Life Insurance 101: Everything You Need To Know About Life Insurance

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life insurance

Life insurance is a perfect way to protect your loved ones’ future financial needs in case of an untimely death. It is the biggest financial security for your loved ones in your absence! Before purchasing life insurance, you’ll need to analyze your financial capacity and determine the standard of living that your surviving dependents would need. This way, you can go for a policy that best suits your needs.

By having this value-asset, you can rest easy knowing that your loved ones will be taken care of even when you’re not around. Surprisingly, there remains a great deal of skepticism and confusion around life insurance. Perhaps, because of the complexities surrounding it, or merely because most of us would rather not talk about our own demise.

Sure, life insurance is not fun to talk about. But being armed with all the requisite information can make it easy for you to decide whether this is a good investment for you or not. Here, we’ll look at everything you need to know.

Let’s dive in. Shall we?

What Is A Life Insurance Policy And How Does It Work

Life insurance is a contract between you and an insurance company. The contract dictates that you pay premiums on a regular basis, either monthly, twice a year or once every year. On the other hand, the insurer agrees to pay a tax-free lump sum to the nominated beneficiaries in case of your demise. This sum of money, also known as a death benefit, is payable to your designated beneficiaries once they file an insurance claim with the insurance company.

Like other forms of insurance, life insurance is founded on three principles:

  • Pooling many risk exposures into a group
  • Accumulating the premiums from each member to create a fund
  • Paying the beneficiaries of those who die every year from this fund

Meaning, individual losses are shared by all insured parties.

By paying the premiums, you’ll be transferring the risk of untimely death to the insurer. The company then looks at your probability of death and comes up with your premium rates. Some of the factors that the insurer may look at before arriving at the premium rates include:

  • Age
  • Medical history
  • Gender
  • Family health history. Are you predisposed to cancer, heart disease or other hereditary diseases?
  • Nicotine use
  • Dangerous hobbies, such as scuba diving
  • Planned travel to risk-prone areas

But how does the insurer verify this information? Well, typically, your insurance company or brokerage firm might use some of these methods:

  • Getting your data from previous insurance applications
  • Requesting medical records from your doctor
  • Checking for any convictions due to careless driving
  • Requesting you to take a medical examination such as urine and blood tests and possibly an electrocardiogram
  • Reviewing your credit history
  • The insurer can sometimes run a criminal background check on you

Who Needs Life Insurance?

Life insurance is a vital asset especially if you have a family who relies on you for financial support. If you’re not yet married, you would also need life insurance especially if you’re in business and would like your business partners to be able to run the business without feeling a financial gap due to your death.

So basically, it can be beneficial to any adult who has any kind of dependents who would be financially affected by his/her death.

But what if I don’t have a wife or kids and I’m not planning to start a business? Can I still take life insurance?

Well, the answer is yes. There are different types of life insurance options that you can take when you’re still young and healthy. This is because, if you happen to get a family later in life, you’d possibly pay higher premiums since the rates increase with age.

Reasons You May Need Life Insurance, Even If You Think You

If you don’t have life insurance, you may need one if:

  • You’re expecting to have a baby soon.
  • If you’re getting married and your soon-to-be spouse will be relying on you to cover their financial needs.
  • If you’ve already raised your children and now live on your own and would love to handle your funeral expenses.
  • You are a caregiver to your aging parents: It will ensure that you have a safety net when you can no longer provide for them.
  • You have debt: If you have a mortgage, a car loan or a business loan, your insurance acts as a security in case of your demise.
  • If you’re self-employed: Some companies will allow you to use your policy as security for a small business loan. The insurance cover also ensures that key stakeholders to your business will still get paid in your absence.
  • You have extreme hobbies: If you have a penchant for extreme sports such as scuba diving or rock climbing.

Types of Life Insurance Policies

When shopping around for a life insurance cover, you need to realize that there are two kinds of policies:

  • Term Life Insurance
  • Whole Life Insurance

Term Life Insurance

Term life insurance is a popular type of cover that lasts for a specific amount of time usually between 5 and 30 years and expires at the end of that period. Term insurance pays out the full insured amount if you die within the specific period. Some term insurance policies can also pay if you’re diagnosed with a terminal illness, although this is something that you’d need to ask your insurer in the beginning. If you happen to live beyond the term period, the insurance simply expires and will not payout.

Whole Life Insurance

Whole life insurance, on the other hand, is a permanent insurance policy that does not expire. You’ll be required to pay the premiums for the rest of your life unless you cash in your permanent policy. Whole life policies are usually more expensive than term insurance policies.

But unlike term insurance policies which only guarantee a specific death benefit, whole life insurance policies have an investment component that builds over time – they have a premium and a cash value. Whole life insurance allows you to borrow against the policy’s cash value.

