For
many folks, especially those with dependents, having life insurance offers
peace of mind. They know that should they die, their dependents will be
provided for as their life insurance policy will pay them out.
Life
insurance is an agreement between the policyholder and the insurance company.
The policyholder is contracted to pay monthly premiums, and the insurance
company guarantees they will pay the policyholder's named beneficiaries a lump
sum when the policyholder dies. This is called the death benefit.
When
the policyholder dies, their beneficiaries will need to file a claim to receive
the funds. The beneficiaries can contact the insurance company's claims
department, which will let them know what is required. Usually, they will need
to submit the policyholder's death certificate and fill in some paperwork for
the claim to be processed. Typically, the funds are paid out between seven to
ten days after the claim has been submitted.
Why You Need Life Insurance
Life
insurance is necessary for people who have dependents who rely on them for
their living expenses. This is especially true for single-income families with
small children. When you die, your life insurance can pay for the funeral costs
and any debts you have, and can continue to pay for the living expenses of your
dependents.
Most
people name their spouse and children as beneficiaries of their life insurance,
but you can include anyone you choose. Other beneficiaries can consist of
employees, siblings, parents, or charities.
Types of Life Insurance
It
is important to learn more about life insurance and the different options before taking
out a policy, as it is a long-term financial commitment that can significantly
impact your family's future.
You
can choose from two main types, but both can be further broken down and
customized to suit your financial needs.
Term Life Insurance
The
more affordable of the two is term life insurance. As the name suggests, this
insurance only covers you for a fixed number of years of your choosing. You can
decide on the number of years you would like to be covered, for example, five,
ten, or twenty years. Term life insurance can be helpful for people who have
young children. The parents might take out life insurance for twenty years so
that if they die, their children will be covered until they are grown and can
provide for themselves.
Most
term life insurance policies have a level premium, which means that the premium
you pay doesn't change and is fixed for the duration of the term. At the end of
the term, the policy has no value, even if your beneficiaries were not paid
out.
Permanent Life Insurance
While
more expensive, permanent life insurance does not expire as long as you pay the
premiums every month. Permanent life insurance includes the death benefit and
has a savings feature that grows in value, so it is seen as an investment
rather than just an insurance policy. You can get a fixed premium depending on
the type of policy you buy. Since it is an investment, you can use your
permanent life insurance policy as collateral for a loan, and you may also
withdraw funds if you need to. If you pass a medical exam, your death benefit
could increase.
Buying Life Insurance
The
optimal time to take out an insurance policy is when you are young and healthy,
as this is when you will qualify for the lowest premium. This is especially
true if you want to purchase permanent life insurance as your money grows. It
is also beneficial because if your premium rate is set, you will still be
paying a low premium as you age. The premium you pay will be higher the older
you are when you buy life insurance.
While age is a major factor taken into account
when determining a policyholder's premium, other factors also considered are:
●
Health issues
You
will need to answer questions about your health, and in some cases, the
insurance company will require you to undergo medical tests and lab work to
determine your risk. Usually, health problems develop as people get older,
which is why it is best to buy life insurance while you are young.
●
Family medical history
Many
diseases are genetic, so a young, seemingly healthy person might be a risk
depending on their family's medical history. Common hereditary diseases are
diabetes, heart disease, and high blood pressure. A history of these and other
diseases in your family can affect your premiums.
●
Gender
Women
generally have a longer life expectancy, so they qualify for lower rates.
●
Where you live
Your
location plays a role in how high or low your premiums will be. For example,
people who live in areas where crime is high may be flagged as high-risk since
they are more likely to be victims of violent crime.
●
Lifestyle
The
insurance company will ask you questions about your lifestyle that could affect
your health or put your life in danger. Common questions include whether you
smoke or drink, how often you exercise and keep fit, or if you have any risky
hobbies.
References
●
Investopedia: Is Life Insurance Worth
It?
●
Nerdwallet: Who Needs Life Insurance?