From how much it costs to who gets the money if you die during the policy term, here’s a straightforward guide to life insurance.
You’ve probably been told you should obtain life insurance, but do you know how it works? You might know the basics – that it’s insurance in case you die – but there’s more to it than that. What happens if you die doing something unsafe, like bungee jumping? Will your ex-wife still get the settlement if you’re re-married? The point is, there are a lot of questions to ask, whether you’re considering buying your first policy or if you’ve had one for years.
So you’ve got your home and auto insurance coverage set up and ticked off your list. But what about life insurance? If you haven’t gotten around to it yet, you’re not alone: 61 percent of Americans don’t have life insurance in place.
Think about that amount for a minute. Imagine how many millions of people financially depend on someone who has no life insurance coverage. It’s a perilous position because if the provider dies, their loved ones will be in an extremely bad place financially.
Maybe acquiring life insurance is already on your radar. Or maybe it’s not—because life itself is just so hectic! If you have loved ones who depend on your income, it’s vital to know how life insurance can protect them if anything happens to you. Here’s what you need to know about life insurance—how it works, what it costs, and which form is suitable for you.
What Is Life Insurance?
Life insurance is cover that pays out a lump sum if you, the policyholder, pass away during the policy period – or if you’re diagnosed with a terminal condition and are not anticipated to live longer than 12 months. It’s there to provide some financial support for your loved ones after you’re gone, whether that means helping to pay off the mortgage or sustaining their standard of living.
We provide two main forms of term life insurance: level cover and declining cover. Which one you choose effects how your cover amount may alter during the length of the policy, and thus how much the cover may cost, and is tailored for people with varied financial demands. For example, if you’re interested in paying off a mortgage if you die during the policy term, you might opt for declining cover; this sort of life insurance policy decreases in value throughout the duration of the term, but the premiums remain the same. This is because, normally, a mortgage diminishes over time as well. That’s why this sort of life insurance is also sometimes called “mortgage protection insurance.”
Life Insurance Basics
Wondering why we’re so keen on term life insurance as the only way to go? The reasons are fairly straightforward and simple:
- It’s the least priced form of life insurance anywhere.
- Term life performs the one thing life insurance is designed to do—it replaces your income when you die.
- It spares your loved ones financial worry at a truly terrible moment.
And as we’ll see as we get into the various kinds of life insurance, they tend to be far more expensive, way more complicated—or frequently both!
Have you come across a lot of complicated language while attempting to find out about life insurance options? We would agree that reading a life insurance policy can be laborious and stressful. But you just really need to know a few key terms to help you grasp how life insurance works:
- Policy — the contract between you and the insurance company
- Premiums – the monthly or yearly payments you make to own the insurance policy.
- Policyholder – the owner of the policy, which would generally be you (the one insured), although you might acquire a policy for another person.
- Claim – a formal request to your life insurance company to obtain the death benefit.
- Death Benefit – the life insurance payoff, or money given out when you die.
- Beneficiaries – the people you designate to receive the death benefit of your insurance (like your spouse or children, but it can be anyone you choose) (like your spouse or children, but it can be anyone you name)
In a word, once you (the policyholder) start paying your premiums, the insurance company guarantees they’ll pay the death benefit to your beneficiaries when you die.
A Brief History of Life Insurance
Life insurance dates very far back, with the oldest known policy in America being granted way back in the 1760’s! Over time, the same fundamental forms we’ve mentioned above—term life to cover you for a period, or permanent to last your whole life—came to dominate the market. But the fact that both forms of life insurance are prevalent doesn’t mean they bring you equal benefits. Let’s look at each one and see how they work!
How Does Term Life Insurance Work?
Premiums are normally monthly, and so long as you keep them current, the insurance company will pay a predetermined sum (often termed the death benefit) to your dependents should you die. Term life is basically a sort of coverage that hedges you off from the full financial effect of large life events that most people experience eventually, but at a reasonably cheap price.
How much does life insurance cost?
In addition to the type of insurance you choose, there are numerous factors that can influence the cost of your premiums. The price an individual pays usually depends on factors including:
- Age – Generally, the older you are, the more expensive a policy will be. This is because with aging comes an increased possibility of getting a medical ailment that may influence your life expectancy.
