What is Life Insurance, how it works & where to buy policy


A life insurance policy is an agreement between an insurer & policy owner whereby insurer promises to pay out certain amount of money when insured dies, in return for premiums that policyholder has paid during their lifetime. best life insurance companies are those with good financial standing, low customer complaints, high satisfaction & variety of policy types.

Types Of Life Insurance

There are many different kinds of life insurance to suit all needs & preferences. choice between temporary & permanent life insurance depends on whether insured person has short or long term needs.

Term Life Insurance

The term life is intended to cover specific number of years & then expire. When you purchase policy, duration is chosen. Term lengths are usually 10, 20 or 30 years. best life insurance term policies are those that balance affordability & long term financial stability.

  • Decreasing Term Life Insurance is renewable term insurance that provides coverage at decreasing rate over course of policy.
  • Convertible term Life insurance allows policyholder to change temporary policy into permanent policy.
  • Renewed term Life insurance quotes are based on date of purchase. premiums are increased annually & cheapest term insurance is usually purchased at start.

Most term life policies will allow you to extend policy on an annual or bi annual basis. It is possible to increase your coverage by renewing your policy each year. But premiums can be steep as they are calculated based on age. Converting your term policy to permanent one is better option for coverage that will last forever. If you want this option, not all term policies offer it. Look for policy that converts to permanent one.

Permanent Life Insurance

Permanent Life Insurance is more costly than term insurance. But coverage remains in effect for as long as insured lives unless they stop paying premiums or cancel policy. When payment of premium is late, some policies offer automatic loans.

  • A whole life policy lasts for duration of your life. Cash value is used to fund policy. Its similar to an account. Cash value Life insurance allows policy holders to utilize cash value in many ways, including to make loans & pay for policy premiums.
  • The Universal Life (UL) Insurance offers permanent insurance that includes component of cash value. Universal life features flexible premiums. premiums for universal life can be changed over time, unlike whole & term insurance. They are also designed to have death benefit that is either level or increasing.
  • The Indexed Universal Life (IUL), form of universal insurance, allows policyholder to earn an equity indexed or fixed rate of return for cash value.
  • The Variable Universal Life (VUL),insurance, allows policyholders to invest their policy cash value into separate account. policy also offers flexible premiums & it can have death benefit that is either level or increasing.

Compare Top Rated Companies

You can start your search for life insurance by looking at our list of top companies.

Permanent Life Insurance Term or Permanent? Permanent Life Insurance

While term life insurance is different from permanent insurance in many ways. it tends to meet requirements of those who are looking for affordable coverage. term life policy is only valid for certain period & provides death benefits if insured dies before that time. This is in contrast with permanent life insurance which remains in force as long as insured pays their premiums. second difference is cost of premiums. Term life insurance tends to be cheaper than permanent because theres no cash value.

You should first analyze your finances & calculate how much would be needed to meet your beneficiarys standard of living, or reason you are purchasing life insurance. Consider how long you will need coverage.

If youre main caregiver & you have two children aged 2 & 4, you will want to purchase enough coverage to take care of your children until they are old enough to be able to provide for themselves.

Consider costs of hiring child care provider & housekeeper, or even using commercial cleaning & childcare services. Then add some money to cover education. Include any outstanding mortgage & retirement needs for your spouse in your life insurance calculation  especially if spouse earns significantly less or is stay at home parent. If you are able to afford it, you should add up these expenses over next 15 years & adjust for inflation.

A type of life insurance with modest death benefit is or Burial insurance. Beneficiaries can choose how to use their death benefits, regardless of name.

What affects your life insurance premiums & costs?

The cost of life insurance can be affected by number of factors. Some things are beyond your control but you can manage other factors to reduce costs before & even after applying. Cost is largely determined by your health & age, so its best to buy life insurance right away.

If your health improves & you make positive lifestyle modifications, you may request risk class change after you have been approved for insurance. Your premiums wont increase even if you are found to be in worse health now than when your underwriting was first done. Your premiums could decrease if you are found in better health. It may be possible to purchase additional coverage for cheaper rate.

