Understanding Life Insurance Policies: Types, Benefits, and Purchase Guide

Life Insurance Policy

When you want to secure the future of your loved ones, look for no other option than getting a life insurance policy. It provides you with a safety net for your loved ones in case of your untimely demise. 

A life insurance plan is a contract between the insurer company and policyholder to pay the death benefit to the designated beneficiaries. Different insurance options are available nowadays with different coverage and premium options. In this blog post, we will explore what a life insurance policy is, how it works, when to get it, and many other important aspects of it. Let’s explore together!

What is a Life Insurance Policy?

Life insurance is a legal contract between the policy owner and the insurance company. According to this contract, the insurance company will give the designated beneficiaries a lump-sum payment called death benefit, upon your death, in exchange for monthly or annual payments called premiums.   

How does Life Insurance work?

A life insurance policy has two main components: a death benefit and a premium. However, some insurance types also come up with a third component which is cash value. 

1- Death Benefit

Death benefit also called face value is the amount of money the insurer gives to the beneficiaries designated in the policy when the policyholder dies The insured has the right to choose the desired death benefit amount according to the estimated future needs of the beneficiaries. 

The insurance company will check if there is an insurable interest and if the applicant qualifies for the coverage based on the underwriting requirements of the company. These requirements are related to age, health, and any dangerous activities in which the proposed insured is involved. 

2- Premiums 

It is the amount the insured pays for insurance. The insurance company is bound to pay the death benefit in case of the policyholder’s death if he pays the premiums as required. Premiums are determined by how likely there is a chance that the insurer will have to pay the death benefit of the policy according to the life expectancy of the insured person. 

However, life expectancy is influenced by various factors like age, gender, medical history, high-risk activities, and others. A part of the premium is deducted from the operating expenses of the insurance company. If your policy has larger death benefits or you have any risky occupation, then your premiums will be higher than normal. 

3- Cash Value 

The cash value comes with only a permanent life insurance plan and it has two purposes. It is a savings account that the insured person can use during his life, the cash accumulates on a tax-deferred basis. The policyholder can also use the cash value to pay premiums or buy another insurance plan. 

The cash value can be taken as a living benefit that remains with the insurer when the policyholder dies. But in case of any outstanding loans against the cash value will decrease the death benefit of the policy. 

How do you buy a life insurance plan?

When you are buying a life insurance policy, you may have various options including:

Through the Internet: according to the type of policy you want, you may apply for and buy a policy online and be eligible for coverage on the same day. Such types of policies are known as instant life insurance. Insurance companies and brokerages use different algorithms to check whether you qualify for a policy or not. They will also ask some questions related to your health and lifestyle to set up your rate. 

Through an Agent: Another way of getting insured is via an agent or a broker. You can go for this option if you want someone to help you through the buying process. While doing so you may find captive agents that sell policies from a single company and independent agents offering you plans from various companies. 

From an Insurance Company: Most insurance companies are available that allow you to get a plan via their site, over the call, or in person. Before signing your policy for a company, make sure you have compared quotes so that you can get the best possible coverage at the minimum possible price. 

Also Read: How Much Income Do I Need For Life Insurance?

What are the different available types of life insurance policies? 

Generally, there are three main types of life insurance policies. These are:

1- Term Life Insurance 

It is one of the most affordable policy types but it only lasts for some specific years usually from 10 to 30 years. Term life insurance also has a one-year short-term life insurance option. However, if you die after the term period, your beneficiaries will not get any payout. Most people use this policy to get assistance with specific expenses like college tuition fees or mortgages. 

2- Permanent Life Insurance

It lasts your whole lifetime and your beneficiary will get the payout no matter what you are when you die. The only thing you have to take care of is to keep paying your premiums on time. Permanent life insurance also has further types including whole life insurance and universal life insurance. You can choose this policy if you want to leave a legacy for your children or spouse. 

3- Final Expense Insurance

The final expense policy is also known as a funeral or burial insurance policy. It is more affordable than permanent life and it is proposed to cover end-of-life expenses like burial costs, medical bills, or other expenses. If you do not want to burden your loved ones with your funeral costs or medical bills, you can go with this type of coverage. 

What are the advantages of buying a life insurance policy?

Here are some of the benefits of buying a life insurance policy. 

  • Payouts are tax-free: Death benefits paid to the beneficiaries are not subjected to federal income tax because they are not considered income. 
  • Secure financial future for the dependents: Insurance policy offers a multiple of your total income equal to 7 to 10 years. The amount is enough to cover major expenses like educational fees and mortgages so that your family would not have to survive on loans or debts. 
  • Final expenses are covered: By having a burial policy or permanent life policy, you can easily avoid your funeral expenses as these are covered by your policy. 
  • Supplement retirement savings: Policies like universal, whole, and variable offer you cash value along with death benefits, which increase your savings in retirement. 

What factors affect the cost of your life insurance premiums? 

Here are the factors that influence the cost of your life insurance premiums:

  • Age (premiums are lower at younger ages)
  • Gender (females tend to be less expensive)
  • Health (poor health means higher premiums)
  • Smoking (smokers have high premiums)
  • Lifestyle (risky activities or hazardous occupations can enhance premiums)
  • Family medical history (any chronic illness in the family leads to increased premiums).

When to get a life insurance plan? 

Many people get an insurance plan when they experience any major life event. For instance: 

  • When you just got married
  • When you buy a new house
  • When you are expecting a baby.