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 Life Insurance Basics

If you're like most people, you probably want to talk to a life insurance agent at some point. You may suspect that a life insurance agent is just trying to sell you something—and that's true, in some cases. But more often than not, they are just trying to find the best coverage for your needs. 

This article will teach you what a life insurance policy actually does (and doesn't!) cover. We'll also explore the different types of policies and how they affect your premiums and benefits. Lastly, we'll discuss what else you need to know before signing up with an insurer.

1. What is a life insurance policy?

A life insurance policy is a contract between the insurer and the insured, under which the insurer agrees to provide benefits in exchange for premiums (usually paid monthly by you) during the insured's lifetime. In other words, you pay money into a special account so that your beneficiaries—usually your beneficiaries' children or other relatives—can get access to money to live on if you die. The purpose of a life insurance policy isn't just to pay your beneficiaries their benefits when you die. Rather, the primary reason for having life insurance is to protect your family from the financial devastation of your death if you're not around to support them.

2. How much should I buy?

It's hard to answer this question without understanding your personal situation first, but here are some general guidelines:

• If you're single and have no dependents, 3-6 months of expenses in an emergency fund is probably enough. There's no need to waste money on life insurance if no one will miss you if you die! Just set up an emergency fund instead.

• If you're married with kids, buy as much coverage as possible (within reason) so that your family doesn't have to struggle financially after you die. Aim for 10-12 times your annual income.

• If you're married without kids, consider buying term insurance in place of whole life or universal life insurance. Why? Well, because term insurance is cheaper than permanent life insurance, and you can invest the savings. Over the years, this strategy can provide a nice safety net if something were to happen to you!

3. What types of policies are available?

Here are three main options:

Term insurance: This policy covers you for a specific length of time (the "term"), typically up to 30 years. There are three main types of term insurance: whole life, permanent endowment, and universal life insurance. We'll discuss all three below. Whole life and permanent endowment: These policies provide a steady income stream to your beneficiaries in the event of your death. In contrast to term insurance, the money under these policies doesn't get paid out until you die (or you stop working and retire). The money gradually gets paid out through regular installments throughout the policy period—which can be much shorter than a 30 year period! So if you only have a few years left to live (say, 5-10), this type of policy will provide more benefits than a typical term policy because there is less coverage. Universal life: This is a term policy but it's different than the other two. You may think that universal life is just like term insurance, but it's not! Universal life policies have a richer payout schedule than any of the above options. If you have any children, universal life can make them much wealthier than they would be otherwise. Depending on your policy and coverage specifications, you may get a check at any time during your lifetime (even if you don't die). Term insurance: If you're looking for an underwriting discount or limited benefits, maybe this kind of policy will be for you. But note that it doesn't offer nearly as much protection as whole or permanent endowment policies.

4. What are the typical annual premiums for each policy type?

Here are a few guidelines:

Permanent endowment and universal life: These policies have fairly high initial (term-to-date) premiums and often require more frequent monthly payments. In fact, your policy may require premiums for life. Whole and term: These policies have low initial premiums but relatively low premium rates over the duration of the policy—in other words, you won't pay much in interest during your whole life. Term insurance: If you're looking for a lower cost option, look into this option. Compared to all of the above options, it's likely to be the cheapest way to cover your family.

5. What's the difference between permanent and term insurance?

While both permanent and term insurance policies are in effect for a fixed length of time, there are important differences between them. Permanent life insurance protects against the loss of your income for a defined period of time (usually 30 years). With a term policy, you don't know how long you'll be covered—it may be 1 year or 30 years, depending on your coverage specifications. Term insurance is also an underwriting discount: this means that the cost to the insurer is cheaper than if you had whole or permanent endowment insurance. That's because the insurer only has to protect you for a specific length of time. In contrast, if you have permanent insurance, they have to cover you for your entire life. The cost difference between these two policies can be dramatic in the long run.

6. Should I get whole or universal life insurance?

Permanent and universal life insurance won't make you rich over night, but they do offer steady income over time. In fact, if you have a permanent policy with whole life coverage, it provides an opportunity for tax-deferred accumulation of your cash value. For example, you may have a $200,000 permanent life policy with a $0 premium. But if you're smart about it, you can invest the premiums and earn interest on them for years or decades. In fact, this might be an even better option than using the policy's cash value to pay for things like college! Whole life policies are usually much more expensive than universal life policies; they also have a very high surrender charge. However, if you can afford them (and your family will benefit from having insurance), whole life policies are great!

7. What are the different types of term insurance policies?

Term insurance protects you against a specific dollar amount. That's right—you can only earn a certain amount of coverage. As I mentioned above, there are three common types of term insurance: whole life, permanent endowment, and universal life. Collectively, these policies ensure that your beneficiaries have enough income to live on after your death. Here are the details: Whole life: This is a relatively new type of policy that can provide steady benefits over an especially long period of time (typically 80 years). The coverage specifications vary widely among insurers so it's a good idea to check with several companies to see what they offer in terms of benefits.

Conclusion

I hope this post has given you a fresh perspective on life insurance. It may seem expensive at first, but it can be a great tool for protecting your family for the future. Thanks for reading! If you enjoyed the post, please share it with your friends and family. I appreciate it! And if you have any questions or comments, please leave them below. I always enjoy hearing from my readers :)

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