Investopedia / Lara Antal

Life Insurance Buying Guide

Step 1: Calculate How much you need

Consider what costs would be incurred in event that you died. Think about things such as mortgages, tuition for college, other debts & funeral costs. Income replacement can be big factor, especially if you or your loved one need money & cannot provide it for themselves.

Online, you can find tools that will help calculate amount that is needed to cover any expenses.

Step 2: Preparing Your application

In general, life insurance applications require beneficiary & personal medical information. It is possible that you will be required to undergo physical exam, as well as disclose your medical history, including any previous medical conditions & DUIs. You might also need to reveal any hazardous hobbies such auto racing & skydiving. Most life insurance applications include following elements:

  • The most important factor is your age. Life expectancy. Which is determined by insurers risk assessment is main factor.
  • Gender Women generally pay less than men of same age because they live statistically longer.
  • Smoking People who smoke are at greater risk of many diseases that can shorten their life expectancy & raise risk based insurance premiums.
  • Health: Most policies require medical exams that include screenings for heart conditions, cancer & diabetes.
  • Lifestyle: Lifestyles with high risks can increase premiums.
  • Your family medical history: You are at higher risk for certain diseases if you know that your relatives have suffered from major illnesses.
  • Your driving record: If you have history of drunken driving or moving violations, your insurance rates can be dramatically increased.

Before policy is written, you will need to provide standard forms of identification, like your Social Security Card, U.S. Passport & drivers licence.

Compare policy quotes

After you have gathered all information you need, compare quotes for life insurance from several providers. prices can vary greatly from one company to another, so you should make an effort to compare policies, ratings & costs of different companies. Finding right policy for your life insurance needs is important because youll be paying monthly premiums over many years.

You can get head start with our list of top life insurance companies. This list shows top companies for various types of insurance needs based on research we conducted with nearly 100 insurers.

Benefits of Life Insurance

Life insurance has many advantages. Here are top features & benefits of life insurance.

The majority of people purchase life insurance in order to give money to their beneficiaries who might suffer financial hardships if insured died. For wealthy people, however, life insurances tax benefits can offer additional opportunities. These include ability to defer growth of cash value & receive tax free dividends.

Avoiding Taxes

A life insurance death benefit is generally tax free.4 However. it may be subject to Estate Taxes. This is why some wealthy people buy life insurance in trust. They can avoid estate tax & maintain value of their estates for heirs by using trust.

Avoiding taxes can be legal strategy to minimize ones tax liabilities. It should not, however, be confused with Tax Evasion which is an illegal act.

Who Needs Life Insurance ?

After insured persons death, life insurance can provide support for surviving family members & other beneficiaries. These are some people that may require life insurance.

  • Parents of minor children. Loss of income & care giving abilities could cause financial difficulties if parent passes away. kids can be provided with resources needed until they are able to support themselves by purchasing life insurance.
  • Special needs adult children of parents. Life insurance is good option for children with special needs who need lifelong care. You can use death benefit to create trust for special needs. Which fiduciary manages on behalf of your adult child.
  • Adults that own property jointly. If death of an adult means that another cannot afford to pay for loan, taxes, or upkeep on property due to loss of income, then life insurance is advisable. An engaged couple that takes out mortgage jointly to purchase their first home is an example.
  • Adult children that provide care for elderly parents can be left money. Adult children often sacrifice their time to help an elderly parent in need. Direct financial assistance may be included in this help. When parent dies, life insurance may help cover costs of adult child.
  • Parents who have taken out private student loans or signed loan on behalf of their children. Life insurance is not necessary for young adults who do not have dependents. However, if parent of child will still be responsible for debt owed after death of child. it may make sense to purchase enough insurance so that debt can be paid.
  • Young adults or children who wish to lock in low insurance rates. Insurance premiums are lower if youre younger & healthy. Even if he or she does not have dependents, 20 year old adult may purchase policy based on expectation that they will in near future.
  • Stay at home spouses. Life insurance is good idea for stay at home spouses, as their work at home has significant value. Salary.com estimates that value of staying at home parents would be equivalent to salary of $162.581.
  • Families with high net worth who anticipate having to pay estate taxes. life insurance policy can cover estate taxes, preserving value of your estate.
  • Families that cannot afford funeral & burial expenses. Small life insurance policies can help families pay for funerals & burials.
  • Businesses with key staff. Businesses with key employees.
  • Married pensioners. Pensioners dont have to choose between receiving pension that includes spouse benefit or not. They can accept full amount of their pension & then use some of that money to purchase life insurance for their spouse. strategy used is pension maximization .
  • Pre existing Conditions Cancer, diabetes or smoking are examples. Some insurers will deny or charge high premiums for people with certain conditions.

