Life Insurance and Its Benefits

Most insurance policies provide a “just in case” umbrella. For example, car and healthcare insurance are based on offering financial relief from the potential of an auto accident and illness, respectively.  There are good chances that these events do not occur and, if they do, there are good chances that they will not be serious. The chances of events occurring and the different severities of such events are all factored into the premiums you pay and coverage you receive.  However, just because you have auto, healthcare, home, and other insurance policies, do not assume that you are already knowledgeable about life insurance.

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Life Insurance and It's Benefits
Life insurance terms and definitions

Life Insurance Facts

Life insurance is completely different in that it is based on “when”, and not “if” occurrence, thus making life insurance products more complex.  This fundamental difference is what makes life insurance more like a financial product and why more life insurance consumers are exploited as compared to other insurance categories.

Complexities aside, life insurance offers you peace of mind regarding the financial future of those that depend on you, and can be a part of your overall legacy. Benefits can range from covering funeral costs to paying for higher education for your children and mortgages. Knowing the facts will help you to purchase the right policy for you and your loved ones’ specific needs. Below are some basic life insurance terms and definitions.

PREMIUMS

Monthly, quarterly, or yearly payments required to maintain coverage

FACE VALUE

The original death benefit amount

CONVERTABILITY 

Option to convert from one type of policy (term) to another (whole life)

CASH VALUE

The savings portion of a policy that can be borrowed against or cashed in

BENEFICIARY 

The individual(s) or entity (e.g., trust) that is designated as benefit recipient

PAID UP

A policy requiring no further premium payments due to prepayment or earnings

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Life Insurance FAQ

A: Life insurance can be used to cover a variety of common expenses, like:
  • Co-signed debt including student loans
  • Mortgages
  • College expenses for the kids
  • Living expenses for your family
  • Stay-at-home labor expenses (cooking, cleaning, etc.)
  • Burial expenses
  • Loans from family members
  • Estate taxes that your heirs must pay for other assets

A: The beneficiary is the person or entity named as the recipient of your policy’s death benefit. It can be a family member, a person unrelated to you, or even a business or other organization. You choose the beneficiary on your own—you don’t need permission from the insurer or the beneficiary. You can also choose more than one beneficiary, and designate how you want the death benefit to be split among them.

Your insurer will automatically disburse the death benefit if you die, but it’s still a good idea to tell any beneficiary about the policy so he or she will be prepared to take action should a problem arise. For this same reason it’s also a good idea to provide the beneficiary with access to the contract.

A: Technically a beneficiary does not have to do anything to receive your policy’s death benefit, but it’s a good idea to make sure he or she is aware that the policy exists in case there are any delays or complications on the insurer’s side.

The insurer will require proof of death and a copy of the contract in order to disburse the benefit.

A: Many employers offer life insurance as part of a benefits package. Usually, the amount is a multiple of your salary, up to a limit (usually one or two times your salary). Whether this is enough protection for your needs depends on your financial situation.

Life insurance is more expensive for those who are older or in poor health, so employer-offered life insurance can be a great way to obtain coverage if you can’t otherwise afford it.

A: The premiums you pay for your life insurance policy are not tax deductible.

Policy Type FAQ

A: Term is basic life insurance, the kind you’d probably think of if someone asked you to describe the concept. You pay a premium and in return the insurer guarantees to pay your beneficiary a lump sum of money if you die while the policy is in effect.

Term policies are sold for specific lengths of time, usually between 10 and 30 years. Once the term expires, you stop paying premiums and the policy is no longer in effect.

Pros

  • Term is the most affordable life insurance you can buy.
  • Term policies are easy to understand, so you don’t have to worry about hidden fees, exclusions, or risks.
  • You can cancel a term policy before it expires.

Cons

  • When the policy expires, so will your coverage; if you still want to be insured you’ll have to either shop for a new policy or convert the policy into a permanent version.

A: Permanent life insurance never expires, and it includes a “cash value” component that grows (or in some cases shrinks) over the life of the policy.

This cash value means you can do things like borrow against your policy or cancel the policy for part of the cash value after a period of time.

Pros

  • It can be useful as part of a highly customized personal finance or estate planning strategy (e.g., if you have a lot of money and other assets to work with).

Cons

  • It’s far more expensive than term insurance.
  • Because of the cost, people frequently buy less coverage than they actually need.
  • It’s more complicated to buy because there are lots of ways to customize the policy for your specific goals.
  • Depending on the type of permanent policy, you could see your death benefit shrink and/or premiums rise over time, or the cash value portion could decrease.
  • There are several types of permanent life insurance: whole, universal, variable, and variable universal.

A: Whole life is a type of permanent life insurance with the following characteristics:

  • You pay a set premium amount.
  • The cash value component grows at a guaranteed (but low) set rate.
A: Universal life insurance is a type of permanent life insurance with the following characteristics:
  • You can adjust the premium or the benefit amount.
  • The cash value component earns interest at a variable rate set by the insurer.
  • You can use the cash value component to pay or reduce your premiums.
A: Variable life insurance is a type of permanent life insurance with the following characteristics:
  • You pay a set premium amount.
  • You can invest the cash value portion of the policy among the insurance company’s portfolio of investments.
  • Because the cash value portion is invested, there is a risk that you can end up losing cash value over the life of the policy.
A: Variable universal life insurance is a type of permanent life insurance with the following characteristics:
  • Like universal life, you can adjust the premium or the benefit amount.
  • Like variable life, you can invest the cash value portion of the policy among the insurance company’s portfolio of investments.
  • Because the cash value portion is invested, there is a risk that you can end up losing cash value over the life of the policy.

LIFE INSURANCE

Know your benefits

LIFE INSURANCE

Understanding different types