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Everything You Need to Know About Life Insurance


Antoni Shkraba

 

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?

Forbes: How Does Life Insurance Work?

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