Life insurance can be one of the greatest ways to protect your family financially. Although most do not like to consider their mortality, it is important to have systems in place to assist your family upon your passing. Proper planning can prevent your family from bearing significant financial burdens. The best life insurance policies make the planning process easy and less overwhelming, and they offer coverage that can put you and your family at ease. This article provides a brief overview of what life insurance is, what it covers, the differences between the various types, and how premiums are established. With more knowledge, you can choose the best life insurance policy that adequately meets your needs.
What Is Life Insurance?
In general, life insurance is a contract between the insured party and an insurance company which states that upon receiving regular premium payments, the insurance company agrees to pay an agreed lump sum amount to beneficiaries upon the death of the insured party. The lump sum is also known as a death benefit. Although there are many different types of life insurance policies, they all have a death benefit. The lump sum payment received from a life insurance policy can provide coverage for various financial expenses.
What Does Life Insurance Cover?
The coverage provided by life insurance is of significant benefit to families. The income tax-free death benefit can help families pay for a wide range of expenses. Expenses related to the insured party's funeral can be covered. Furthermore, the funds can be used for income replacement, mortgages, debts, and other expenses. The best life insurance eliminates the burden that may come with losing the insured party’s income and financial contribution to the household. Moreover, it can help eliminate any extra debts that the insured incurred that may transfer to their spouse. How the beneficiary chooses to use the funds is at their own discretion.
The best life insurance companies have supplemental coverages that the insured party can consider purchasing. These coverages may include scheduled payouts instead of a lump sum, grief counseling, and a financial planner. Having access to these supplemental coverages and services can give your family additional support.
Given the level of coverage offered, estate planners and financial advisors all recommend getting the best life insurance policy to protect your family and prevent them from experiencing financial distress and hardship. Understanding the differences between the most popular types of life insurance can ensure you choose the best life insurance policy.
What are the Various Types of Life Insurance?
There are three main types of life insurance policies. They include term, whole, and universal. Each type has unique features and highlights. Knowing the differences between them can help you make informed decisions.
Term life insurance is also known as temporary life insurance. It provides protection for a predetermined amount of time, which could be 10 or 20 years. A notable feature of term life insurance is that it's the least expensive of all the options and the premiums stay mostly the same throughout the term. After the term has expired, the premiums may rise and proper coverage may not be guaranteed. Term life insurance is most appropriate for individuals who are just starting out in their careers but also have families. The death benefit from term life insurance is often used for income replacement to help ease the burden for families. The best life insurance policies offer an opportunity to transfer from term to permanent policies seamlessly, without requiring a physical exam or complicated paperwork.
Unlike term life insurance, whole life insurance is permanent. As a result, the premiums are more expensive. Whole life insurance has many advantages because equity can be built and the policy accumulates a cash value. Funds can be put back into the policy, invested, or saved. Whole life insurance is the most popular permanent insurance option available at this time. Some insurers allow higher premium payments for a limited amount of time in order to have the policy paid and full by the time the insured party turns 65 years of age. The best life insurance companies offer other beneficial variations on whole policies.
The third most popular type of life insurance is universal. Universal life insurance combines the benefits of term and whole life insurance. Specifically, it is permanent like whole life insurance and it gains a cash value; however, it can be less expensive, and thus more like term insurance. Universal life insurance is flexible. Therefore, the premiums can be raised or lowered throughout the policy. Similar to whole life insurance, the interest gained is tax-deferred, which can be a great way to transfer wealth.
Overall, there are three main types of life insurance that include term, whole, and universal. Term is the least expensive of the three and provides a temporary option for new families while whole and universal can be used to gain interest and transfer wealth. Premium amounts, as well as your current life situation, can influence which type of policy you obtain.
How is the Premium Calculated?
Understanding how life insurance premiums are calculated is essential. Premiums can range quite significantly across companies and policies. Typically, life insurance companies classify insured parties by risk category. Risks are assigned due to the insured party's health status and their lifestyle. Health factors such as cholesterol, blood pressure, pre-existing chronic diseases and illnesses are considered. Moreover, age and gender are also taken into account. Lifestyle factors include smoking, alcohol consumption, and other activities. Studies show that smokers tend to pay much higher premiums than non-smokers. A physical exam is usually required to establish the risk category.
In order to compare premiums across companies, it may be helpful to use a comparison tool to get an idea of the average premium cost. This will help provide guidance on which company has reasonable premium rates.
The Best Life Insurance Offers Protection and Peace of Mind
In sum, life insurance is the best way to protect your family. Policies provide income tax-free funds that can cover expenses and seamlessly transfer wealth. The best life insurance offers flexible plans and optimal coverage at a reasonable rate.