How Life Insurance Savvy Are You?
Life insurance can be a crucial component in your financial plan because it can protect your loved ones when you pass away. Even if you have some knowledge of life insurance, keep in mind that it has several moving parts and numerous policy types to keep track of. However, knowing the basics can help you become an informed life insurance shopper and find life insurance quotes that work for you. This article will let you test how life insurance savvy you are and help you better understand how life insurance works.
How does life insurance work?
Life insurance can pay your loved ones a substantial sum, called a death benefit, if you pass away while the policy is in force. They can use this death benefit to replace your income, pay off your debts, and create peace of mind. You pay monthly or yearly premiums to maintain coverage. Many factors impact these premiums, including:
- Age
- Gender
- Health/health history
- Family health history
- Smoker/nonsmoker
- Occupation
- Hobbies
- Riders
- Insurer
- Policy type
Key features of a life insurance policy
Life insurance policies have several features. Know these terms so you understand the difference between policies when shopping:
Death benefit
The death benefit is the amount paid to your beneficiaries if you pass away while the policy is in force. A higher death benefit will cost more in premiums but can provide better coverage.
Beneficiaries
Your beneficiaries are the people or organizations you name in your policy to receive your death benefit if you pass away while the policy is in force. Many name their spouse as a beneficiary so the spouse can provide for their children. However, you can name multiple people and split the death benefit accordingly. You can also name charitable organizations as beneficiaries if you prefer some proceeds to go to a charitable cause.
Cash value
Permanent life insurance policies come with a cash value growth component. Your insurer puts part of each premium into this account, which grows tax-deferred at a certain rate depending on the permanent life insurance policy type. When the cash value grows large enough, you can borrow against it or withdraw from it. You also receive the full cash value minus surrender charges if you surrender the policy.
Riders
Riders are optional add-ons that provide specific types of additional coverage, usually for a fee (although some are free). For example, an inflation rider increases your death benefit by a fixed percentage — such as 5% — each year to keep up with inflation. In exchange, you pay slightly higher premiums.
Common types of life insurance
There are several types of life insurance policies. Each differs in its features and benefits:
Term life insurance
Term life insurance often lasts 10 to 30 years, depending on your preferred term length. If you outlive the policy term, you must get a new policy to maintain coverage. There is no cash value component, either. However, term life insurance premiums are quite affordable. They can suit you if you don’t have complex financial needs and want to keep costs low.
Permanent life insurance
Permanent life insurance costs more than term life insurance, but coverage lasts for life. The cash value component also offers the ability to build wealth through the policy. There are many types, such as:
- Whole life insurance: This comes with fixed premiums and a death benefit. The cash value grows at a fixed, guaranteed rate.
- Universal life insurance: This comes with an adjustable death benefit. Cash value grows based on current interest rates, and you may be able to use your cash value to pay premiums.
- Final expense insurance: A small whole life policy to cover end-of-life costs, such as funeral expenses. They cost less than traditional whole life policies and can be easier to qualify for, but the death benefit is smaller.
A permanent life insurance policy may work well if you need more wealth-building options and prefer lifetime coverage.
Upgrade your life insurance knowledge
At its core, life insurance protects your loved ones in case the worst happens. If you pass away early, it helps them replace your income, pay off debts, and secure themselves financially. There are numerous policy types, each suited to different types of prospective policyholders. After comparing policy types and selecting the best one for your needs, you’ll want to shop with multiple insurers and compare each quote in terms of the death benefit, premiums, and more. Keeping all this in mind will help you be a more informed policyholder and maximize your coverage while staying within your budget.