Life insurance is a contract between an insurance company and an insurance buyer. A life insurance policy guarantees that the policyholder’s beneficiaries will receive a lump sum (often known as the death benefit) if he/she were to pass away during the coverage period, in exchange for the policy premiums paid during their lifetime.
You can customize the insurance policy by choosing the policy type, insurance duration, and coverage amount. If you die while your life insurance is in effect, the beneficiary can make a claim, and the tax-free death benefit will be paid to them. If your family is dependent on you, life insurance provides affordable economic protection and unparalleled peace of mind. Your family can use the life insurance payout (the death benefit) to settle long-term financial obligations like mortgages and student loans, pay for their living expenses like rent, grocery, or utility, or even pay for funeral arrangements.
Simply put, life insurance can help you take care of your loved ones by minimizing the financial stress they would suffer upon your passing. A life insurance policy also offers a sense of freedom that comes from knowing that your loved ones will be taken care of irrespective of what happens to you.
A lot of people consider life insurance as something that is only for the healthy and wealthy. That could not be further from the truth! The life insurance industry is broader than most consumers realize, making it possible for almost anyone to find a policy that suits their own unique needs. Getting life insurance when you are young and healthy will help you lock in the best possible rates and quite possibly for less than what you would pay for a large pizza.
Much like everything else in the world of finance, life insurance also comes with its own set of complex jargon that can be confusing for someone just starting their insurance research. Here are a few terms that you will find on almost every policy document in the market:
The two most common types of life insurance are term life insurance and whole life insurance.
Term life insurance offers coverage for a predefined amount of time known as the coverage period, whereas whole life insurance offers coverage for your entire lifetime. However, this long coverage period of whole life insurance comes at a cost. The average whole life insurance premium is 5-15 times the term life insurance premium for the same coverage amount. Term life insurance is an excellent way to get coverage without breaking the bank.
Whole life insurance offers a cash component that you can borrow from in case of emergencies, but overall, term life insurance is the best bang for your buck when it comes to life insurance. Whole life insurance is recommended only for the extremely rich looking for tax-free investments and those living with permanent health conditions. These specific requirements justify very high premiums.
Term life insurance is the best choice for most people because it offers coverage when they need it the most (such as paying off financial obligations like mortgage or college tuition and raising kids) and comes with comparatively low monthly premiums. If you are very young and healthy while applying for term life insurance, you might even be able to lock in a premium that is less than what you would pay for a car wash without compromising the coverage amount.
The main benefit of having life insurance is that your family will receive a lump sum if you were to die unexpectedly, and you get the reassurance of knowing they will have the resources to help carry on without you.
All life insurance policies can give you confidence that your family will be financially stable even in your absence. But, in general, the more life insurance you have, the more benefits your family will receive when they need it the most. For example, some people get nominal life insurance (about $25,000) through their work. This amount may be better than nothing but often is only enough to cover final expenses and a few mortgage payments. However, with a large life insurance coverage, families can enjoy many benefits, including funding for college education for children, income replacement for years of lost salary, paying off the home mortgage and debts such as car loans, credit cards, and student loans, and supporting other obligations such as caring for older parents.
Deciding how long your life insurance coverage should last is one of the most important decisions you must make while picking a term life insurance plan. Your choice depends on three main factors: How much you need, how much you can afford, and how much you qualify for. The term must be long enough to cover all liabilities and outstanding debts like mortgages and college education for your children. For example, if you have a mortgage with 20 years left on the note, a 20-year term policy may be a good option. A good rule of thumb would be to pick a coverage term that exceeds your last mortgage or loan payment.
Some situations that you might want to consider while selecting a term for your life insurance are:
|Age, Gender||$250k coverage amount||$500k coverage amount|
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