Life Insurance

Life Insurance

Life Insurance

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Life Insurance

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Life insurance isn’t the most pleasant topic to think about — but when you pass, your family might be relieved you signed up for a policy.

 

What is Life Insurance?

Life insurance pays out after your death to the people you designate as beneficiaries — usually children, a spouse or other family members. It’s an important safety net if anyone depends on you financially. The life insurance payout can pay debts such as a mortgage, replace your income and provide college tuition funds.

What are common features of life insurance?

No matter what type of policy you buy, life insurance consists of these four components:

Policyholder The person who owns the life insurance policy. Typically, if the policyholder dies, the death benefit is paid out, but it’s possible to take out a policy on someone else.

Beneficiary The person, people or institution(s) that receive money if the policyholder dies. There can be more than one beneficiary named on the policy.

Premium The money paid monthly or annually to keep a policy active (or “in-force”). If you stop paying premiums, the policy lapses.

Death benefit The money paid out upon the event of the policyholder. Life insurance goes into effect as soon as you make your first premium payment, meaning you’re eligible for the death benefit as soon as the policy is in force.

Insurance companies always pay the death benefit, except in specific circumstances where they aren’t obligated to like:

  • The policyholder outlives their term life policy

  • The policy lapses or is canceled

  • The death occurs within two years of the policy being in-force and the insurance company finds evidence of fraud on the application

Types of Life Insurance

  • Term life insurance covers a limited time period, such as 10, 20 or 30 years, and does not build cash value. If you die within the term, your beneficiaries receive the payout.

  • Permanent life insurance costs more than term but offers additional features like cash value that you can borrow against and grows over time. Whole life is the best-known form of permanent life insurance. Other types include universal, variable and variable universal.

  • Guaranteed Universal life insurance promise a certain death benefit, and payments don’t change. There’s typically little or no cash value within the policy, and insurers demand on-time payments. Missing a payment could mean you forfeit the policy. And since there’s no cash value in the policy, you’d walk away with nothing if you forfeit. If you’re sometimes late with bills, this is not the product for you. In addition, consider that future financial or health problems could cause you to miss a payment.

  • Indexed universal life insurance links the policy’s cash value component to a stock market index like the Standard & Poor’s 500. Your gains are determined by a formula, which is outlined in the policy.

  • Variable universal life and variable life insurance, you tie your cash value to investment accounts, such as bonds or money market and equity accounts. There can be high risk to the investment account value based on the market, but if you do have cash value, you can take partial withdrawals or loans against it.

  • With simplified issue life insurance, you won’t have to take a medical exam. You’ll be asked a few health questions, and you could be turned down based on your answers.

  • Guaranteed issue life insurance: There are no medical exams and no questions asked. You can’t be turned down. This is the most expensive way to buy life insurance, and you might find only low coverage amounts available, such as $50,000 or $100,000.

  • Mortgage life insurance covers the current balance of your mortgage and pays out to the lender, not your family, if you pass away.

  • Joint life insurance insures two lives, usually those of spouses, under one policy:

    First-to-die: Pays out upon the death of the first person, whichever one it is. The surviving spouse typically would be the beneficiary. The policy would then expire; it doesn’t continue to cover the second person.

    Second-to-die: Pays out when both people have died. A policy like this typically is used when heirs, such as children, will need money to pay estate or inheritance taxes, so that they don’t have to sell off assets.

 
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How to buy life insurance

Life insurance isn’t a purchase you make often, so you may not know where to start or how to get life insurance quotes.

Determine how much life insurance you need

The amount of life insurance you need depends on your family’s needs and priorities. Do you have debts to pay? Will your family need to replace your income to meet everyday living expenses? Do you want to fund a college education for your children?

If you can, apply when you’re healthy

Life insurance companies use life expectancy as the basis for determining rates. Anything that could shorten your life expectancy could lead to a higher price. Your age, gender, medical conditions and family’s health history are all taken into consideration.

So it’s smart to buy life insurance as early as possible, when you’re young and healthy. If you wait, your life insurance quotes will increase solely because of your age. If new health problems arise, your rates could go up even more.

But if you already have a health issue, don’t let that stop you from getting life insurance quotes. Insurance companies vary in how they view pre-existing conditions, and some types of life insurance don’t require a medical exam.

 
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