Life Insurance Basics
What is life insurance?
Life insurance is a contract between a policyholder and an insurance provider. In essence, it says: “If you make all of your insurance payments as agreed upon in our contract, we, the insurance company, promise to pay out a benefit to your loved ones—the beneficiaries—when you die.”
That benefit comes in the form of a cash payment, which can be paid out in one lump sum or in increments, depending on what the policyholder wants. The total amount paid out is reflective of the premiums—the regular installments of insurance payments—made by the policyholder over the course of the life of the policy.
The reason people get life insurance is so that in the event of an untimely or even long-anticipated death, the deceased person’s loved ones are looked after financially and are not suddenly forced to scramble to make ends meet, pay bills or look after themselves.
Types of life insurance are generally broken up into four categories: term life, whole life, universal life and variable universal life policies. The differences between these are centered on how long the policyholder must pay their premium, when the policy expires and under what circumstances the policy is no longer valid.
Because life events such as marriage, childbirth and major purchases impact the long-term needs of beneficiaries, it’s important to frequently reassess your life insurance policy to ensure that those you love are adequately provided for.
Do I need life insurance?
The point of life insurance is to make sure that your dependents are looked after when you pass away. Therefore, assuming you have no dependents, life insurance may not be a worthwhile use of your money. If you do have dependents, you might consider asking yourself a few questions to determine if you need life insurance and, if so, how much you ought to purchase. Possible questions include:
- How much money would your dependents need for living expenses and how long would it take until they became self-sufficient?
- Will your dependents inherit assets that can help them support themselves?
- Are there any friends or relatives on whose care and financial support your dependents can count?
In considering factors such as these, you can establish a ballpark estimate of how well taken care of your dependents will be. You can then decide how much or how little you need to contribute to a life insurance policy and which type of policy is best for you and your dependents.
How do I buy life insurance?
Before diving head-first into a life insurance policy, have some background knowledge so you can know what you’re looking for. Understanding the difference between different kinds of life insurance and their pros and cons given your circumstances will enable you to reach the goals for you have for providing for your loved ones after you’re gone.
Once you’ve established what kind of life insurance you need and how much coverage you require, your next move is to get quotes from as many different providers that fit your coverage specifications as possible. By comparing prices, you’ll be able to pick out the most-financially attractive offer on the table or, in some cases, use one offer as leverage for getting a better offer from a different provider.
Finally, after settling on the provider that’s right for you, all that’s left is the application process. This generally entails collecting the necessary personal documents, completing an application or interview and in some—but not all—cases, getting a medical examination. Note that there are policy providers that do not require medical examinations at all, so if that facet of the process is a non-starter for you, you may want to ask providers up-front whether that is a requirement for them or not.
After completing all of the necessary paperwork, tests and interviews, you simply need to wait for approval, sign any outstanding documents and, when the time comes, pay for your policy.
Term life insurance is by far the cheapest type of life insurance coverage that you can buy. But it only lasts for a specific period of time. Those who outlive the term of their coverage have essentially [...]5 min read Jan 06, 2021
Get answers to your cannabis questions, including: Does health insurance cover it?4 min read Dec 08, 2020
Bankrate helps you understand the benefits and options with long-term care insurance.5 min read Jun 18, 2020
Choose the type of life insurance that best fits your circumstances. Here’s what to know.2 min read Nov 13, 2017
Suffice to say we would prefer a host of unpleasant experiences to confronting our own demise.2 min read Sep 15, 2015
Premiums can skyrocket when term life winds down. What can a policyholder do?2 min read Aug 31, 2015
Don’t count on a lovely parting gift from your life insurance when you change jobs.1 min read Aug 03, 2015
See what life insurance experts found ‘worrisome’ and ‘mind-boggling’ in our survey.3 min read Jul 08, 2015
If your life insurance is lacking, you have no good excuses and no time to waste.5 min read May 01, 2015
Learn whether insurance money left for loved ones comes with tax strings attached.1 min read Oct 20, 2014