What is life insurance?
The main purpose of life insurance is to provide risk management. What is risk management? Risk management is obtaining insurance that helps you to manage certain types of risks; in this case it is life insurance.
Life insurance is not meant to protect the insured but the beneficiary. If something happens to you, little Timmy and Sue can still go to college, the auto loan gets paid off, the mortgage loan is paid, the funeral expenses are taken care of along with other expenses. The financial burden is taken off the shoulders of your loved ones.
What are the two main types of life insurance?
(1) Term insurance or temporary insurance and (2) is permanent insurance, such as whole life insurance, universal life insurance, variable life insurance, and variable universal life insurance. And I will cover each of these life insurance policies term and permanent in future tutorials in more detail.
Term life insurance
Term insurance is exactly what it says is, temporary, for a certain term. The most common terms are 10years, 15years, or 20 years but some policies are offered for 30 years. Term insurance policies maintain level premiums, meaning that your monthly premium doesn’t increase and stays flat for the length of your term insurance policy.
So if you want your family protected, you better “expire” while the policy is active. On the first day after your term policy expires, your benefits expire. According to insurance companies, only 3% of term policies are ever paid out. Term policies are very lucrative for insurance companies.
Permanent life insurance is exactly what it means, permanent; as long as you keep making those monthly premiums you have life insurance coverage. This is also very lucrative insurance for the insurance companies.
Unlike term insurance, permanent policies have a cash value. Part of your premium goes towards a cash value account within your policy that accumulates over time.
As I mentioned earlier some examples off permanent insurance are whole life insurance, universal life insurance, variable life insurance, and variable universal life insurance.
Group life insurance through work
Get life insurance through your work, if it’s offered. Life insurance e is offered along with the health insurance benefits.
Group life insurance is the cheapest way to get life insurance coverage, usually free of cost at 1 to 2 times your pay. You can buy more by paying a premium which is deducted from you employee check.
As a financial advisor, the most I saw being offered to one of clients by an employer was 6 times pay. Of course, you have to pay extra for anything above the free coverage that is given by your employer.
The extra coverage may require medical underwriting. However, medical underwriting isn’t required for the free life insurance coverage
And of course if you leave your job, the life insurance benefits end just like your health insurance. The life insurance is not portable.
Independent life insurance
Independent life insurance costs vary. That means that there are several factors that cause each individual policy to have different premiums.
When you do get an independent personal life insurance policy it does require medical underwriting. The insurance company will require you to have medical exams and review your medical records.
There are many options available to you for life insurance.
The factors that determine the cost of your policy
These basic types of factors are the most important factors in determining your life insurance costs, the monthly premium you will pay for the tenure of the policy.
Firstly, what is the age of the insured, the older you are the more expensive the policy . For example, younger people are expected to live longer, so the policies are cheaper for them
Secondly the sex of the insured male or female.
Next, medical underwriting results depend on medical exams and your medical records as requested by the insurance company. This is one of the most important components for the insurance company in determining your premium.
The length of your term insurance policy determines your premium. For example, premiums for a 10 year term policy are less than for a 20 year term.
Your occupation, what you do for a living determines your premium, if you are a police officer; your premium is going to be higher than for an accountant. This is due to the risk associated with the occupation.
Your personal activities, such as skydiving, riding a motorcycle, bungee jumping and other such risky activities can lead to higher premiums.
Your personal habits, such as smoking, drinking, or illegal drug use can lead to higher insurance premiums.
Lastly, the type of insurance policy you choose, term or permanent insurance, it can lead to variance in insurance premiums. Historically, term insurance is cheaper than permanent insurance.
Benefits of Life Insurance
The benefits of life insurance are for the beneficiaries not the insured. The death benefits provide for various expenses that can lift the financial burden off your loved ones after you are gone, of course this depends on the amount of the death benefit.
You loved ones get a tax-free inheritance because the death benefit is tax-free. You can even leave your benefit to charities.
Additionally, for some it can be a great tool for estate planning.