Every policy is different for insurer & insured. Review your policy to determine what your insurance covers & how much your beneficiary will receive.

What you should do before buying life insurance

Research Policy Options & Company Review

Life insurance is significant investment & commitment. Its important to conduct proper research to ensure that life insurer you select has an excellent track record & financial stability, as your heirs might not be receiving any benefits for decades. Investopedia evaluated scores of different insurance companies & rated them in various categories.

Consider Your Death Benefit Needs

It is good way to protect your family in event of your death. There are some situations where is not best option, such as when you purchase too much insurance or insure someone whose income does not need to be replace. Its vital to take into account following.

What costs would not be covered if you were to die? Maybe it isnt warranted if your spouse earns lot & you have no children. You should still consider your spouses financial needs & effect of your death. If both spouses are required to earn income in order to meet their financial obligations or maintain lifestyle they desire, both may require separate life insurance.

Please read this article to learn why you should buy life insurance

When buying life insurance for another member of your family, you should ask yourself: What are you looking to protect? In case of death, burial costs may be needed to cover children & senior citizens who have no income. parent might also wish to ensure their child is insured in future by buying modest sized policy while theyre young. This allows parent to make sure that their child will be able to financially support their family in future. maximum amount of life insurance that parents can purchase for their child is 25% of their current policy.

Would investing money paid as premiums to permanent insurance over course of policy yield higher return? Consistent saving & investment, such as self insurance, could be better hedge against uncertainly in certain cases, if an income is not needed to replace or policys cash value returns are too conservative.

How Life Insurance Works

The two major components of life insurance policy are death benefit & premium. These are two main components of term life insurance. But whole or permanent life policies have an additional cash value.

1. Death benefit. Death benefit. For example, insured could be parent & their beneficiaries might be children. According to estimated needs of beneficiaries, insured chooses amount for death benefit. Insurance companies will decide if there is an insured interest, as well as if insured can qualify for coverage, based on their underwriting criteria. These include age, health & hazardous activities that insured may participate in.

2. Premium. Insurance premiums refer to amount of money that policyholder must pay in order for insurance company to be able pay out death benefits. Premiums can also depend on how likely insurer is going have pay this benefit, based upon life expectancy of insured. insureds gender, age, health history, occupation hazards & risky hobbies are all factors that can influence life expectancy. premiums for policies with higher death benefits are more expensive. They are also higher when policyholder is at higher risk. Permanent policies which accumulate cash values are also higher.

3. Cash value. Cash value. cash value of permanent life insurance is used as savings plan that can be used by policyholder during lifetime of insured. It accumulates tax deferred. In some policies, withdrawals are restricted depending on intended use of money. policyholder may, for example, take out cash value loan & pay interest. Cash value can be used to purchase insurance or pay for premiums. When insured passes away, living benefit remains in companys possession. Cash value loans will decrease death benefit of policy.

What You Need to Know

Sometimes, policy owner is different from insured. business may buy key person insurance for critical employee, such as CEO. Or, an insured person might decide to sell his or her policy in exchange for money, through settlement.

Changes to Life Insurance Policies & Riders

Most insurance companies allow policyholders to modify their policies in order to meet their specific needs. Riders is most popular way for policyholders to modify their policies. availability of riders depends on each provider. Typically, policyholder pays an extra premium or fee for each rider. However, some policies include riders as part of their base premium.

