Obtaining life insurance can sure feel like a complicated process. You are probably asking yourself how does life insurance work and do I even need it? While trying to understand the ins and outs of life insurance can feel overwhelming, it doesn’t have to be that way.
How Does Life Insurance Work?
Obtaining life insurance is never about yourself. It is always about your loved ones. Essentially, life insurance provides compensation to your loved ones when you pass away. The compensation that your loved ones receive after your passing comes from an insurance company, as life insurance is a contract between you and an insurance company. In order for your family to receive compensation upon your death, you will need to make regular premium payments to your life insurance company.
Life Insurance Terminology
One of the reasons life insurance can feel so complicated is because of the terminology that is used. We’re here to help you break down these terms so you can better understand the whole life insurance process.
- Premiums simply refer to the payments you make to the insurance company for your life insurance policy.
- Beneficiaries are the people who receive compensation from your life insurance plan.
- Beneficiaries are often spouses or children.
- However, you can choose anyone you would like as a beneficiary.
- The term death benefit refers to the total amount of compensation your beneficiaries will receive upon your death.
Main Types of Life Insurance
Overall, there are two main types of life insurance, term life, and permanent life. Term life insurance covers for a fixed amount of time. Permanent life insurance covers you until the end of your life. Term life insurance is generally cheaper to purchase compared to permanent life insurance. However, term life policies have no value if you outlive the contract.
Here is a breakdown of the two different life insurance policies:
Term Life Insurance
- The most affordable type of life insurance.
- The most popular type of life insurance with 71% of purchasers.
- Typical policy lengths are 10, 15, 20, 25, or 30 years.
- If you pass away within your policy, beneficiaries will receive the tax-free death benefit money.
- If you outlive your life insurance contract, the policy has no value without an additional renewal.
- Often times you can renew your term life insurance policies in increments of one year after expiration.
- Each renewal year of term life insurance will be at a higher rate.
Permanent Life Insurance
- Is the more expensive life insurance policy, as it provides lifelong coverage.
- This insurance policy usually builds cash value over the life of the policy.
- There are multiple varieties of permanent life insurance.
Whole Life Insurance
- Offers a fixed death benefit and cash value component that grows at a guaranteed rate of return.
Universal Life Insurance
- Offers more flexibility compared to a whole life insurance policy.
- Premium payments and the death benefit can be altered with certain limits.
- Cash value will generally build depending on the type of policy.
- Will typically have investment subaccounts that you can choose to manage.
- Designed to cover only funeral costs and final expenses.
- Generally provides a small death benefit, often between $5,000 and $25,000.
Survivorship Life Insurance
- Insures two people under one policy, usually a married couple.
- When both spouses pass away, the policy is then paid out to beneficiaries.
- Generally utilized as a part of a larger financial plan to fund a trust or pay estate taxes.
Do I Need Life Insurance?
Life insurance is necessary for anyone who has a spouse, children, or financial dependents. Life insurance is essentially a financial problem solver. Upon your death, you don’t want to burden loved ones with financial struggles. Even if your spouse and children are financially independent, there will be costs associated with your death. Your loved ones will be responsible for paying for your burial and other end-of-life expenses. These are all elements to keep in mind when selecting your life insurance coverage.
Consult with an Experienced ERISA Lawyer Today
If you still have more questions about life insurance or have been denied life insurance benefits in the past, contact an experienced ERISA lawyer as soon as possible. An experienced ERISA lawyer will be able to look at your case, helping you reach your best possible outcome. Reach out today to schedule a free consultation.