One of the greatest risks we deal with is the danger of our lives being unexpectedly taken from our loved ones. While you can't prepare for every possible life-threatening scenario, you can invest in life insurance.
Life insurance is a type of coverage that provides financial support for your loved ones or beneficiaries should you pass away. When you have an insurance policy, you are bound by a contract to pay premiums (usually monthly or annually) in order to qualify for coverage. With an active policy at the time of your death, your beneficiaries will receive what is called a death benefit, which is typically a lump sum that they may use to help manage their expenses. There are other payouts outside of a lump sum, as well, including installment payments, annuities, and retained asset accounts.
The most common financial obligations that life insurance will cover include:
- Outstanding debt, such as loans or credit card bills
- Mortgage payments
- Tuition payments
- End-of-life expenses, like funeral services
- Living expenses, such as groceries
Most life insurance policies will cover most causes of death, including circumstances such as accidental death, natural death, suicide, or homicide. However, there are a couple of situations or rules that may affect the validity of your policy, such as not making premium payments or misrepresenting the health of the policyholder. This would result in your family not receiving the death benefit.
Knowing the purpose of different types of life insurance and how life insurance works will help you decide what kind of coverage you need and what to expect down the road, which we'll go over next.
Different Types of Life Insurance Explained
So, how does life insurance work? Life insurance policies all have the same basic idea—you regularly pay money so that your family is left with the means to provide for themselves or at least pay for the cost of your death, such as funeral services. However, not every policy is the same. Policies vary based on the length of the terms covered and how much policyholders are required to pay in premiums.
Term life insurance
A term life insurance policy has a set period of coverage, usually somewhere between 15 and 30 years, though some policies are more customizable. In these cases, the policyholder has fixed premiums, meaning they won't go up or down in cost, which guarantees them their death benefit if they pass away within the set term. If they don't pass away during their policy term, they don't receive any money.
Term life policies are the most affordable upfront, meaning the premiums are less than a whole insurance policy. This makes them the most common type of life insurance, but it also makes them worth the least over time.
Whole life insurance
While term life insurance is more affordable, a whole life insurance policy is a type of permanent life insurance, which offers you life-long coverage as long as your premiums are being paid. Permanent policies also offer a cash value account, which you can borrow from once you've built some funds in your account by making your premium payments. An insurance company will use some of its revenue to pay policyholders in this method.
With a whole life policy, you usually pay fixed premiums and receive a fixed lump sum, no matter when the policyholder dies. These policies are usually quite a bit more expensive, but they offer more security and long-term solutions.
Universal life insurance
Universal life insurance policies are another type of permanent insurance. These also have a cash value benefit for policyholders, but the growth of the cash account is based on the market conditions. Though there is usually a guaranteed minimum interest rate, the cashback value will change with the market, whether it goes up or down. Despite the uncertainty, universal insurance policies offer the most flexibility. Unlike whole life insurance, you can adjust your coverage and premiums depending on your personal needs and circumstances.
What Might Affect Your Life Insurance Costs
Your cost of life insurance will vary depending on the insurance company, policy type, and other personal information that may affect your needed coverage.
- Age. The younger you are, the less expensive your insurance premiums will be, and on the other end, the older you are (and more at risk of passing away) the higher your premiums will be.
- Gender. Men are typically charged more for life insurance premiums because they have shorter life spans compared to women.
- Health. The healthier you are as an individual, the more affordable your premiums will be, too. If you have more at-risk health conditions, like serious illnesses, heart disease, cancer, or if you smoke/use tobacco, you may have to pay more upfront. When you get health insurance, they ask for metrics like your blood pressure, weight, and other health-related topics to help determine how at-risk you may be.
- Occupation. Certain jobs are riskier than others, so if you have a dangerous job, you will likely have to pay higher premiums. For example, a construction worker has a greater risk of being fatally injured compared to someone who works at a desk, so the construction worker will likely have higher premiums.
- Hobbies. High-risk hobbies are also going to hike up your premiums a bit; if you love skydiving, you can probably expect to pay more.
Life Insurance Beneficiaries
A life insurance beneficiary is whoever you as the policyholder leave your death benefit to. You can designate one or more beneficiaries, and it can be practically anyone you want. Most commonly, people designate one of the following:
- Other dependent
- Business partner
Note that you can name a primary beneficiary, who will receive your death benefit if they are alive at the time of your passing, and contingent beneficiaries, who receive your death benefit if the primary beneficiary passes away.
What Things Are Not Part of Life Insurance Coverage?
We've answered the question: "what does life insurance cover?" But what about things that life insurance doesn't cover? While there's often a lot of flexibility in what your family or other beneficiaries can use the money for, there are a couple of distinct situations that won't be covered by a death benefit. Here are the more prominent things life insurance does not cover:
- Expired policies. The main downside of term life policies is that they aren't permanent, so if your policy expires and you pass away, your loved ones or beneficiaries don't get any money from the insurance provider. If this is a big deal to you, you will want to invest in a type of permanent policy.
- Fraud. At the beginning of your policy, there's something called a contestability period, usually a period of about 2 years. Should you pass away during this time and the insurance provider finds something you misrepresented in your application, your beneficiary may not see the death benefit. This is relatively uncommon and is usually only acted upon if the policyholder dies under suspicious circumstances, but this is also why you should always be honest with all the information you provide.
- Criminal activity. If a policyholder commits a crime and dies because of that crime, insurance providers aren't legally obligated to pay the death benefit and beneficiaries won't qualify to make a claim.
These examples are primarily what you should think about when getting a policy, but make sure you read the fine print when you sign on for an insurance policy. Some insurance providers have further exclusions that prevent you from receiving the death benefit.
Finding the Right Insurance Agency
Life insurance benefits offer a lot of peace of mind, especially if you have a family that relies heavily on your income. They can also be a good source of money if you choose to get a policy that offers cash value benefits.
If you want good coverage, and more specifically, coverage that will suit your personal needs, a reliable insurance agency is key. You don't want to sign up with just anyone—you want a provider with competitive rates and an admirable track record. You want to work with a company that offers you more security, not more stress.
Find the right provider with Acrisure: we work with a huge variety of insurance partners, and with our advanced AI technology, we can pair you with the perfect insurance provider. Contact us to get started.