Understanding the basics about life insurance will ultimately benefit you and your family. While talking about life insurance can be intimidating, having some general knowledge of the terminology can go a long way. Prior to getting life insurance quotes, knowing and understanding key concepts will help make better decisions. Doing some research on the front end can save you time and money and can make all the difference in how smoothly the process goes when it’s time for the payout.
What Is Life Insurance?
While it seems almost crude to ask this question, the answer helps to provide a fundamental understanding. Life insurance is a contract between the insured and an insurance company in which the insured agrees to pay monthly or annual premiums in exchange for a monetary payout to beneficiaries upon the insured’s death.
Life insurance is particularly helpful for individuals who have families who are dependent on their income. Insurance provides a vehicle to help beneficiaries sustain themselves after the loss of a family member, particularly one who plays a substantial role in the household finances.
What Are the Exclusions?
One issue with life insurance is that each company has their own standards; as such, the exclusions are dependent on the underwriters. Most people erroneously assume that life insurance covers all types of death, but this is not necessarily true. One exclusion that is pretty consistent across all companies is death due to suicide. Depending on the insurance company, other insurances may exclude death due to participation in war or aviation. The most important point is to check with your insurance company to learn more.
Understanding Temporary versus Permanent Insurance
Perhaps you have heard of the various types of life insurance such as term, whole, and universal. Despite hearing about them, knowing the distinctions between them can make all the difference moving forward. They each have unique features that are worth knowing prior to getting life insurance quotes.
Term life insurance is life insurance that is provided over a particular time period. Typically, the term is 10 to 20 or even 30 years. Term life insurance is convenient for young professionals and individuals just starting out their career. This is because it offers guaranteed death benefit at low premiums which will ensure that beneficiaries will receive a lump sum payment.
The premiums for term life insurance are significantly lower than the premiums of whole and universal insurance since it’s temporary. The inexpensive premiums are essentially offered in exchange for a limited term. Upon the expiration of the term, the premium rises significantly or the policy may be canceled. As such, term life insurance is considered a temporary form of insurance until an individual can purchase another type of life insurance.
On the other hand, there are permanent types of life insurance including whole and universal. Whole life insurance offers policies that provide coverage across an entire lifetime, guaranteeing death benefits across the full length of the policy. Whole life insurance premiums are typically much higher than term insurance policies; however, you do not have to worry about the policy ending or premiums going up increasing to unaffordable amount because whole life insurance offers fixed premiums.
Whole life insurance policies have a tax-deferred cash value which means that they can be used for savings. Many people who are interested in tax deferments prefer whole life insurance policies.
The disadvantage of whole life insurance is that it is much more expensive and if coverage lapses, there could be significant increases in premiums. Additionally, whole life insurance is more complicated and the terms are more confusing.
Universal life insurance policies are also permanent but slightly different from whole. Universal life insurance policies guarantee death benefits, but the premiums are typically variable because they rely on current interest rates to calculate the price. The death benefit may also vary in a universal life insurance policy. Similar to whole life insurance, tax deferred cash value can be built up over time.
The major disadvantage of universal life insurance policies are that the premium may rise quite significantly and the death benefit may lower. Life insurance quotes will show you the financial differences across various types of insurance.
Consider Your Needs
Prior to obtaining a life insurance policy, it may be helpful to outline your needs and that of your beneficiaries. First, determine whether you really even need life insurance since not everyone needs life insurance right away. This is particularly true for younger people without dependents.
If you do need life insurance, it’s important to get a policy that provides the appropriate coverage. For example, the needs of a young professional and an older individual may be quite different. One way to determine needs is to consider the beneficiaries and how your death would impact them. If you have young children who rely on your income, your needs may differ from someone without children or a family at all. While it is a question most do not like to think about, identifying who would be impacted by your death and how their lives would change financially is essential in helping you choose a life insurance policy.
Also, determine what you would like to get out of a life insurance policy. Is it just to replace income or will you be borrowing against it at some point? Life insurance quotes will help you determine if you can afford a permanent policy or if a temporary policy is more beneficial. Regardless of your needs, there is a policy for you.
How to Choose a Life Insurance Company
Choosing an insurance company and an agent does not have to be overwhelming. The easiest way to find an insurance company or an agent is to ask family or friends. Family and friends are great resources and have excellent insight into companies. Another way is to research the top rated companies and review overall customer satisfaction. Getting life insurance quotes may also help you pick a reputable company.