- Lifestyle – Leading an unhealthy lifestyle can boost rates. For example, drinking too much alcohol or being overweight can lower life expectancy. Premiums will be normally higher to reflect this.
- Health – Having a pre-existing medical condition can effect the price you pay. Some more significant, persistent medical issues entail that rates will be normally higher.
- Family medical history — Insurers may ask if your parents or siblings have a history of a serious medical condition. For certain people this may effect your pricing, as there can be a greater probability of you suffering from the same problem.
- Occupation — If you have a dangerous job, it’s probable that you may have to pay more than someone who works in a lesser risk profession – for example, someone who is an office administrator.
- Smoker status – A smoker can expect to pay more for life insurance cover than a non-smoker, because of the health risks linked with smoking. This includes all nicotine replacement products, including vaping.
- Length of cover – Life insurance plans with longer terms can be more expensive than policies with a shorter term.
- Amount of cover – You pick how much you would like to be protected for – generally, the bigger this is, the higher the premiums will be.
It just might cost you a little extra in premiums. Whether you obtain cover, and what you’ll pay, is dependent on your unique circumstances, so it will be different for everyone.
It’s crucial to answer any questions your insurer asks you accurately and honestly when applying. If you don’t, it might have a terrible impact on your loved ones, as it can affect whether your insurer is able to pay out a claim on the policy in full.
What does my life insurance cover?
Life insurance is designed to assist your family financially when you pass away. If you have a catastrophic illness that may have an impact on your finances, you could consider critical illness cover. What your life insurance will and won’t cover depends on which insurance company you’re with, so check your policy documentation, but the core concepts remain the same.
But certainly, if you die in a bungee jumping accident, we’ll still pay out – no assurances that your left-behind loved ones will ever forgive you, though.
Can I pick who the money goes to when I pass away?
Generally, the answer is yes—but you’ll need to make sure the necessary arrangements are in place.
If you have a joint life insurance policy and you pass away, the money will normally go to the surviving policyholder—that is, the other person you had the policy with—unless you make different arrangements. If you and your spouse separate at any moment, we can split your joint coverage into independent policies.
If you have a single life insurance policy, the money will be paid into your estate. Here’s where it’s particularly crucial that you make your wishes known.
If you want to pick a beneficiary (the person who will benefit from the lump sum payoff from your life insurance policy), you could consider placing it into a trust. Here are the potential benefits of doing this:
- As the policy is being placed in a trust, it won’t be counted as part of your taxable estate when you pass away. This implies that any money passed on to your beneficiaries is normally exempt from Inheritance Tax.
- The money can reach your beneficiaries more rapidly if you select additional trustees who then deal with this after you pass away.
You can also make it explicit who you’d like to receive the money from your life insurance policy when creating a will—but, this may not be as tax-effective as placing it into trust.
It’s a good idea to obtain independent legal and financial counsel when considering placing a life insurance policy into a trust or making a will.
Do I need life insurance?
Whether you need life insurance depends on your unique circumstances. Think about whether there are any people who depend on you financially, such as a partner or children. If so, life insurance is a way you can help give them a financial safety net if you’re no longer there to provide for them. Payouts from life insurance can be used to help pay off mortgages, cover the cost of raising children, and meet monthly payments. If you haven’t made any arrangements for your loved ones in case you were to pass away, you might want to consider life insurance.
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Bottom Line :
6 percent of Americans don’t have life insurance in place. There are a lot of questions to ask, whether you’re buying your first policy or if you’ve had one for years. It’s important to know the basics and who gets the money if you die during the policy term. There are two main forms of term life insurance: level cover and declining cover. Which one you choose affects how your cover amount may alter during the length of the policy, and thus how much the cover may cost.
It’s the least priced form of life insurance anywhere, and it replaces income when you die. There are two basic forms of life insurance: term life and permanent. Term life is basically a sort of coverage that covers you for a period, and permanent is to last your whole life. Insurers may ask you a number of questions when applying for life insurance cover. If you have a single life insurance policy and you pass away, the money will be paid into your estate.
You could consider placing it into a trust so that any money passed on to your beneficiaries is normally exempt from Inheritance Tax when you die. It can reach your beneficiaries more rapidly if you select additional trustees.