  • This rider provides extra life insurance protection in case insured dies accidentally.
  • If policyholders insured is rendered incompetent, rider will relieve them of paying premiums.
  • Disability income riders pay monthly benefit if insured is unable to continue working for several months due to an illness or accident.
  • The rider for accelerated death benefits allows an insured to receive part or entire death benefit upon diagnosis of terminal illness.
  • The Long Term Care Rider can be used for in home or nursing home care, or to cover assisted living.
  • The rider allows policyholder to purchase additional insurance without having to undergo medical examination.

Loaning money. Cash value is feature of most permanent life policies that policy holders can use to borrow money. In theory, cash value is used as collateral to borrow money from an insurance company. policyholders score does not matter, unlike with some other loans. loan repayment terms are flexible & interest is credited to cash value of policyholder. If you do not pay back loan. it can lower your policys benefit.

How to fund retirement. Cash value policies or investments can be used to generate retirement income. opportunity may come with higher fees & lower death benefits, making it better option only for those who have already maxed out other tax advantaged investment & savings accounts. Life insurance is another option to fund your retirement.

You should re evaluate need for life insurance every year or following major life events such as marriage, divorce or birth of baby. It may be necessary to change beneficiaries of your policy, increase or decrease your insurance coverage.

How to Qualify for Life Insurance

The Insurance Information Institute reports that there were 841 life insurance & annuity companies in United States as of 2018. With hundreds to choose from it is possible for anyone to locate policy at reasonable price. Which meets some or all their requirements. According to Insurance Information Institute, there were 841 companies that offer life insurance or annuities in United States as of 2018.

Moreover, there are many companies that offer different types of life insurance policies & policies of various sizes. Some even specialize in policies tailored to specific requirements, like policies designed for those with chronic illnesses. Brokers who are experts in field of life insurance know exactly what each company offers. Brokers can help applicants find insurance at no cost. It is possible for almost everyone to get life insurance policy, if they are prepared to look & pay high prices or accept less than ideal death benefits.

Because insurance market is so much larger than most consumers think. it is possible to get life insurance even if your previous application was denied or you were unable to afford quotes.

The younger you are & healthier you are more likely you will qualify for insurance. As you age & become less fit. it becomes harder to get life coverage. Some lifestyle choices such as smoking or taking part in dangerous hobbies like skydiving can also lead to higher insurance rates or make it more difficult to qualify.

Who Needs Life Insurance ?

If you want to protect your spouse, kids & other family members if something happens to you, then life insurance is must. death benefit of life insurance policy can be used to pay for mortgage or college tuition. It may also help with retirement. Cash value is also component of permanent life insurance that grows over time.

What affects your life insurance premiums?

  • Life insurance costs less as you get older
  • Females tend to be cheaper
  • Smoking increases insurance premiums
  • Poor health (higher premiums if you are in poor health)
  • Risky lifestyle (risky activity can raise premiums)
  • Families with history of chronic illness (chronic illnesses in family can increase premiums).
  • Drivers record (good drivers can save money on their premiums).

What are benefits of life insurance?

  • Tax free payouts. death benefit is paid in lump sum & not taxed by federal government because its not income to beneficiaries.
  • The dependents wont be worried about their living costs. majority of policy calculators suggest multiplier equal to your annual gross income that will cover major expenses such as mortgages, college tuition & other large costs without requiring survivor spouse or child to borrow money.
  • You can cover final expenses. With standard life or term policy, you can avoid funeral expenses that can be substantial.
  • The policies can be used to supplement other retirement savings. Policies such as permanent life insurance, including whole, universal & variable policies, can provide cash values in addition to death benefit. Which can supplement other retirement savings.

How do you qualify for life insurance?

You must submit life insurance application to be eligible. Life insurance is accessible to everyone. cost of your premiums can be affected by factors such as age, health & lifestyle. Certain types of insurance do not require any medical history. But they have higher rates & waiting period prior to receiving death benefits.

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