In order to know which life insurance policy is best for you, you must first understand its function. What is life insurance? It is a contract between you and an insurer to provide your beneficiary with death benefits based on your payment of premiums.
Still sounds complicated?
In this guide, you’ll learn all of the basics that you need to understand—no matter your stage of life. Whether you’re shopping for the first time or switching policies, we encourage you to read on to find out more about life insurance 101.
Types of Life Insurance
The two primary types of life insurance are term and permanent. With term insurance, you are covered for a set amount of time. It typically lasts 5-30 years, whereas permanent insurance covers your entire life or up to 100 years old.
For the most part, providers sell term policies with level premiums, so you never have to worry about the rate going up as you get older. However, you may have the option to convert your policy to a permanent insurance after the life insurance term is up. With permanent policies, you can choose between whole life and universal plans. Whole life means that you pay the same premium throughout your entire life while universal life insurance gives you flexible premiums.
The biggest difference between term and permanent policies is the ability to build value. A term plan has no value at the end of the life insurance term, but permanent insurance increases cash or loan value. That means you can withdraw, invest, or even borrow against that value. If that’s a feature that is important to you, a permanent policy would be your best option.
Calculating Life Insurance Rates
Your health and age are two of the biggest factors determining your premium rate. In fact, policies are issued either simplified issue or fully underwritten. The former often comes at a higher price because it is based on simple application questions. The latter typically offers lower rates if you show good health through a thorough medical exam and lab work.
Those aren’t the only factors that insurance companies consider, however. They also base your premium on:
- Your Gender
- Family Medical History
What Does It Cover?
You might be thinking that if your young and healthy, you don’t need insurance at all, but that’s simply not true. It is especially important for young people with families to get insured. A good life insurance policy can help your loved ones with:
- Funeral Expenses: Did you know that the average cost of a funeral is over $7,000? Add to that the cost of a cemetery plot, headstone, or vault, and it’s even higher. These high end of life expenses are the biggest life insurance selling points for a majority of people.
- Replacement Income: If your income plays any role in your household’s finances, you need life insurance. When you leave behind a spouse and young children, it helps them maintain their standard of living.
- Mortgage Payments: It is also crucial that you have life insurance to cover mortgage payments. Nothing could be worse than losing a loved one and your home all at once. Your insurance policy could help with monthly payments or pay off the remaining balance entirely.
How Much Coverage Do You Need?
The answer largely depends on your family and financial needs. Typically, young married couples with children and single parents need the most coverage for the items we mentioned above. We suggest that you take a look at your mortgage or other loans, the cost of your funeral, and your income to choose an amount that best fits your needs.
On the other hand, empty nesters and retirees typically need fewer death benefits. You may not need life insurance at all if you’ve paid off all of your debts and saved accordingly. A financial advisor can help you determine how much coverage you will need.
Get Your Life Insurance Quote
Every policy is different. What may be best for you could be entirely different from what is best for your neighbor. For that reason, we recommend that you do further research and shop around for the best life insurance quote for your needs. There are plenty of agents and online tools ready to help you choose a life insurance policy.