Life insurance means many things for most people. For some, it’s a source of income for their dependents to live on, cover outstanding debts, pay for their kid’s education or cover their burial costs upon their demise. A life insurance policy is a must-have for anyone who wants to leave an inheritance for their dependents when they pass away.
How life Insurance Works
There are various life insurance types and they all work the same way. You make premium payments in exchange for the company to pay your beneficiaries what’s known as a death benefit upon your passing. Life insurance is a great way to protect your beneficiaries’ financial future. A beneficiary can be a person, individual, an estate, a trust, or an organization.
In rare cases, like when diagnosed with a terminal illness, the policyholder may access the insurance funds while still alive.
Life Insurance Payout Options
There are various payout options insurers adopt in compensating beneficiaries of an insurance policy:
Lump sum: with a lump sum, the beneficiary will receive all the policy payout at once.
Installments or annuities: Installments or annuities imply the beneficiary will receive the payout and accumulated interest over time.
Retained asset account: If the policy is large, the insurance company can allow beneficiaries to write checks against the account’s balance.
When buying a life insurance policy, you will be asked to name one or more beneficiaries. This can be your spouse, children, parents, siblings, estate, trust, business partner, or a charity organization. You can name anyone as your beneficiary, provided you can prove they will struggle financially following your death. You can also name multiple beneficiaries and update them as you go.
What Does Life Insurance Cover?
Once disbursed, beneficiaries can use the death payout from a life insurance policy for whatever they want. It can be used to pay for everyday expenses, mortgages, covering funeral costs, putting a kid through college, child-care, and more.
The life insurance company must be contacted upon the individual’s death to start the claim and payout process. As long as the policy is active at the time of your death, your insurer is obligated to make payouts to your beneficiary but with a few exceptions. Insurance companies will make payouts due to natural causes, accidental death, suicide, homicide, etc.
However, the provider’s liability may be limited in cases of expired policy, criminal activity, fraud, or other exclusion like hazardous hobbies.
Who Needs Life Insurance?
Parents with young children or kids with special needs.
Older adults without savings.
Young adults who want to lock in low rates.
Adult with private student loans.
When Should One Start Thinking About Life Insurance?
No age is too early to start thinking about life insurance. You should buy life insurance if:
You prefer to pay lower premiums
When you reach specific life milestones
You are young and healthy
Types of Life Insurance
There are two major types of life insurance: term and permanent policies. A term policy covers a specific amount of time, while a permanent policy covers you for life.
The amount for premiums can be as little as a few dollars up to millions.
Whole Life Insurance: A whole life insurance covers you for your entire life. It comes with fixed premiums and guaranteed cash value on top of the death benefit.
Universal Life Insurance: This offers a more flexible life insurance option. The policyholder can reduce their death benefits and reduce or increase their premium. There are various types of universal life insurance, including indexed universal life policy, guaranteed universal life policies, and variable universal life policy. Some universal life insurance options are subject to market fluctuations.
How to Get Life Insurance
The eligibility criteria to buy life insurance vary based on the company. Most companies will require you to undergo a compulsory medical checkup before taking out the life insurance. The test helps the insurer determine the premium the person would pay.
They may also require documents like proof of identity, citizenship, birth certificate, driver’s license, valid passport, resident permit, or more. Others may include proof of income and social security number.
What Affects Life Insurance Premiums?
Several factors affect the cost of life insurance, including the following:
Age: the older one gets, the more expensive it will be to buy a life insurance policy.
Gender: Men typically pay more in premium than women due to short life expectancy.
Other factors include frequency of cigarette smoking, weight, health, lifestyle, policy type, and amount of coverage.
Things You Should Consider When Buying a Life Insurance
Understand the factors that affect your premiums
Know the difference between whole life insurance and term life insurance.
Determine if you can get a no-exam policy.
Understand your current financial situation
Know the coverage you need
Don’t lie in your application
Don’t focus on premium