Life Insurance
What is life insurance, and how does it work?
Ask most people what life insurance is, and they’ll tell you it’s a policy you buy that pays money to your family if you pass away. Ask them to explain key policy features, the different kinds of policies available, how they work – and they’ll probably try to change the subject.
But if you’re looking for life insurance those things are important.
Each life insurance policy is different, and each state’s laws regulating insurance policies are different. Before purchasing a life insurance policy, you should consult with a life insurance professional at C. B. Insurance Solutions. It may also be a good idea to consult with your legal or tax advisor. The information provided below is general guidance only and should not be relied on in connection with any specific policy.
What is a life insurance policy, and what are its key features?
A life insurance policy is an agreement between an insurance company and a person (or legal entity). Each life insurance policy is different, and each state’s laws regulating insurance policies are different. In general, most insurance policies identify the following:
· The insurer: Only certain companies can provide life insurance, and these companies are regulated by state insurance departments.
· The policyholder: The person or entity (such as a family trust or a business) which owns (or “holds”) the policy. The policy can insure the holder, or it can insure another person.
· The insured: The person whose life is insured.
· The death benefit: The amount the insurer will pay when the insured passes away.1
· The beneficiaries: The people or entities that will receive the death benefit. It can all go to a single person (e.g., a surviving spouse) or it can be divided by percentage among many different people and entities (e.g., three children could each get 30% and 10% could go to a charity).
· The policy length: The time that the insurer agrees to pay a death benefit. This can be a specific term (e.g., 10 or 20 years) or it can be permanent – a policy that lasts for the life of the insured for as long as premiums are paid.
· The premium: The monthly or yearly payments needed to keep the policy in effect.
· The cash value: Permanent life policies, like whole life insurance, have a cash value component that builds over time and can be cashed out or borrowed against. A term policy has no cash value.
What are the different kinds of life insurance policies and how do they work?
There are two types of life insurance term and permanent life insurance. A term life insurance policy provides coverage for a specific period of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because unlike the permanent policy or whole life insurance, there’s no cash value component to the policy – once the term is over, there’s nothing left.
Permanent life insurance provides coverage that lasts your entire life. Unlike term, it’s not a “pure life insurance” product because it includes a cash value component which helps make coverage last while the insured is alive and premiums are paid, and while providing other financial benefits. A portion of your premium dollars grow tax-deferred over time – but the entire death benefit is immediately payable from the first day you have the policy. The cash value on the other hand, may take some years to build up to a significant amount.
There are two main types of permanent insurance: whole and universal life. Whole life insurance is simpler – the premium remains the same for life, the death benefit is guaranteed, and the cash value grows at a guaranteed rate. Universal life insurance can be less expensive, but the premiums, death benefit, and cash value growth rate can vary, making the policy more complex.
What benefits do people get from life insurance at different stages in life?
Life insurance can be a powerful tool for protecting your financial confidence – and especially the financial confidence of the people who depend on you – so most adults should consider it. However, before you get a policy you should ask yourself: what type of financial protection do I need at this point in my life?
Now that you know what it is, how do you get a policy that works for your needs?
There’s one more thing you should know about life insurance: the longer you wait to buy it, the more expensive it typically gets. Don’t put things off. If you can purchase life insurance through your employer, that’s a great place to start. You can get a basic level of coverage at very attractive group rates – but don’t assume it’s enough.
Life insurance is one of the most consequential financial purchases you can make – and it’s worth taking the time to investigate all your options to get the coverage that best fits your needs.
Frequently asked questions about life insurance
What does life insurance cost?
The cost of a policy – for a given level of death benefit – can vary greatly depending on the type of policy (i.e., term or permanent) and all the variables that can affect your life expectancy – age, weight, health, gender, lifestyle, occupation, and risk factors such as smoking.
How can a life insurance policy be tailored to my needs?
Almost all life insurance policies have optional features called riders that can provide valuable added benefits that tailor the policy to your needs.
Can I buy a policy that lets me increase my coverage later?
Yes, certain permanent life insurance policies have a benefit increase rider that allow you to increase the death benefit at certain intervals (e.g., every three years) without a new medical exam or evidence of insurability.
Always remember C. B. Insurance Solutions will shop around on your behalf to get you the best price available.
