurers consider the policyholder’s age and life expectancy. The younger you are, the lower the risk of death, which means lower life insurance premiums. On the other hand, the older you are, the more you will have to pay in premiums.
The second most significant factor that affects life insurance costs is gender. According to the National Center for Health Statistics, life expectancy for females is approximately five years longer than for males. As males are more likely to receive a death benefit payout sooner than females, they pay more in insurance premiums, while women enjoy slightly lower rates.
- Medical History
Your medical history is also taken into consideration in estimating your premium. A pre-existing illness or previous health problems will raise your insurance premium. However, if you haven’t experienced any serious illnesses and have lived a healthy life, your premiums will be lower.
Smoking increases the risk of health problems. Insurance companies charge higher premiums to smokers because they view them as high-risk insurance buyers. Approximately 40% to 100% higher premiums are charged to smokers because they’re at greater risk of filing a claim.
The lifestyle you lead will not only affect your insurance rates but can also affect your eligibility. When applying for insurance, you need to provide details about your lifestyle, including your location, driving record, and criminal history. Further, if your profession involves risky activities like scuba diving, fishing, and plane piloting, you may have to pay more for your insurance.
How to Choose a Life Insurance Beneficiary?
Beneficiaries are people who receive the death benefit from your life insurance policy after your death. With a life insurance policy, you can protect those you love in case of your untimely death. Thus, choosing beneficiaries for your policy is an important aspect of this policy. By doing so, you can name a trustable beneficiary, ensuring your money will be utilized as intended.
Most often, beneficiaries are spouses, parents, and children. However, you can designate more than one beneficiary, as well as what percentage they will receive after your death. Marriage and divorce are life events that can affect your beneficiary selections, so be sure to review and update them regularly. In order to change your beneficiaries, you need to submit a beneficiary change form to your life insurer on time.
Types of Beneficiaries
Beneficiaries can be divided into two categories:
- Primary Beneficiary– The primary beneficiary is the person you would like to receive the death benefit first.
- Secondary Beneficiary– There is the option of adding secondary beneficiaries. A secondary beneficiary is a person who will receive the death benefit if the primary beneficiaries die.
|Tip: Beneficiaries must know the insurance company’s name to initiate a claim. So, always notify your beneficiaries that you have a life insurance policy and let them know the name of your insurer.|
How Does a Beneficiary Make a Claim?
After your death, your family may need immediate cash for ongoing expenses, such as mortgage and credit card payments. So, the life insurance beneficiary may want to initiate the claim process as soon as possible. Beneficiaries must know how to receive payouts after a loved one dies.
Below, you will find steps that explain how to file a claim!
1. Contact the insurance company
In order to claim life insurance benefits, the beneficiary must contact the local insurance provider. It’s not the insurance company’s responsibility to contact you. After contacting the insurance company, beneficiaries must fill out a form that simply reports the death. Once the beneficiary has completed the appropriate documents, the company sends him instructions on how to proceed. The sooner you contact your insurer, the faster you receive the money.
2. Death certificate
For the claim process to begin, you must submit a copy of the death certificate. A beneficiary can generally apply for the death benefit by submitting a completed claim form and a copy of the death certificate to the insurance company.
3. Verify the documents
When the insurer has all the necessary documents, it usually takes about one week to process a claim. A claim is usually paid within 30 days after the insurer receives all necessary documents. So, ensure that all supporting documentation is attached to the claim form.
The Bottom Line
Although purchasing life insurance can be a sensitive matter, but it can be a good way of protecting your family’s financial future. We at theinsuranceinsights.com can help you determine the type of insurance that is best for you.
If you need any information regarding insurance, you can contact us or ask any questions by leaving a comment below!