Last Updated: August 5, 2022

A Concise Overview On What Is Life Insurance?

TLTR: In this article, we will explore and give a general overview in what is life insurance, and how the policy works. The blog also deals with its types in brevity, and why you need one of those policies for yourself. 

Life insurance is one of the most sought-after insurance policies that provides monetary assistance to the beneficiaries a person has chosen upon the event of his/her death. These beneficiaries could be the insured’s family members, loved ones, or an organization. The details that we have provided below will help you understand the policy, and make wise insurance decisions.

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What Does The Policy Cover?

This policy generally covers burial expenses and makes up for lost income in the family. Generally speaking, it covers the following expenses when the policy holder passes away: 

  • Mortgage Payments 
  • Co-signed Debts 
  • College Expenses 
  • Living Expenses for the Family 
  • Burial Expenses 
  • Tax Expenses (can be disregarded in some types of insurance) 
  • Contributions to Charity

Types Of Life Insurance

There are two main types of policies that you can choose from. Here’s a brief overview of both to help you choose your desired policy.

Term Life Insurance

Term life insurance is applicable for a set period of time that is determined while confirming the policy with an insurance company. With this type of insurance, the designated beneficiary receives the death benefit, if the policy holder happens to pass away within the specified term.

The policy offers relatively more affordable premiums, and is generally preferred by people who look forward to buy coverage that lasts for 30 years.

Permanent Life Insurance

Permanent life insurance is applicable for the policy holder’s life-time, rather than a specific period of time. It can be further classified into three types, namely; Whole Life, Variable Life, and Universal Life. All of these policies holds a cash value, and the death benefit gets paid at the cash value.

The most significant difference amongst these types of permanent life insurance, lies in how the premiums and cash value fluctuate.

When it comes to whole life insurance, the cash value goes into a series of fund-like multiple sub-accounts. Their value can fluctuate according to the market, and can be borrowed or withdrawn at any point in time. Whereas, with veriable life, the policy has a cash value with flexible premiums and adjustable death benefits.

Under universal life itself, indexed universal life insurance has potential for bigger gains in cash value according to stock market performance. Likewise, guaranteed universal life insurance has a fixed premium rate without the risk of market fluctuation. On the other hand, variable universal life insurance’s interest rate is set by the company, and its cash value can fluctuate as well. 

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Average Cost Of Life Insurance

The premiums are determined primarily by the policy holder’s life expectancy. According to NerdWallet, the average cost is around $26 per month for a term life insurance policy based on a 20-year, $500,000 policy.  

However, every carrier has its process of evaluation. Most factors are age, gender, health status, family’s medical history, occupation, and driving record.  

The rates differ significantly according to the policy of choice. Generally, term life insurance is much more affordable than permanent life policy. But within the latter option, one is expected to pay different rates according to their respective cash value and trend.   

According to Policy Genius, one can also use the DIME (Debt Income Mortgage Education) method to determine the cost of life insurance you need. It focuses on your outstanding debt, annual income for a specific number of years you have told to provide for your family, the mortgage amount you leave behind, and your children’s education cost. 

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Why Should You Get Insured?

Inevitable, yet unprecedented occurrences can affect your dependents’ wellbeing, whether financial or otherwise. So, it’s best to get a policy that suits your needs and situation. Just as homeowners’ insurance saves you from the financial burden that natural disasters, theft, and vandalism might bring upon your home, life insurance does the same for you and your family. Here are a few other reasons to purchase it:

  • Getting insured provides better support for dependents’ financial stability when you can’t be there for them.
  • It helps to pay out mortgage and any kind of debts without burdening your family/dependents.
  • Most insurance coverage also includes burial costs. So, you won’t have to worry about financial burdens.
  • If you have children, life insurance is also a good way to leave behind some inheritance.

Exceptions Of The Policy

Even if the policy provides coverage on the occurrence of the insured’s death, it does not provide coverage under the following circumstances:

  • Fraudulent Death
  • Death Resulted from Initiating Criminal Activities 
  • Carrier-Specific Exclusions 
  • Expired Policies

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How Does It Work?

The process of getting a life insurance policy relies highly on the insurer. These are some common steps that you and your insurer will need to undertake:

  1. Choose the term length, a beneficiary, and a payout amount for your policy.
  2. Answer general questions posed by your potential insurer. Most are regarding your demographics, health status, and any other pre-condition that the insurer must know about beforehand.
  3. Upon the event of your death, the insurer will pay out a lump-sum to the designated beneficiary. This is only possible if you have paid out your premiums on a regular and timely basis.

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Frequently Asked Questions (FAQs)

How much life insurance do I need?

The amount of coverage you would require varies from what other people would, depending on many factors. Financial experts recommend that you purchase coverage of at least 10 to 15 times your annual income. The amount should be enough to cover your family’s expenses such as mortgage and bill payments in the future, should anything happen to you. 

Which is the best life insurance company?

When it comes to term life insurance, according to Nerd Wallet and U.S. News, Haven Life is the best bet there is. However, if you need other types of insurance as well, Mass Mutual is also an excellent life insurance company to choose from.

What is whole life insurance cash value?

With whole life insurance, you can actually get coverage for the entire duration of your lifetime, as long as your premiums are paid regularly. The cash value of whole life insurance increases with time. This is why it can act as an emergency fund source for any mishap or for any loan you would require to take.

Do I lose money from life insurance?

When you get a term life insurance policy, and did not pass away before the set term expired, you will not recover the amount you paid to the life insurance company.  

Losing money from life insurance is a way to put it. But look at the bright side. You did not have to face anything tragic or pass away at an unexpected moment. Any monetary value lost is value gained in terms of peace of mind and relief.

How many life insurance policies can I get?

People usually get one life insurance policy. However, getting multiple life policies is relatively more common than one might assume. If you had a life insurance policy as an infant, the situation and financial requirements would be different when you turn into an adult. Or, if you need additional coverage, you may add another policy to your plan.  

There is no apparent legal limit to the number of life insurance policies you can purchase. However, your agent or life insurance company can ask for your coverage amount before you get multiple policies.

Multiple Coverage Options at Your Fingertips

Choose from various options and select the policy that best suits your requirements.

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