Life insurance covers a variety of potential expenses.
However, it’s most important role is to ensure financial security of your loved ones after your passing.
What is life insurance?
Life insurance is a contract between you and your insurance company. It is a way to ensure the financial future of your family and/or business.
There are different types of policies, but they all pay money to your “named beneficiaries” in the event of your death. Click here for more information.
How does it work?
Life insurance works like this: you pay a premium and the insurance company will grant a death benefit to your beneficiaries if you pass away. A beneficiary can be one or more person, a trust, an estate, or an organization.
There are some cases where you can access part of your funds while you are still alive. An example of this is terminal illness. If you can provide evidence of a qualifying condition you could get an accelerated death benefit.
Once the money is disbursed, the beneficiary can use the money however they want. It can be used to pay for household essentials, paying outstanding debt, funeral costs, college, or childcare, just as a few examples.
As long as the policy is active when the policyholder passes, the insurance company is required to payout. Providers will pay out death claims due to:
- Natural causes, such as a heart attack, old age, or illnesses like cancer
- Accidental death, including accidental drug overdose
- Suicide, after the policy’s suicide clause period ends
- Homicide, unless the beneficiary played a role in the murder
There are specific exclusions depending on your policy. These are written in to limit the insurer’s liability. Expired policy, fraud, and criminal activity, among other exclusions may lead to your beneficiary not receiving the death benefit.
How does the payout work?
There are three life insurance payout options:
- Lump Sum: This allows the beneficiary to receive the entire death benefit at once. Lump sum payout is the most common form of disbursement for life insurance. It has the greatest flexibility and is tax-free income.
- Installments or annuities: The beneficiary will regularly get the proceeds and accumulated interest over a period of time. However, interest income is subject to taxation.
- Retained asset account: This option works similarly to a checking account. The initial balance in the account is the death benefit. The beneficiary can ten write checks against the balance and accrue interest over time. However, you can’t deposit into a retained asset account.
Who should I choose to be a beneficiary?
Typically, a beneficiary is a spouse, parent, sibling, children, trust, estate business partner, or charity organization. Whoever you choose, it is an important decision.
You can name multiple beneficiaries. You can also name secondary beneficiaries. If your primary beneficiary cannot claim the benefit, it will be passed onto your secondary.
It is important to keep your beneficiary information up to date. Especially after major life events, this is to ensure the money goes to the intended person.
Do I need it?
An easy way to find an answer to that question is to ask yourself this: would my death financially impact the people in my life? If the answer is yes, you should consider getting a policy.
The people who could most benefit from life insurance include:
- People with young children or adult dependents: Life insurance can guarantee that children who need lifelong care will be taken care of even after their parents die.
- Older adults without savings: This ideal for those who want to provide financial coverage to the family in the event of their death, but don’t have sufficient savings. The policy holder would leave them the death benefit.
- Young adults who want to secure low rates: Insurance rates are dependent on age and health. This usually means that young people are offered better rates.
When should I get it?
It is never too early to start thinking about life insurance. Start considering life insurance when:
- when you’re young
- starting a family
- planning retirement
- buying a home/car
Income replacement is another benefit of life insurance. It provide an additional source of income for your loved ones that you can no longer provide.
Are the different kinds?
There are two main types of life insurance: term and permanent coverage.
Term policies provides financial protection for a specific time frame. Permanent, also known as whole or universal life, provides it for a lifetime.
How do I get it?
An application and phone interview is often required. You will also be required to provide documents and get a medical exam. However, there are no-exam policies.
It is recommended that you talk to a financial planner before purchasing. It’s also a good idea to get multiple quotes to make sure you are getting the lowest rate.
There is almost always eligibility criteria, but it varies from company to company. It usually includes a medical exam. You’ll also need to supply some documentation such as:
- Proof of identity/citizenship/age: Drivers license, birth certificate, or passport are all valid forms of ID.
- Proof of residency: Renters will need a copy of their signed lease or rent receipt. Homeowners are required to provide mortgage bill, property tax statement, or a postmarked utility bill.
- Proof of income: Letter of employment, pay stubs, tax returns, or earning statements from your bank are all acceptable.
- Social Security number: Used for background checks.
Is it expensive?
Price is dependent on multiple factors. In 2022, the average monthly cost for a term policy is about $30.66, based on a $500,000 policy for a 30 year old man.
The factors that most affect the price of life insurance are:
- Cigarette smoking
Policy type and amount of coverage also influence cost.
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