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Last Updated on April 12, 2024 by Insurdinary Editorial Team | Fact Checked by Rhonda Gary -->
Most people don’t like to consider what life will be like for those they leave behind when they pass. Even so, preparing for the future is one of many key steps for financial security. You have likely asked yourself several questions:
Because of these questions, roughly 52% of American citizens in a Forbes study have at least one form of life insurance. After all, a life insurance policy can help you bolster the economic security of your loved ones even if you aren’t around anymore. With a policy that suits your needs, you could use the insurance to build funds while you are alive.
But how does life insurance work? What kind of life insurance do you need?
We'll help you start your search by providing you with a basic understanding of this wealth protection tool. This article explains technical life insurance terms, how it works, and what the plan can do for you in terms of your financial security.
As you start reading the explanations below, it may help to have a few terms defined so you can understand the beginnings of life insurance. You will learn more as you keep reading through the latter sections. Life insurance shares some technical words and phrases with health insurance and vice versa, though others distinctly belong to life insurance policies.
You should know four important words to start learning about life insurance:
A life insurance policy solidifies the agreement between you and an insurance provider that they will pay out as a death benefit upon your passing. Unlike with health insurance, it does not have a deductible or out-of-pocket maximum.
In return, most insurance companies require you to submit an application and receive a risk classification based on your mental and physical status. The underwriter then either rejects or accepts the application and designates a premium amount for the policy. Your premium may be able to change with improved mental or physical wellness.
The amount for your death benefit generally remains static unless you apply for a policy with a larger or smaller death benefit. The smallest available life insurance policy pays $25,000, but the largest available policy can go into the millions.
When an agent refers to different life insurance for monetary assurance, they generally mean one of three types.
Term life insurance lasts for a set period before ending, making it a more affordable option for temporary coverage. You can usually get a term policy to stay active for 10 to 30 years. However, if you intend to have coverage last into your elder years, you may benefit more from permanent life insurance options.
Permanent life insurance refers to a policy that remains active for as long as you pay the insurance premiums and keep it without cancellation. Therefore, it can last for your entire life from the day you start paying, improving your and your beneficiary’s financial security.
Whole-life policies accumulate cash value while maintaining the death benefit amount. You can use the cash value to pay insurance premiums, as a source of cash, or as a loan.
Universal life insurance also accrues cash value while providing the same policy coverage as whole life insurance. However, universal policies can also earn interest on cash value, potentially providing more financial safety. These policies also allow for extra monetary customization, including:
Life insurance policies vary in price depending on several factors, especially your risk classification. An underwriter may define you as super-preferred, preferred, or a standard risk. Risk classifications come from your traits as listed in the application:
Someone who has used prohibited drugs in the past or who has potentially dangerous hobbies, like skydiving, may receive a substandard risk marker. Smokers also may receive a smoker risk marker to denote the potential issues associated with smoking.
The higher your risk classification, the more you pay in premiums. So, an older smoker can expect to pay higher premiums than a younger, more athletic person who perhaps has a cholesterol issue.
Additionally, the cost varies depending on how much you want for the death benefit and how long you want the policy to last. Universal and whole-life policies will generally cost more than term policies due to how long they should last.
Insurance riders refer to additional policy adjustments you can customize to make your policy suit your needs as much as possible. Potential riders include the Disability Income Rider, which can pay the insured monthly if they cannot work for several months due to illness or injury. An Accelerated Death Benefit Rider can pay some or all the death benefits to the insured if a doctor diagnoses them with a terminal illness.
These riders often increase the premium amounts you pay, but they can improve the scope of your coverage substantially.
What kinds of benefits does a life insurance policy provide for you, as the insured, and your beneficiaries? You already know about the cash value and interest, but there’s even more you can get from your policy.
Your death benefit comes tax-free when paid to your beneficiaries. They can then use the funds to cover bills, college tuition, funeral fees, and more. Financial security from the death benefit can also work as wealth protection for any savings you set aside for your beneficiaries.
Even if an underwriter finds you to be at substandard risk, you can apply to several companies and receive their responses. You can then choose a policy that covers the amount you want at the most reasonable premium for your budget.
Many people use cash value growth in life insurance to increase their income tax-free. While exclusive to whole and universal life insurance policies, the smaller categories in each type allow for different investment plans. You gain the potential to build generational wealth if you use the cash value wisely, though it typically grows slowly on whole insurance plans.
When you apply for health insurance, you may find it difficult to buy and use from several companies. With life insurance, you can get as many policies as you can reasonably afford if the numerous premiums do not cause lapses in payment. With each policy you have, you can name many different beneficiaries for each one, covering several people or entities.
Hundreds of insurance companies offer various types of life insurance, so finding the one that suits you best can be difficult. For example, when seeking temporary fiscal security measures at a lower cost, you should look at term policies first. However, if you want longer-lasting financial stability for your beneficiaries, a whole or universal life policy would likely serve you better.
To narrow down your options, you should ask yourself several questions:
Having answers to these questions can help agents narrow down what kind of policy you want. You can also look it up yourself using Insurdinary. Our state-of-the-art system compiles results from several life insurance companies so you can have the best options we can find.
Experience financial security through life insurance found on Insurdinary, or contact our customer service team for hands-on assistance today.