Life insurance is a term we’re all familiar with, but what does it actually entail, and is it something you should consider? In this brief guide, we’ll go over the basics of what life insurance is, and discuss some of the pros and cons.
What Is Life Insurance?
Life insurance is a contract between the policyholder and the insurer, which states that the insurer will pay a designated beneficiary a sum of money upon the policyholder’s death, in exchange for a premium paid either monthly or annually. Depending on the contract, the sum can also be paid in advance in special circumstances, such as terminal illness.
When applying for life insurance, you will be required to disclose medical records detailing any past or present conditions. Most insurers will require a medical test, as well as disclosure of your lifestyle habits and whether you’re working in a high-risk environment. Your financial information will also be taken into account, such as your annual income.
Based on this information, your insurer will be able to determine your premium and approve your request, a process which may take several weeks. Needless to say, lying about your health is likely to result in your application being declined.
Types of Life Insurance
There are two main types of life insurance:
Term life insurance: can be taken out for a limited number of years, ranging from 10 to 30 years. If the policyholder dies within that term, the beneficiary will receive the payout stipulated by the policy. If the insurance expires before the policyholder’s death, they have the option to either renew it for another term policy, change it to a whole life insurance, or simply terminate it. Be advised that if you outlive your term life insurance, the amount you paid is kept by the insurance company.
Whole life insurance: it covers the policyholder for the remainder of their life, starting from when the policy was approved. Regular premium payments will be required in order to avoid the cancellation of the policy, or late payment (surrender) fees. When you die, your beneficiary will receive the death benefit, which is income-tax-free.
The type of life insurance you opt for depends on your long term plans, as well as your budget. Term life insurance protects you for a predetermined amount of time, and it’s often a popular choice with parents looking to provide for their kids until they finish college, for example. Whole life insurance aims to build cash value throughout your life, but it is also more expensive, and premiums can easily cost 10 times more than those of term policies.
What Are the Benefits of Life Insurance?
The main benefit of getting life insurance is providing your loved ones with financial stability, should anything happen to you. For example, a death benefit will allow your spouse to continue making mortgage payments after you have passed away. It can also provide financial aid in case you become terminally ill, or suffer a fatal accident.
If you have a permanent (or whole) life insurance, you can also use it to borrow money from your insurer, using your cash value as collateral. Another perk is the fact that these cash withdrawals, just like the death benefit, are usually income-tax-free. It’s best to note that borrowing against your cash value will reduce the death benefit amount.
Life insurance policies are also flexible and can be tailored to your needs. The death benefit can be increased or reduced. Also, with whole life insurance, you can lock in your premiums for the remainder of your policy.
Are There Any Cons to Getting Life Insurance?
Like with any type of insurance, the cost is probably one of the biggest drawbacks of getting a life insurance policy. Unless you are young and fit, you can expect to pay more on your premiums, depending on your health, lifestyle, and any other risk factors that come with your work.
The length of your policy will also determine whether getting one is worth it, financially. For example, term life insurance may deliver a larger death benefit while also charging smaller premiums, but if you outlive the policy, the money will not go to any beneficiary.
Depending on the type of policy you choose, your premiums will also vary. Term life insurance policies will see an increase in premiums upon each renewal, whereas whole life insurance premiums stay the same as long as they’re paid on time. Permanent life insurance may sound tempting, but it will come with regular annual or monthly payments for the rest of your life.
Life insurance is a great way to protect your family financially after you’re gone. But, like any long-term investment, it requires you to weigh in the pros and cons, and pick the best policy for you and your loved ones.