Insurance
October 9, 2015

3 Life Insurance Mistakes People Make

Life insurance is not a subject many are eager to discuss, but it’s an important option to consider if you are concerned about the welfare of your family. Before…

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Basic Life Insurance Questions

If you’re interested in learning more about or purchasing life insurance, this guide will help you understand the basics of what it is and how to choose the right kind for your needs.

A life insurance policy is a contract you make with an insurance company. You make payments on the policy and, in return, the insurance company provides a lump-sum payment, also called a death benefit, to the beneficiaries you have chosen upon the death of the insured. In some cases, other events such as terminal or critical illness can also warrant payment.

Life insurance is usually chosen depending on the needs and the goals of the policy holder. The holder usually pays a premium, either in a series of payments or as one lump sum. The policy holder decides on the amount of insurance they would like to purchase, and the payments will vary based on how much the total policy is set to pay out. The policies will usually describe limitations and exclusions, such as claims related to suicide, fraud, etc.

Deciding whether or not you need life insurance is a personal choice. It can help provide support to your beneficiaries, including income from years of lost work, help with your family’s financial goals, help in covering the costs of a funeral and burial, etc. If you have people that depend on you for financial support, life insurance can help provide income tax-free benefits in the event of your death.

Term life insurance is designed to offer financial protection for a specific period of time, such as five or 10 years. With traditional term insurance, your premium payment amount stays the same throughout the amount of time you have chosen for a coverage period. After the coverage period, policies might offer continued insurance at a higher premium payment rate. Term insurance is significantly less expensive than permanent policies but does get more expensive over time. The insurance benefits are paid at one time in a lump sum, not in regular payments.

Permanent life insurance is life insurance that covers the remaining lifetime of the policy holder. This type of insurance accumulates a cash value up until the date of its maturation. The policyholder can access the money in the cash value by withdrawing money or taking a surrender value. There are two different types of permanent insurance: whole life and universal life.

Whole life insurance provides lifetime coverage and usually has higher premium payments than term life. The premium payments are usually fixed, and it also has a cash value, which means you can accumulate savings over time.

Universal life insurance also provides lifetime coverage. However, these policies tend to be more flexible and allow you to adjust the amount of your premium payment or coverage amounts over the course of your lifetime. It usually has higher premium payments than term life insurance.

If you have anyone that relies on you financially, it’s wise to have a life insurance plan. In order to determine how much life insurance you need, you’ll have to examine the particulars of your own situation. It will depend on the financial needs of your beneficiaries, your current salary and amount of support, the amount you expect to be needed for funeral costs, etc. One common way to determine how much you need is to multiply the policy holder’s income by 15 and purchase a policy with an equivalent death benefit for a term that lasts until the person would likely retire.

Life insurance can be super expensive or relatively inexpensive depending on what type you are purchasing and how much you decide to get. Insurers will use rate classes, or risk-related categories, to determine premium payment amounts. The risk class you fall into is determined by your overall health, family medical history, lifestyle (i.e. tobacco use) and other factors.

The length of time that you pay for your life insurance coverage depends on what type of plan you purchased. Some people will complete payments on their coverage long before they die, while others will have only made a few payments at the time of their death.

Life Insurance Tips

If you’re planning to purchase life insurance, here are some tips on navigating the process.

There are a number of factors that can help you decide how much life insurance you need.

  • How much of the family income do you provide?
  • How many survivors would need financial help if you were to die?
  • Do others in your life or extended family depend on you financially?
  • Do you need to set aside college funds, etc. for children?
  • How much do you expect final expenses and debts to amount to after your death?
  • Do you intend to leave money to anyone else?

There is no tried and true formula. Some experts suggest that you purchase between five to 15 times your current income, but the specifics will depend on your particular financial circumstances.

There are various reasons for choosing both term and permanent life insurance, and one isn’t necessarily better than the other. Term has lower premiums in the early years, so it can be a good choice if you don’t have the means to make higher payments at the moment. However, it also doesn’t build up cash value, so you won’t be earning money on your payments. If you don’t pass away during the terms of the contract, your beneficiaries won’t receive money on it. But that also means that you will have lived through the set period, which is typically retirement. And you can also have the option to pay into a continuing plan after that.

Permanent life insurance covers your entire life and is good for estate planning and transfer of wealth, and it builds cash value over time. But it is typically considerably more expensive than term insurance.

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