Many people buy home and car insurance policies and crossed them off the list. What about life insurance? If you don’t realize this, you’re not alone: last year, only 54% of Americans had some form of life insurance. Awareness of affordability and value prevents people from buying the life insurance they need. In this article, we will discuss what is life insurance and how does it work?
Maybe you’ve begun to consider buying life insurance. Maybe it’s not because life itself is too busy! If the people you love live on your income, you should know how life insurance protects them when anything happens to you. Here’s what you need to know about the working principle, cost, and type of life insurance for you.
What is life insurance?
Life insurance is an agreement between you and the insurance company. In exchange for your monthly payment, the insurance company will pay a sum of money to your relatives when you die.
Well, this is not an interesting topic. But pay attention to this point: you buy life insurance not because you will die, but because the people you love will survive. You want them to have financial security after you die.
What does life insurance include? Life insurance can cover the possible loss of income, funeral expenses, debts, and other economic needs after your death. Once you sign the insurance contract and start paying monthly, what you really buy is inner peace. Even after you die, you still provide financial peace for your loved ones.
How does life insurance work?
Reading life insurance agreements is probably the most boring thing in the world, right? But you really only need to understand a few common terms to help you realize how life insurance works:
- The policy – the contract between you and the insurance agents.
- The Premiums-the amount you pay to the insurance company every month or every year
- Policyholder-the owner of the policy, usually you (the insured), But you can buy an insurance policy for another person
- Claim – formally apply to your life insurance company to get the death benefits.
- Death benefit – life insurance expense, or payment made at your death
- Beneficiary – the person you choose to receive the policy death benefit (such as your spouse or children, but can be anyone in your name)
In short, once you (the insured) start paying the premium, the insurance company guarantees that they will pay the death benefit to your beneficiary after your death.
Types of life insurance
Here we will start with the basics. Basically, there are two main types of life insurance: one is term life insurance lasting a certain number of years, and the other is permanent life insurance lasting a lifetime.
Term life insurance gives insurance for a specific period of time. If you die at any time during this period, your beneficiary will receive the death benefits from the policy.
The term life plan is more economical than the permanent plan because it has a simple goal, that is, to pay the death benefits, rather than other rhetoric (for example, doubling as an investment tool will only increase your premium).
Permanent life insurance
Permanent life insurance will run through your life. Its forms are whole life insurance, universal insurance, or variable life insurance, each of which is slightly different.
In addition to insuring your life, permanent insurance adds an investment to your policy – cash value. The insurance company takes a large piece of your premium to open an investment account.
But here’s the thing: cash value life insurance is one of the worst financial options! There are many better places to invest, which will bring you better returns.
Do I need life insurance?
Almost everyone needs life insurance. No matter what stage of your life, life insurance is an important part of your financial security.
Let’s see if you are suitable for:
You may have some credit card and student loan debts that need to be repaid after you die. But if you have no debt and no family, what you really need to worry about is funeral expenses. If you have registered with a group life insurance plan through your employer, you may not have an urgent need to buy your own policy!
Getting married is a place where you start your new life, which means you will get through the difficulties together. But “until death separates us” is not the end! You should both have a life insurance plan.
This is not only to pay off your debts after one of you dies but also to protect your spouse and prepare for their future when they are sad about your loss. Buy enough life insurance to ensure that they are taken care of.
If you have kids, you and your spouse need insurance, even if one of you doesn’t work away from home. The absence of full-time parents can have a great effect on the family budget. Nowadays, childcare is not cheap.
Think about how to manage your family, provide your children (including college), and possibly pay off your home within a few years after your death or your spouse’s death. Believe us, you want (and need) this peace of mind.
Currently, you may already have a lot of retirement savings. You can even become self-insured on your way without any life insurance. That’s a good place!
But suppose you’re still paying for your house and trying to increase your retirement savings. If you die today and your spouse is no longer dependent on your income, is the amount in your savings account enough to take care of them?
How much is life insurance?
The payment of your life insurance premium will depend on the type of insurance policy you buy (whether term or permanent), but other factors will also play a role, such as your age, health, and lifestyle.
Let’s see Lisa. She is in her 30s, non-smoking, healthy, married, has one child, and has an annual income of $40000. On average:
- If she buys a 20-year term life insurance and receives a death pension of $400000, she will pay about $18 a month for the plan.
- If she chooses permanent life insurance with a death pension of $125000, she will pay about $100 a month.
This is what the insurance company will consider when calculating your life insurance premium:
- Personal and family history
- Smoking or not
- If your lifestyle includes dangerous hobbies such as skydiving, shark wrestling, etc
- If you often travel to dangerous places in the world
After they have these details, the insurance provider will arrange a medical examination with you (unless you purchase a non-medical life insurance policy).
So, since you know what they’re after, how can you lower the premium? Although you can’t adjust your age too much, you can quit smoking, exercise regularly, and try to lose weight if necessary to reduce the weight premium.
What’s the value of life insurance that I need?
Financial expert, Dave Ramsey suggested fixing the death benefit at 10-12 times the annual salary. This is for one important reason: prepare for the future of your family.
Let’s take a look at Lisa in our previous example and how the death benefit 10-12 times her income really helps her family:
- Lisa’s salary is $40000 and her policy death benefit is $400000 (40000 times 10).
- If Lisa dies, her family can invest $400000 in a mutual fund with a return of 10%.
This investment can bring Lisa‘s an annual salary of $40000.
The interest Lisa’s family can earn each year will pay Lisa’s salary. The initial investment can stay there indefinitely because they use the interest to help live without Lisa.
It provides spiritual peace and financial security for Lisa’s relatives in really difficult times.
What kind of life insurance is suitable for me?
If we are not clear when discussing these two main types, the only life insurance we suggest you buy is term life insurance. Not only is it cheaper than a permanent policy that allows you to invest the difference in a retirement account, but it expires when you no longer need it. When?
When you and your assets become self-insured. Self-insurance only means:
- You have a well-funded emergency fund with enough money to maintain your four walls (food, utilities, shelter, and transportation) for three to six months
- Your child is going to college or living on his own
- Your retirement account is in good condition (which means their annual return may replace your income)
How is life insurance paid?
The death of a family member is not the time for anyone to think about paperwork. Therefore, it may be helpful to consider in advance how life insurance expenditure works.
When doing a claim, please contact the life insurance company online or by email. The beneficiary is required to provide the company with a certified copy of the applicant’s death certificate through the hospital or the county or city where his death is located.
As for the timing of claims, here is good news: there is no time limit for life insurance expenditure. When you and your family are ready, you can complete it according to your own schedule.
What is the form of payment? You can pay in a total or in installments. We absolutely recommend that you pay the full amount at one time. Installment payment has many disadvantages and lacks the control level of a one-time payment.
Is life insurance worth it?
Life insurance is valuable. The correct type of life insurance makes everything different!
Bottom line: term life insurance is your best choice because life insurance should be the protection and protection of your family, not any investment or profit-making plan. Allow the mutual fund to deal with the investment part.
Are you ready to start? Zander insurance’s trusted experts can provide you with a quick and free quotation for term life insurance policies in a few minutes.
We would love to hear about your ideas, suggestions, and questions. So feel free to contact us.