Understanding Life Insurance / Life Insurance 101

Life insurance provides monetary support for beneficiaries in the event of your death.  At its most basic, it is meant to cover final expenses such as funeral costs, estate taxes, and the medical bills often left behind after a lengthy illness.

But there are a variety of other costs that a person should consider when purchasing life insurance.  A spouse may be left with a mortgage that cannot be paid on a single income.  Children need support or college financial assistance.  You should consider the needs of those you’ll leave behind when considering how much life insurance is appropriate for your circumstance.

The benefits paid by a life insurance policy are cash is the beneficiaries’ pocket, allowing them to spend it however they see fit.

How expensive is it?

Price varies by type of policy, so be sure you understand it before you buy.  Price is also influenced by the age of the policyholder.  Younger people have lower premiums because they are a less risky investment and will likely be paying in for many years.  Older people face higher premiums because they are at a much greater risk of dying without having paid much into the insurance company.

Prices can also be dependent on medical history and lifestyle choices.  This can include:

  • A history of smoking or drug use
  • Obesity
  • Driving record
  • Risky occupations and hobbies
  • Pre-existing conditions such as heart disease, cancer, diabetes or depression
  • Family medical history

Will an insurance policy always pay out?

There are a variety of circumstances in which a policy may not pay out or will pay less than the full value.  These might include:

  • The age of the policy. Some have a grace period, often of two years, where benefits will be limited.
  • Circumstances of death. Suicide often nullifies life insurance. This protects the policyholder as well as the company.
  • Death caused by particularly risky activities such as skydiving
  • Death which occurs during the commission of a crime. Such deaths do not necessarily have to be a direct result of the criminal activity. Having a heart attack while committing a robbery might not be covered, for example.

Always fully understand your policy before purchase.

Types of Insurance

There are different types of insurance which function in different ways.  Some policies have a simple cash payout, and they are purchased according to value.  A $50,000 policy will understandably be more expensive than a $10,000 policy. 

Other policies involve investment options.  Rather than simply paying a static premium every month in exchange for a predictable payout, you instead pay at least a minimum and have your money invested less administrative fees.  This allows your benefits to grow over time.  However, they are also subject to market fluctuations, so the amount of payment cannot be guaranteed.

Term life insurance is insurance that only covers a person for so many years or until a certain age.  Past that point, a person would have to find another policy, generally a much more expensive one.

Universal life insurance, on the other hand, continues throughout a person’s lifetime.  Because of this, universal life insurance can be more expensive than term life insurance.  Often, the choice between the two depends on current income and the ability to pay relevant premiums.   

There are a lot of variables to consider when purchasing life insurance, from what it costs to what it will cover and how long it will last.  Weigh all of your options, and be sure you understand the limits of your policy, so you can make an informed decision concerning the best policy for you and your family.

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