Life insurance is a contract between an insurer and a policy owner. It is one way you can provide financial support for loved ones after you die. When you open a life insurance policy, you will pay a regular premium (monthly or annually) in exchange for life insurance coverage. As long as your policy is active when you die, the insurance company will pay out a lump sum, also known as a death benefit, to the policy beneficiaries.
Your beneficiaries can use the money for whatever purpose they choose. Often this includes paying everyday bills, paying a mortgage, or putting a child through college, all in all, it provides financial security for your beneficiaries. A policy beneficiary is a person who can claim the death benefit after you pass away. You can name multiple beneficiaries and decide what percentage they each will receive when you die.
WHAT DOES LIFE INSURANCE COVER FOR?
Life insurance benefits can cover a wide variety of expenses. In many cases, policyholders invest in it to replace their income, give their beneficiaries financial protection, and ensure that they can meet financial obligations. That obligations usually include End-of-life expenses (such as funeral and burial costs), Mortgage payments, Tuition payments, Personal debt (including outstanding loans or credit card bills), and Day-to-day expenses (groceries, etc.).
Financial obligations aren’t the only way to use death benefit funds. Some individuals choose to open a life insurance policy to build an inheritance for their children or make a charitable donation to the policyholder’s organization of choice.
Life insurance program covers most causes of death, including natural and accidental causes, suicide, and homicide. There are two common reasons why an insurer may deny a life insurance claim: a lapse in payment or misrepresentation of the policyholder’s health. If the policyholder misrepresents or omits information about their health, insurance providers may deny a claim. The insurer may deny a claim based on the circumstances of the death. For instance, if a policyholder dies by homicide, the insurer will likely deny a claim if the beneficiary is responsible for or involved in the victim’s death. Life insurance policies also frequently include what’s known as a suicide clause, which voids coverage if the policyholder dies by suicide within a specific period after opening a policy. Also, some insurance providers will deny claims if the policyholder dies while engaging in a high-risk activity, like skydiving, at their time of death.
TYPES OF LIFE INSURANCE
There are two main types of life insurance: Term life insurance and Whole life insurance. Which type of life insurance you need depends on several factors, including your reason for purchasing a policy, your finances, and any investment goals you may have.
Term life insurance
Term life insurance lasts for a specific period of time, typically from one to 30 years. During the term, the policyholder makes fixed premium payments in exchange for a guaranteed death benefit. Under a term life policy, coverage ends at the end of the term. The best term life insurance policies balance affordability with long-term financial strength. If you pass away within the term of your policy, your beneficiaries can make a claim and receive the death benefit money, tax-free.
Term life insurance is the most popular type of life insurance sold (around 71% of purchasers) according to the Insurance Barometer Report.
Whole life insurance
Whole life insurance is a type of permanent life insurance. As long as the policyholder pays their premium, the policy will remain active for their entire life. In most cases, the policy premium and death benefit are fixed, and you will pay the same premium as long as you have the policy. Policyholders may be able to withdraw from or borrow against the cash value portion of their policy to fund expenses while they are living. It allows the policyholder to use the cash value for many purposes, such as a source of loans or cash or to pay policy premiums.
Term life insurance vs. Whole life insurance
Term life insurance occurs over a predetermined period of time, typically between 10 and 30 years. Term policies may be renewed after they end, with premiums recalculated according to the holder’s age, life expectancy, and health. By contrast, whole life insurance covers the entire life of the holder. Unlike a term life policy, whole life insurance includes a savings component, where the cash value of the contract accumulates for the holder. Here, the holder can withdraw or borrow against the savings portion of their policy, where it can serve as a source of equity.
IS LIFE INSURANCE A GOOD INVESTMENT?
Whether or not life insurance is worth the investment depends on several factors, including your finances, end-of-life goals, the needs of your beneficiaries, and the type of policy you choose. If you have loved ones that depend on you for financial stability, a life insurance policy may be well worth the investment. Regardless of which life policy you choose, the death benefit can help your family cover a wide range of costs, including mortgage payments, tuition, and day-to-day expenses. The death benefit from a life insurance policy can also cover end-of-life expenses, like funeral and burial costs, taxes, and any personal or medical debt that remains after you die.
Another reason some individuals may view life insurance as an investment is a tax-free advantage that beneficiaries receive. Though there are some circumstances where a beneficiary may be required to pay taxes on the death benefit, for the most part, the money isn’t taxed and your beneficiaries receive the full policy payout. That can be an efficient way to invest when you intend to transfer wealth to a beneficiary.
HOW MUCH DOES LIFE INSURANCE COST?
The cost of life insurance varies significantly depending on several different factors. One of the biggest cost factors will be the type of life insurance you buy. For example, a term life insurance policy is significantly less expensive than a whole life insurance policy for the same amount of coverage.
The most common factors affecting life insurance rates are AGE (The younger you are when you buy a policy the less you’ll pay), SEX (Females have a life expectancy that is nearly five years longer than males, so men generally pay more for life insurance than women), HEALTH (The insurer will evaluate your past and current medical conditions in order to calculate your life expectancy) and LIFESTYLE (Your driving history, criminal record, and dangerous occupations and hobbies can all result in higher life insurance rates).
HOW DOES A BENEFICIARY MAKE A CLAIM?
Claims can be paid quickly – in about a week, assuming the insurer has all the documents it needs. Don’t assume a life insurance company will contact you. It’s unlikely they know that your relative died. While some insurers are proactive in monitoring insured customers who have passed away, they won’t discover a death immediately.
Claims are typically paid within 30 days after the insurer receives the necessary documents. You don’t need an original copy of the life insurance policy to make a claim. You only need to know the name of the insurance company and contact them to initiate the claim. That’s why it’s important to let your beneficiaries know that you have a policy and tell them the name of the insurer.