Life Insurance Policy
What is a Life Insurance Policy? - Life insurance policy is an insurance contract between you (the insured) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a set amount of money if or when you die to your "named beneficiaries", in exchange for your premium payments.
There are different types of life insurance policies, but the two most common types which we will focus on are:
Term Life Insurance (Temporary) - which pays a benefit only if the insured person dies during the term of the policy (usually from one to 30 years).
Permanent Life Insurance (Cash Value Insurance) - which pays a benefit whenever the insured person dies.
Why you need a Life Insurance Policy
Should you buy life insurance? There are many reasons for buying a life insurance policy, top among them is "peace of mind". Life insurance coverage should provide you with peace of mind, knowing that those you care about will be financially protected after you die.
You should consider buying life insurance if any one of the following applies to you:
You are married and your spouse depends on your income
You have children
You have an aging parent or disabled relative who depends on you for support
Your retirement savings and pension won't be enough for your spouse to live on
You have a large estate and expect to owe estate taxes
You own a business, especially if you have a partner
You have a substantial joint financial obligation such as a personal loan for which another person would be legally responsible after your death
What a life insurance policy do for you
Life insurance can replace the loss of income that would occur in the event of your death.
Life insurance cash payment can be used to pay any debts that you may leave behind.
Life insurance can be used to pay off mortgages, car loans, and credit card debts.
Life insurance proceeds can also be used to pay for final expenses and estate taxes.
Finally, life insurance can create an estate for your heirs.
If you do your homework, you may be surprised at the variety of life insurance plans that exist, their creative uses, and how they can benefit you and your family when you pass away and while you are still alive.
Term life insurance
Term life insurance provides coverage for a specific period of time and pays the policy death benefit if the insured dies during the term of the contract. If the insured live to the end of the term, the policy simply terminates, unless it automatically renews for a new period.
Term life insurance usually have a term of 10, 15, 20, or 30 years or more. When the term is up, the insurance is no longer in effect.
Term life insurance is relatively affordable when you are young and can be extremely expensive at an older age.
Term life insurance provides no residual value at the end of the term.
Term life insurance is the most affordable type of life insurance, with premiums as low as $15 / month.
With Term life you can lock in your rate for the entire term period, which makes budgeting and planning easier.
At the end of the term period, you may be able to renew your policy at an adjusted rate.
You might also be able to convert your term life policy to whole life at the end of your term.
Permanent Life Insurance
Permanent life insurance policy provides coverage for your entire life, provided you pay the premium to keep the policy in force (subject to the claims-paying ability of the insurer). Permanent life insurance policies cost more than term life policies, but they feature a cash value savings component that accumulates over time as you pay your premiums.
Permanent life insurance offers more comprehensive coverage, and has a variety of uses beyond providing a death benefit to your named beneficiaries. Permanent life insurance can also:
Supply a retirement income
Serve as a cash reserve while you’re alive
Offer long term care features
Provide an opportunity to tap into the death benefit while you are still living to pay medical expenses if you become terminally ill.
All life insurance policies have one thing in common – they’re designed to pay money to the “named beneficiaries” upon death of the insured. Always review your policy or contact your agent to identify the limitations and exclusions of your coverage.
Use this chart to quickly compare the five key types of life insurance policies:
| Life insurance type | Coverage length | Best for ages | Builds cash value? | Medical exam required? | Death benefit amount |
|---|---|---|---|---|---|
| Term | 10, 15, 20, 30 years | 18 – 65 | No | Varies | $100,000+ |
| Permanent | Your lifetime | 18 – 65 | Yes | Yes* | $50,000+ |
| Universal | Your lifetime | 18 – 65 | Yes | Yes | $50,000+ |
| Variable | Your lifetime | 18 – 65 | Yes | Yes | $50,000+ |
| Final Expense | Your lifetime | 50 – 85 | Yes | No | $2,500 – $35,000 |
How much life insurance can you afford?
The cost of your life insurance will depend on a number of factors:
Your age
Your health
The type of policy you’re applying for
How the policy is designed
When determining the amount of coverage for which you qualify, insurance carriers consider each of these factors
Typically, permanent insurance, with its flexibility and multitude of uses, is much more expensive than term insurance. As you get older and/or your health diminishes, insurance carriers identify you as being a higher risk, and therefore charge you higher premiums.
It’s best to lock in coverage while you’re young and in good health.
How much coverage you need can be calculated based on your income, your projected future income, your net worth, and your age.
In the case of key-person business insurance, the potential loss of profitability that would result from your passing would be a key component in the calculation.
How to Get Life Insurance Discounts
There are some factors that can impact upon the cost of life insurance that are under your control. They are:
Smoking – Non-smokers pay less for life insurance than smokers do because they live shorter lives. If you smoke, consider quitting.
Health – While some health conditions cannot be avoided, others can. A regular program of exercise, diet, and proper nutrition can keep you in shape and keep your life insurance costs down.
Drinking – Statistics show that drinkers are more likely to die than non-drinkers are, especially in accidents.
Dangerous Activities – Your insurance company will want to know if you are a skydiver, or about other hazardous activities you may be involved in.
Once you purchase a life insurance policy, make sure to periodically review your coverage, especially when you have a significant life event (e.g., birth of a child, death of a family member) and make sure that it adequately meets your insurance needs.
