I don’t know about you, but when I first started researching life insurance, it didn’t take long for my eyes to cross and my brain to shut down. Suddenly, I realized I had moved onto cute cat videos with no clearer understanding of the process. The life insurance business is a lot of options, terminology, policyholders, beneficiaries, and degrees of payment, time, etc. It’s no wonder I chose cat videos.
So, this month, I’ve set out to unpack the basics; here’s your Life Insurance Primer just in time for National Life Insurance Month.
Basically, life insurance is a contract between a policy holder (you or me) and an insurer (the insurance company). This contract guarantees that the insurer will pay a designated beneficiary (you or someone in your family) a sum of money (the benefit) in exchange for a premium (a monthly or yearly payment) upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. Whew, did you get all that?
These policies tend to fall into 2 major categories:
Protection Policies: These provide benefits (usually in the form of a lump sum) in the event of a specified occurrence.
Investment Policies: These facilitate growth of capital by regular or single premiums and include: whole life, universal life, or variable life.
Right away, I’m just going to tell you that there are A LOT of options when it comes to choosing a policy; too many to go through in our little blog here. So we will focus on 3 general policy types: Whole Life, Term Life, and Mortgage.
Whole life, or permanent life, policies are the quintessential life insurance policies, the kind we all have a basic understanding of or assume is our only option. These policies are designed to exist until the policy-holder’s death. Whole life premiums are fixed, based on the age of issue, and usually do not increase with age. The insured party normally pays premiums until death or policy maturation, whereupon the policy value is paid out in cash.
These kinds of policies are most appropriate when all revolving debt is paid off, education is fully funded, and a person has substantial savings in the bank.
Term life insurance is life insurance that provides coverage at a fixed rate of payments for a limited period, usually 10, 20, or 30 years. If the insured dies during the term, the beneficiary will receive the death benefit. Term insurance is typically the least expensive way to purchase a substantial death benefit
Both term insurance and permanent insurance use the same mortality tables for calculating the cost of insurance, and provide a death benefit which is income tax free. However, the premium costs for term insurance are substantially lower than those for permanent insurance. The reason the costs are lower is that term programs may expire without paying out, while permanent programs must always pay out.
Mortgage Insurance (not to be confused with Private Mortgage Insurance) is specifically designed to protect the repayment of a mortgage. Should a policy holder die or be diagnosed with a terminal illness, a mortgage insurance policy would pay out a capital sum in the amount sufficient to repay the outstanding mortgage.
Watch this video brought you by Life Happens, featuring Danica Patrick!
Only you can know what options best suits the needs of your family. With some quality advice from your local insurance agency, you start in the right direction. Call or come in today (951-275-0340); we’re offering a free Life Insurance Review all month long! Or click over to our Life Insurance page. Atchley & Associates Insurance Services wants to help put you on the path to security. Your future is now.