When choosing a life insurance policy for you and your family, there are many aspects to consider. Understanding the basics of life insurance is vital when researching and ultimately choosing life insurance coverage.
What is Life Insurance?
Life insurance is a contract between you and an insurance company, in which you will receive coverage based on your payment of premiums. Life insurance will provide a death benefit to whomever you name your beneficiary – typically a spouse – should you pass away. In the event this occurs, your beneficiary would file a claim with the insurance company to submit proof of your passing. Your beneficiary would either work with the agent that worked with your family to fill out the necessary paperwork or contact the insurance company directly. Once the insurance company receives all documents, the beneficiary would then be issued the death benefit payout.
Should a child be named your beneficiary, a custodian of the policy would have to file the claim. This could be someone to choose to manage the money from the policy in the event the child is still a minor. If someone was not appointed, the court will appoint someone.
What Types of Life Insurance Are There?
There are four different types of life insurance: term life, whole life/permanent life, universal life, and variable life. Term life insurance is the simplest form of life insurance and only pays out if the person dies during the term. These terms usually are 30 years in length. Whole life/permanent life insurance will pay a death benefit whenever the policyholder dies. Universal life insurance, also known as adjustable life, is much more flexible than traditional whole life insurance policies. The savings account that accompanies this policy generally earns interest and the policyholder will have the option of altering premium payments. Variable life insurance combines death protection with a savings account that can be invested in stocks, bonds, and money market mutual funds. This policy involves more risk than others, and the value may decrease should the investment perform poorly.
How is Life Insurance Issued?
Policies come in two forms: simplified issue or fully underwritten. Simplified issue policies will only require answers to questions about your health when completing the insurance application, but could cost more since the insurance company has less proof about your health. A fully underwritten policy will require a medical exam and complete lab work. The policies will usually have a lower premium if your results show you are in good health.
How Are Rates Determined?
Generally, the younger and healthier you are, the less you will pay for a premium. Age is usually the most important factor when your premium rate is calculated. Some other factors include: gender (women usually get lower rates since they have a longer life expectancy), results from medical exams and lab work, family medical history, marital status, location, and lifestyle.