Insurance can be a confusing topic, especially when it comes to life insurance. We know that having coverage for our homes, vehicles, and healthcare is smart, and required by law in some cases. But life insurance and its benefits can be harder to discern. Keep in mind that these policies can be enormously beneficial to your loved ones in the event of your passing and that you should consider them as part of a sound financial strategy.
What is life insurance?
Like other policies you may hold, life insurance is a policy that you purchase from a reputable dealer for a monthly or annual cost. These policies have varying benefits and differing costs but many financial planners consider them a wise decision, especially for people with dependents.
Unlike with your vehicle insurance, you personally do not receive life insurance benefits, as it is paid out following your death. Instead, you must elect beneficiaries who will receive the payment from your life insurance provider. This can be a partner, your children, other family members, or even a friend or organization. You can choose who you want to receive the money, but you would select the person or people who are responsible for arranging and paying for your funeral.
After your death, the selected people will receive the policy’s face value, which varies by policy.
What are the benefits of life insurance?
If you have dependents, like children or others who rely on your income, a life insurance payout can help support them after your passing. In addition to creating a financial safety net, you can also use the money for final expenses such as arranging a funeral or paying off debts or taxes.
Life insurance payments can also create an inheritance for beneficiaries, even if the original policyholder does not have pre-existing wealth or assets to pass along. In some cases, you can also borrow against your life insurance, creating a backup savings account that you can access in an emergency.
What are the types of life insurance?
There are two basic types of life insurance: term life and whole life.
Term life insurance, as its name implies, pays out if the death occurs during the policy’s term, which is usually between one and 30 years. Within term life insurance, there are two types:
- Level term insurance means that the benefit amount stays the same over the policy’s term.
- Decreasing term policies have a declining benefit that typically drops every year as the policyholder ages.
Whole life insurance covers the death regardless of when it takes place. There are three kinds of whole life insurance:
- Traditional whole life makes it so both the benefit and the premium stay level throughout the policy’s life.
- Universal life means more flexibility, creating a savings account that earns money over time which is then paid out upon the policyholder’s death.
- Variable life combines a standard life insurance policy with a savings account that is invested in various places such as the stock market or money market mutual funds.
How do I choose the right life insurance policy?
As with all financial decisions, you should do plenty of research before choosing a life insurance policy. Consider your needs and your financial goals, as well as what you want to leave dependents behind. This can be an uncomfortable subject but must be taken under advisement to provide for your loved ones in the future.
Generally, premiums are higher for whole life policies than for term life, and premiums are likely to rise as you age. Some plans also require you to pass health screenings to determine your rate. If you can, work with a reputable financial advisor or insurance broker to help you understand all of your options.
Life insurance is a part of your financial portfolio that can benefit your loved ones after you’re gone, but it’s essential to make sure that you get the policy that is right for you. While there are just a few types of life insurance generally, every specific policy will have nuances that you should understand before signing on the dotted line.