Life Insurance

What Is Life Insurance?

A life insurance policy is a legal agreement between a life insurance company and the policyholder. In exchange for premiums paid by the policyholder during their lifetime, a life insurance policy guarantees that the insurer will pay a sum of money to one or more named beneficiaries when the insured person dies.

Types of Life Insurance

There are numerous types of life insurance available to meet a wide range of needs and preferences. The major decision of whether to choose temporary or permanent life insurance is important to consider depending on the person to be insured's short- or long-term needs.

Term life insurance

Term life insurance is intended to last for a set number of years before expiring. When you purchase the policy, you select the term. The most common terms are 10, 20, and 30 years. The best term life insurance policies strike a balance between affordability and long-term financial stability.

• Decreasing term life insurance is renewable term life insurance with coverage decreasing at a predetermined rate over the life of the policy.
• Policyholders of convertible term life insurance can convert their term policy to permanent insurance.
• A quote for renewable term life insurance is provided for the year the policy is purchased. Premiums rise annually and are typically the least expensive term insurance at first.

Once the term is up, many term life insurance policies allow you to renew the contract on an annual basis. This is one method of extending your life insurance coverage, but because the renewal rate is based on your current age, premiums can skyrocket each year. Converting your term life insurance policy into a permanent policy is a better solution for permanent coverage. This is not an option on all term life policies; if this is important to you, look for a convertible term policy. Permanent Life Insurance

Unless the policyholder stops paying premiums or surrenders the policy, permanent life insurance remains in force for the insured's entire life. It is more costly than term.

• Whole life insurance is a type of long-term insurance. It builds up a cash value over the course of the insured person's life. Cash-value life insurance also allows the policyholder to use the cash value for a variety of purposes, such as borrowing money or paying policy premiums.
• Universal life (UL) insurance is a type of permanent life insurance with an interest-bearing cash value component. Premiums for universal life are variable. Unlike term and whole life insurance, premiums can be adjusted over time and designed with a fixed or increasing death benefit.
  
• IUL is a type of universal life insurance that allows the policyholder to earn a fixed or equity-indexed rate of return on the cash value component.
  
• Variable universal life (VUL) insurance allows the policyholder to invest the policy's cash value in a separate account if one is available. It also has adjustable premiums and can be designed with a fixed or increasing death benefit.

Term vs. Permanent Life Insurance

Term life insurance differs from permanent life insurance in several ways, but it tends to meet the needs of the majority of people seeking affordable life insurance coverage. Term life insurance is limited in duration and pays a death benefit if the policyholder dies before the term expires. Permanent life insurance remains in force as long as the policyholder continues to pay the premium. Another significant distinction is in premiums—term life is generally much less expensive than permanent life because it does not require the accumulation of cash value.

Before applying for life insurance, you should assess your financial situation and calculate how much money is needed to maintain your beneficiaries' standard of living or to meet the need for which you are purchasing a policy. Consider how long you'll require coverage. For example, if you are the primary caregiver and have two children aged two and four, you would want enough insurance to cover your custodial responsibilities until your children are old enough to support themselves.

You could look into the cost of hiring a nanny and a housekeeper, as well as using commercial child care and cleaning services, and then add money for education. In your life insurance calculation, include any outstanding mortgages and retirement needs for your spouse. Especially if the spouse is a stay-at-home parent or earns significantly less. Add up these costs over the next 16 years, plus inflation, and that's the death benefit you might want to buy—if you can afford it.

What Factors Influence Life Insurance Premiums and Costs?

The cost of life insurance premiums can be influenced by a variety of factors. Certain factors may be beyond your control, but others can be managed to potentially reduce the cost before (and even after) applying. Because your health and age are the most important factors in determining cost, purchasing life insurance as soon as you need it is often the best option.

If your health has improved and you've made positive lifestyle changes since being approved for an insurance policy, you can request that your risk class be changed. Even if it is discovered that you are in worse health than when you were underwritten, your premiums will not be raised. If you are discovered to be in better health, your premiums may be reduced. You may also be able to purchase additional coverage at a lower cost than you did previously.

Guide For Buying Life Insurance

Step 1: Determine How Much Life Insurance You Require

Consider what expenses would need to be met in the event of your death. Mortgage, college tuition, and other debts, not to mention funeral costs. Furthermore, income replacement is important if your spouse or loved ones require cash flow and are unable to provide it on their own. There are online tools that can help you calculate the lump sum that will cover any potential expenses.

Step 2: Get Your Application Ready

Personal and family medical histories, as well as beneficiary information, are typically required on life insurance applications. You may be required to undergo a medical examination and disclose any preexisting medical conditions, a history of moving violations, DUIs, and any dangerous hobbies such as auto racing or skydiving. Most life insurance applications require the following components:

• Age is the most important factor because life expectancy is the most important determinant of risk for insurance companies.
• Gender: Because women live longer lives on average, they pay lower rates than men of the same age.
• Smoking: A smoker is at risk for a variety of health problems that can shorten one's life and raise risk-based insurance premiums.
• Health: Most policies require medical exams to screen for health conditions such as heart disease, diabetes, and cancer, as well as other medical metrics that can indicate risk.
• Dangerous lifestyles can drive up premiums significantly.
• Family medical history: If you have a history of major disease in your immediate family, you are at a much higher risk of developing certain conditions.
• Driving record: A history of moving violations or drunk driving can significantly raise insurance premiums.

Step 3: Compare Policy Quotes

After gathering all of your necessary information, you can obtain multiple life insurance quotes from various providers based on your research. Prices can vary significantly between companies, so it's important to shop around to find the best combination of policy, company rating, and premium cost. Because life insurance is something you will most likely pay for monthly for decades, finding the best policy to fit your needs can save you a significant amount of money.