The purpose of any life insurance policy is to protect your family, or any organizations, who rely on your income. Not all life insurance products are the same. Understanding their benefits and drawbacks is the first step in determining which is better for your circumstances. Two main categories of insurance policies are offered through life insurance agencies.
Term life insurance and permanent life insurance policies are the categories, though under each of these offer different types of coverage. Each of those coverage options are priced differently and offer different types of benefits.
Understanding these categories, what they offer and how they function to protect you is critical to choosing the right life insurance policy. Equally as critical is taking your time to make sure you learn what to expect from the various policies.
Failing to do so may result in hundreds of dollars being invested into a product that, upon your death, does not benefit your loved ones as you planned. The following quick reference offers you what you must know about life insurance policies as well as how to select one that works for you.
How Life Insurance Works
When you purchase a life insurance policy it is a basic contract between you and the life insurance company. The company agrees to pay your beneficiaries an amount of money in the event you die, and you agree to make payments toward this sum regularly.
Policies are paid monthly, bi-annually, or annually. Typically, agencies offer discounts for those willing to pay annually or bi-annually. You pay more for the monthly payment plans in most cases.
How Do Life Insurance Companies Make Their Money?
Life insurance companies generate income by taking your monthly payments and investing them. Many companies make their money from customers who default on their premium payments per month and the money that is built up is forfeit to the insurance company.
The agent with whom you work makes a commission based on the policy you choose and the amount of coverage you select. This is important to keep in mind as unscrupulous agents may try to sell you more coverage than you need.
How is Life Insurance Money Paid to Beneficiaries?
When you take out a life insurance policy you must choose who receives the money upon your death. This money is called a death benefit. Your beneficiaries use this money for funeral expenses, paying off remaining debts or they use it as they please.
Your beneficiaries do not need to have your insurance policy in their possession as a copy is kept with the agency. The only thing your beneficiaries must know is which insurance company holds the policy.
When your family goes to this agency upon your death, they submit a claim for the benefits. Most companies pay within a week or so. How much they receive is completely dependent on the type of policy you had and how much you paid into it over the years.
What is Term Life Insurance?
As its name suggests, term life insurance only offers you coverage for a set amount of time. If you do not die within this time frame, no one receives benefits. Here are some additional characteristics for term life insurance policies to keep in mind:
- It can be purchased for 10-30-year periods.
- It is often the most affordable life insurance policy.
- Premiums generally go up as you age (usually after 50 years of age).
- It can usually be converted to Permanent (or Whole) life insurance.
- It can be good for additional temporary coverage in combination with another policy.
- It only pays death benefits.
- No health exam is required.
- You cannot typically borrow against the policy.
What is Permanent Life Insurance?
This type of policy covers you for the entirety of your lifespan. While you pay more for this type of policy, more benefits to go along with it.
- Premium amounts do not generally change, even after 50 years of age.
- Permanent life insurance is seen as a financial investment.
- Permanent life insurance pays death benefits and a cash value for the policy.
- Money accumulated is tax sheltered (no taxes paid on it).
- Four sub-categories exist, including whole life, variable life, universal life, variable universal.
- Many policies allow you to borrow money tax free from the policy.
- The policy requires a health examination.
Most who have families to consider purchase this type of life insurance because it has both a cash value and a face value. The cash value of this type of policy is the amount of the premiums paid into the policy added to any earnings from the money being invested.
The face value of a permanent life insurance policy is the same as the death benefit. In other words, your family or beneficiaries receive more. There is a downside to this option. Depending on the type of permanent life insurance you select, the policy’s value may decrease. This is true for variable life and variable universal types of coverages.
How Much Will You Pay for Life Insurance?
Agencies set their pricing based on several factors, each relating to the estimated life expectancy of someone with your set of circumstances. Each agency has its own set of criteria and what factors it scrutinizes more than others.
The following factors are generally considered:
- Lifestyle risk factors (risky hobbies, tobacco or alcohol use, bad driving record)
- Medical history
It may shock you but be prepared for the insurance agency to request your medical records, ask for you to take a health exam, pull your driving record from the DMV, check your credit history, and run a criminal background check.
The reason the company is so careful in its review of your application is because once it is approved and issued, you are approved for life. This policy remains active if you make the payments, regardless of whether you develop a chronic illness or develop personal habits counter to a healthy lifestyle.
Keep in mind, since each application is reviewed carefully it takes at least a few weeks to have the policy issued. If you need coverage more quickly it may be to your benefit to get a term policy while waiting for approval on the permanent policy.