If you have people dependent on you and your earnings, getting life insurance is a great way to help your beneficiary live a stable life in the case of your unexpected death. Life insurance is, in other words, a lifesaver as it helps you take care of your family in case you are not there.
Although it sounds straightforward on paper, there are many variables one must weigh when considering getting coverage. It is hard to find the right life insurance policy without really knowing the types and details.
This article will set the foundations for you, which will help you understand life insurance better to protect yourself and your family.
Life Insurance Definitions
It is hard for someone who has no idea or even some idea to understand the words used for your life insurance. Death benefit? Cash Value? Beneficiaries?
All these words seem fancy, but you need to at least know them before signing any agreement with an insurance company (also called a carrier).
Here are a few to start with:
- Policy – A contract with the insurance company in written form.
- Premium – Monthly payment made for your insurance coverage.
- Carrier – The insurance company that holds your insurance policy.
- Beneficiary – In the event of your unlikely death, these people will receive your premium in lump sum form.
- Death Benefit – In case of your death, your beneficiary receives the contracted payment.
- Face Value – How much your policy is worth. How much money will your beneficiaries receive?
- Cash Value – A cash value savings component that can be used for a source of loans or pay premiums.
- In Force – Active Insurance contract.
Types Of Life Insurance
It is essential to understand and realize the different life insurance types before going ahead and getting one. There are a few types worth viewing.
Term Life Insurance
Term life insurance is one of the most common types of life insurance opted by most people and is not very complicated. It is a contract signed for a certain period, and in case someone dies within that time frame, then and only are they provided with the contracted death benefit.
When you get the term life insurance, the insurance company makes a calculation to help determine the premiums you have to pay. The policy is also dependent on the person’s age, gender, family history, smoking status, driving record, and health (individual medical exams are required).
Another question that is quite prominent nowadays is whether all of this is taxable. Absolutely not, if you die during the policy term, your beneficiaries will receive the policy’s face value.
Let’s say Alex is 35 years old and is looking and wants to protect his family in the case of his unexpected death. He buys a $600,000 term life insurance policy and is charged around $60 per month for ten years. Suppose Alex dies unexpectedly in a car crash before the tenure period. In that case, Alex’s beneficiaries will be paid the policy’s face value, which is $600,000 only if he has kept up with the payments.
Alex could renew his life insurance at the end of the term, and if he chooses not to and he dies after the period, his beneficiaries will receive nothing.
There are several types of term life insurances, and each is on different people at different stages of their lives.
Types of Term Life Insurance
- YRT Policies: YRT, or Yearly Renewable Term, is a type of policy that can be renewed annually without needing to provide any evidence for insurability. Although it seems like an attractive choice, it is quite expensive because each year, premiums increase as the owner’s age increases. The risk of death also increases, which is why it seizes to be extremely expensive for individuals.
- Level Term Policies: The example of Alex is a prime example of a level term policy. It is covered for a specific time period where all the factors are fixed, so you have to consistently pay the same amount every month until your tenure ends. It is mostly opted by families as it offers to be extraordinarily feasible and affordable.
- Decreasing Term Policy: This is one of the riskiest of them all as this is where your premium (the amount you pay) is fixed, but the death benefit that your beneficiaries will receive will be less as the years go on. So, if in the beginning, your family were to receive $500,000 as the years pass by, they might end up receiving $450,000, maybe even less. Often, people use a mortgage to counter the declining death benefit.
- Group Term Life Insurance: (not exactly a type but an alternative of term life insurance) is when multiple people are covered by one contract/policy. This is relatively a cheap insurance plan, and often people opt for it rather than the individual ones. Companies often offer these to their employees if they meet eligibility requirements, which differ from company to company.
Life insurance is mostly recommended for people with younger families and depends on someone to provide it. In other words, term life insurance is the best fit as it is affordable and has its benefits.
Permanent Life Insurance
Permanent life insurance is coverage that never expires. Unlike term life insurance, permanent life insurance also offers a savings portion with a death benefit.
There are two types of permanent life insurance, which are whole life and universal life. The former is coverage, which offers a range that lasts a lifetime. On the contrary, the latter offers a savings portion and offers different premiums earning through market performances.
Although permanent life insurance tends to survive a lifetime, if in any case you are unable to fulfill premium payments, the policy will no longer be of value. In other words, your beneficiaries will not receive the said amount.
Permanent life insurance offers a savings portion, which comes in handy at times. Policy owners can borrow funds to meet other expenses to pay off bills etc. Unfortunately, before you can borrow the cash, you have to wait before your funds reach a certain amount. Simultaneously, you have to be a bit careful when borrowing, not exceeding the policy’s cash value; otherwise, your contract will be terminated.
Do I Need Life Insurance?
The question you may be asking, AM I RISKY? The primary purpose of getting life insurance is to help your family in time of need in case of your unlikely death. If you have people dependent on your life insurance, it is the most cost-effective way to help your family without being there.
Life insurance is entirely worth it unless you are wealthy and may have a stash of cash lying somewhere. The death benefit would help your loved ones cover money for all expenses that may come to mind. This can include from day-to-day expenses, education tuition for your children, taxes, debts, rent, and savings. It depends on your family and their expenditure, so you need to ask yourself whether you need one or not.
Tips For Getting Life Insurance
As you know by now, insurance companies are cautious and try not to lose money. Insurance companies sometimes ask for family history, driving records, smoking history, and much more, depending on the companies themselves.
Try the following to get a cheaper Life Insurance premium.
- Pay your bills on time to increase your credit score.
- Smoking is injurious to health. Yes, even the cigarette box itself says that. Hence this affects your health, leading you to pay more on premiums.
- Be healthy and active to save money in the long run.
- Avoid driving violations.
These are just a few things you can do to prevent yourself from paying more than you need. At times people do end up paying more for life insurance. This is especially true if they have dangerous jobs that are often life-threatening.
Should I Get Life Insurance
Whether you have decided on getting life insurance or not entirely depends on your personal situation.
Ask yourself what your goals are? What are your priorities? Is your family dependent on you and your earnings?
If you have other people who depend on your income, life insurance is usually a good idea. If your family has multiple forms of income not tied directly to one person, then it might not be as important.