Differences Between Term and Whole Life Insurance

Here are key differences between term and whole life policies to help you in your decision-making process:

Term Life Insurance

  • Term life policies are just plain insurance without an investment component such as a cash value
  • Term life policies only have value if you die
  • Term life policies demand less commitment that a whole life insurance policy
  • Term life insurance policy is almost always less expensive than whole life policies
  • Term life policies can only payout if the insured person dies within the set time period

There are different types of life insurance that fall under these two categories. Each of these is unique and has different benefits and drawbacks. They include:

  • Term life insurance
  • Level term insurance
  • Increasing term insurance
  • Decreasing term insurance

Whole Life Insurance

  • Non-participating whole life
  • Participating whole life
  • Level premium whole life
  • Single premium whole life
  • Limited payment whole life
  • Indeterminate premium whole life
  • Whole life economic
  • Interest sensitive whole life insurance
  • Variable life insurance
  • Universal life insurance
  • Variable universal life insurance
  • Guaranteed issue life insurance
  • Simplified issue life insurance
  • Final expense insurance
  • Group life insurance: This is an employee benefit paid for by some employers. It’s usually a term life insurance but can sometimes be whole life insurance.

Things to Know Before Buying Life Insurance

It is important that you fully understand the intricacies of life insurance before signing up for it. For starters, life insurance is a contract between you and the insurer, and just like any other contract, you’ll want to understand what you’re getting into before you put your signature on that policy paper.

Here are a few things to keep in mind:

  1. You need to understand how insurance needs will change through various phases of your life. For instance, you may pay for higher premiums as you age and get more predisposed to health complications.
  2. Life insurance is a contract that has specific requirements that both the insured and the insurer need to make good on. As a precaution, do not buy an insurance cover without fully understanding it. Otherwise, you’ll be letting a salesperson make a critical decision on your behalf.
  3. Life insurance is a commodity that gets sold by professional salespeople. You, therefore, need to assess every offer independently to make the best decision.
  4. Whole life insurance is an investment vehicle hence will often be more costly than term life insurance.
  5. There are several things that could disqualify you or lead to higher life insurance premiums, including:
    • History of health issues, such as cancer or heart attack
    • Pre-existing health conditions, such as diabetes or heart disease
    • Testing positive for HIV/AIDS
    • A driving record that indicates negligence or risky behavior
    • Substance abuse, including alcoholism
    • Hazardous occupation, such as logging or military service
    • Dangerous hobbies

Who Can Be My Beneficiaries?

This is a common question amongst many people shopping for life insurance covers. If you’re married, you can appoint your spouse as your beneficiary. You can also nominate your children, charities or other relatives to be beneficiaries. But be sure to update your beneficiaries regularly when your preferences change.

Remember that no matter your choice, you must inform the appointed party that they are your beneficiaries because they are the only people who can file for an insurance claim in case of your demise.

Where Should I Buy Life Insurance From?

When shopping around for an insurance company, it’s important to know that all insurers are not created equal. Your insurance can help your beneficiaries only when bought from a strong, reliable company that’ll hold their end of the bargain. Before anything else, they need to have a strong financial standing.

Once you’ve identified companies with the ability to make payout as promised, you’ll then need to approach them and ask for an insurance quote. This is usually determined on a person-to-person basis. When applying for life insurance, don’t be tempted to be scanty with the truth since this can lead to major repercussions when the insurance discovers any misgivings during the claim process.

Choosing between term and whole life insurance really runs down to your needs and preferences. If you want your death benefit to potentially increase over time, then you should consider buying a whole life policy. You should go for a term life policy if you only need an affordable life insurance plan that gives you a bare-bones coverage for a given period of time.

Tips on How to Save On Life Insurance

Have you asked for a quote from a company and do not like how much you’re being asked to pay in premiums? Well, here are a few things that can save you hundreds of dollars in the long run:

  • Buy life insurance policy early on in life when you’re still young and healthy. Your premiums will be surprisingly low.
  • Buy a life insurance plan that you can comfortably pay for and that will benefit your loved ones in case of your death. Don’t go for $1,000,000 coverage while you can only comfortably pay for $500,000 or $750,000 coverage
  • Get quotes from various insurers and go for the offer that makes the most sense to you. You should only sign the contract after you’ve extensively read through the fine print.
  • Get healthy before you apply. If you’ve been on nicotine or tobacco, you should quit smoking at least 18 months before applying for a life insurance policy. A high nicotine rate will potentially lead to higher premium rates.

Make a Decision Now!

Now that you’ve gone through, it should be easier for you to make a decision about the type of coverage that’s good for you. By buying, you’ll be protecting the lifestyle of your loved ones after your demise.

If you find it daunting to make your mind on the type of policy that is really good for you, talk with a trusted advisor who can guide you through the process but be sure to rely on your gut instincts before signing the contract. If it doesn’t feel comfortable, it’s probably not the right fit for you!