Most Americans have a need for some form of life insurance, especially those who are not independently wealthy or have others who are dependent on their income. One of the best ways to protect your loved ones from financial hardship is to prepare for the unexpected. While it may be difficult and intimidating to think about life insurance, keep in mind that even a basic policy can provide your family with financial protection if you were to pass away suddenly.
Looking at life insurance quotes can be a good way to get an estimate of how much you might have to pay for coverage. However, if you are unfamiliar with how policies work, it can be hard to find the right one for your situation. Fortunately, understanding life insurance is pretty simple. Learn about how life insurance works and how to determine if you need a plan below.
What is life insurance?
A life insurance policy is essentially a contractual agreement between you in an insurance company. When you enter this contract, you are agreeing to make regular premium payments for a specified period of time, sometimes for the remainder of your life. In return, the insurance company agrees to pay out a specific benefit in the event of your death.
As you shop around, you will receive various life insurance quotes offering different premiums and benefit payout amounts. Generally, your premium can be paid monthly, twice a year or annually depending on your preferences and the payment plans your insurance provider offers. Your insurance contract is legally binding, so make sure that you are satisfied with the proposed life insurance policy before signing up.
When you create a new policy, you will need to appoint a beneficiary to receive the payout after you pass away. You may have multiple beneficiaries on the same life insurance policy, but you will typically have only one primary beneficiary.
Types of Life Insurance
Generally, most consumers will have to choose between the two main types of life insurance: term and whole policies. There are a few unique drawbacks and benefits to each type of policy. However, depending on your situation, you may actually find it easy to choose between the two.
Term Life Insurance Policies
A term life insurance plan is one where you pay your premium in order to cover the payout your beneficiaries receive in the event of your death. The amount paid is determined by how high your premiums are. Your death benefit can be paid out as either a monthly payment, a lump sum or an annuity. Typically, most people ask to receive their life insurance payouts as a lump sum.
The cost of premiums for term life insurance policies is lower than for whole life policies. This is because a term policy will expire at the end of the term, which anywhere from 10 to 30 years. However, if you survive the duration of the term, you will not receive any payouts on your policy and will need to apply for a new policy to maintain coverage.
Whole Life Insurance Policies
Whole life insurance offers the same benefits as a term policy, but these policies do not expire. Whole life policies are active until the policyholder passes away or stops paying the plan’s premiums. Additionally, whole life plans also retain their cash value, which gives them an added investment aspect for larger payouts.
However, this extra investment feature causes whole life insurance policies to come with significantly more expensive premiums than a term policy. While this may seem like a disadvantage, these insurance policies tend to help consumers save money for their loved ones in the long term. Furthermore, these policies insure consumers until they die and do not end after a specified term.
Benefits of Life Insurance
A life insurance policy can be a worthwhile investment because the cash can help your beneficiaries replace your income and pay for final expenses when you pass away. Your beneficiaries will be able to use their payouts for anything, including college tuition, medical bills, living expenses, funeral costs, mortgage payments, charitable donations and more.
Life insurance can be a worthwhile investment for homeowners, primary breadwinners, parents, individuals with high debt and others. Passing away before you are insured can lead to a number of serious consequences, such as leaving your family in debt, not providing a financial back-up plan for your children and more.
Benefits of Term Life Insurance
Term life insurance is the most popular type among consumers due to the many advantages these plans offer. Generally, consumers purchase a term life policy while they pay off large debts, which is usually around 20 to 30 years. In this case, if the policyholder passes way during the insurance term, the benefit payments would be enough to cover the outstanding debt.
Some common benefits of a term life plan are as follows:
- They are simple to understand and purchase.
- They are the cheapest type of life insurance available.
- You can secure a lower premium by purchasing coverage when you are young
- If you can no longer afford your policy, you will not lose any money other than the premiums you have already paid.
- Since you are not required to add cash value to your coverage, you can invest and save your extra money however you wish.
Benefits of Whole Life Insurance
Whole life insurance may be a better option if you are looking to combine investing your money and purchasing insurance coverage. Once you purchase a whole life policy, you will be covered until you stop paying your premiums or you pass away. Although these policies may be more expensive than term life policies, here are some benefits that can make them a good option:
- This type of policy allows you to invest additional cash while purchasing life insurance.
- You can use the cash-value aspect of your insurance policy as part of your estate planning.
- The insurance plans can work as a method of saving money for your beneficiaries to access in the future.