Everything You Need to Know About Life Insurance
Life insurance is sometimes confused with medical coverage. While both services are very important, medical coverage is very different from life insurance. Medical coverage is about staying healthy, while life insurance is all about what happens after death. With a life insurance policy, a customer pays premiums to a life insurance provider. In return, the life insurance provider pays out a lump sum to whomever the policy owner designates as their beneficiary. Typically, the beneficiary is a family member, such as a spouse or a child. However, some life insurance policies pay out to charities. Policy holders are not limited to one beneficiary. In addition, they can also dictate how much goes to each beneficiary.
How much a beneficiary can receive depends on a couple of different factors, most notably, the type of insurance plan and how much the policy holder was paying. Picking a life insurance plan is a very important decision. Consumers searching for a plan are encouraged to take as much time as they need to fully understand the specifics of the various plans and how much their beneficiaries will actually receive.
Different Types of Life Insurance Policies
There are two primary groups of life insurance policies. The first type of policy is universal life insurance, which are also sometimes referred to as whole life insurance policies. Universal life insurance policies last for as long as the policy holder pays the premium. Universal life insurance policies pay out a lump sum upon the death of the policy holder, but they also come with investment or savings options. With these options, policy holders accumulate cash value while they are paying for their insurance. Over the course of their life, policy holders may withdraw money from these policies if needed, otherwise, the unused money is added to the total lump sum.
The other type of life insurance policy is known as term life. Under term life insurance policies, the policy holder only has insurance for a certain length of time. As long as the policy holder passes away while the insurance is in effect, his or her beneficiaries will receive a payment. If the policy holder survives past the initial term, the insurance policy is no longer in effect, and the policy holder will have to get a new plan if he or she wants anything to go to his or her beneficiaries.
Because they are only temporary, term life insurance policies are cheaper than universal life insurance policies. In addition, more costs typically go into universal life insurance plans because of the savings options with those policies.
Most policy holders choose to go with the lump sum payment for their beneficiaries. However, some policy holders pick a different payment plan, known as a family income benefit. Through this method, beneficiaries receive monthly payments instead of receiving the lump sum all at once. Policy holders typically choose this option if they are worried about how their beneficiaries will handle one giant payment. It is especially common with younger children, who do not have the financial responsibility to reasonably handle receiving a giant payment all at once.
Who needs life insurance?
Life insurance is technically not required but is strongly recommended. For parents, life insurance is an important way to guarantee their children are financially provided for in case of an emergency. Even couples without children should consider life insurance, since it ensures their spouse is taken care of financially.
In some situations, it may be impossible to get a loan without a life insurance policy. This is especially common with mortgage lenders. For the lender, they feel safer providing the loan because they know that even if something unfortunate happens to the borrower, he or she will still be able to pay off the loan.
Not everyone needs life insurance to provide for their family after they pass away. Some employers provide a death in service benefit, which provides similar benefits as life insurance. Even then, policy holders are still strongly encouraged to look at a life insurance plan and compare the benefits to the death in service package provided by their employers.
How much does life insurance pay?
The amount that a life insurance policy pays out is known as the death benefit. Determining the exact death benefit can be difficult without the assistance of a life insurance agent. The closest estimate is for the policy holder to take his or her yearly salary and multiply that amount by eight. Because there are so many factors that can change between taking out a policy and actually using the policy, it is very important to treat this number as a rough estimate.
How much does life insurance cost?
Some policy holders may decide to take out a smaller insurance policy, which will have a smaller death benefit. The size of the death benefit has the largest overall impact on how much a life insurance plan costs. There are a couple of other factors that go into determining the cost of life insurance.
Insurance agents take into account the health of the policy holder when they sign up. If the policy holder is older or has health issues, they will have much higher premiums. Anyone that lives an unhealthy lifestyle, such as smokers or drinkers, will pay higher premiums as well. Insurance agents also look at past family history, marital status and where the policy holder lives when determining the price. Finally, the gender of the policy holder may influence the cost of life insurance. Females typically pay less in health insurance, since they have a longer life expectancy.