Ins and Outs of Life Insurance

Before we get into the nitty-gritty, let’s first define life insurance. Essentially, it helps take care of those you care about because it can help them financially — income or debt-wise— when you die. When you decide to buy life insurance, it is a contract between you and the insurance company in which you make regular payments and the company gives benefits to your family when you pass. 

There are two types you can get: permanent life and term life. Permanent insurance covers you until you die and term insurance only covers you for a set amount of time. Term life insurance is typically cheaper, but permanent lasts your whole life and the term has no value once the contract ends. 

Both types share some similar characteristics although policies can vary greatly. For instance, there are specific policies for couples, families, people who are high risk, etc. Despite the difference in consumer, here are some similarities the policies generally share:

  1. Beneficiaries: You choose the people who are going to receive the life insurance money when you die. Most often these people are children, parents, spouses, etc, but you can choose anyone you like as a beneficiary. 
  1. Premiums: These are payments you make to the insurance company. For permanent policies, you can put the money into a cash-value account. For term policies, premiums cover the cost of the insurance as well as administrative costs. 
  1. Riders: You are able to add on options to your insurance policy. This applies if you want to add a child to the policy or you want to make sure your premiums are covered in case you can’t work.  
  1. Death Benefit: This is the amount of money the beneficiaries are paid when the person with the policy passes. You will choose a value, and that amount is sometimes a fixed value. If you get a permanent policy you can add more money if you add on a rider to the policy. 

Most people get life insurance because they want to make sure their family is financially supported after they pass, as your family will have to pay for your burial and other expenses. With this plan, you can make sure that these expenses are covered and aren’t suddenly put on your family members. 

It’s best to meet with a financial advisor in order to pick out the plan that best suits you and your needs. However, here is a rundown of how the two basic policies work:

Term Life Insurance:

This type of policy lasts for a specific period of time that you choose when you first buy the policy. Usually, people choose ten, twenty, or thirty-year periods. If you pass before, the company will pay the amount originally stated in the contract to your beneficiaries. Many people go with this option because it is a lower cost than permanent life insurance. It also offers large amounts of money. You can choose to get rid of your life insurance after the time period is up if it doesn’t seem necessary to you. People who get term life insurance do so for reasons such as:

  • Not wanting your spouse to be responsible for the mortgage if you die. 
  • Wanting to ensure that your child(s) can still go to college. 
  • Still wanting coverage, but don’t want to or can’t afford the higher premiums of permanent life insurance. 

Permanent Life Insurance:

With permanent policies, you are covered until you die, but you have to pay premiums. These policies will build value as you grow older as a portion of the premium payment is added to the cash account. You can earn interest or even be invested depending on the policy you choose. This value will increase more quickly when you are younger as it is cheaper to insure younger people. Before you pass, you can make withdrawals from the cash account within the policy, borrow from it, or use the interest payments to cover premiums down the line. Adding on different options to a policy can make filing taxes more complicated. It’s best to talk to a financial advisor before choosing a plan. 

Other permanent policies:

Universal life insurance: This type of policy provides permanent coverage but gives you flexibility. You can make varying payments based on your finances or how the investments of your cash account do. You might be able to stop premium payments. However, if you do badly, you might have to pay more. Bottom line, this policy depends on how the company’s investments do. 

Whole life insurance:

Their premiums are a lot higher than term policies. Yes, whole life policies come with great aspects like fixed premiums, potential cash value, and guaranteed payouts, but most people are better off with 401(k)s, stocks, real estate, or individual retirement accounts than whole life insurance. 

Variable universal life insurance:

This is more flexible than regular universal life insurance. People can invest in many different options, but these investments have a lot of risk. 

Indexed universal life insurance:

This insurance policy puts investments into index funds that try to track the stock market. This policy is also more complicated than regular universal life insurance because there are caps on returns and complex fee structures. 

Some additional things to remember are that young people, non-smokers, people without major medical problems, or just people that have higher chances of living longer will have cheaper policies than those who might not live as long. For this reason, many companies will require you to get a medical exam in order to know your health status. You may even want to check to see if your employer offers life insurance as well. 

Resources

https://www.nerdwallet.com/hub/category/life

https://www.nerdwallet.com/blog/insurance/how-does-life-insurance-work/

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