What is Life Insurance?
Jonathan Cuevas
Last updated on June 29, 2023
Life insurance gives you the peace of mind that your loved ones will have what they need (college, mortgages, paying off debt) even if you’re no longer around to do it.
At first glance, acquiring insurance seems very complicated and tedious, however, it is simpler than it seems. We will listen to your needs and help you understand its basic operation, so that you can choose the best option for you.
How Does Life Insurance Work?
In essence, life insurance can be broken down into four basic elements:
- Policyholder : Usually the insured, this person is responsible for policy payments.
- Beneficiary: The person, group of people or entity that receives the benefits of the policy.
- Premiums: The monthly or annual payments necessary to keep the life insurance policy active.
- Death benefit: The money beneficiaries receive if the policyholder dies while the policy is active.
There are life insurance policies that come with additional components, however the elements described above are the basics of insurance.
The insurance company is responsible for making the payment of the policy, unless you stop making payments, lie in your application or fail to comply with its terms, the conditions of the contract will be fulfilled as promised.
WHAT KIND OF LIFE INSURANCE DO YOU NEED?
In general, life insurance is divided into two types:
- Term
- Permanent
You must evaluate what type of life insurance policy you should acquire by analyzing your financial needs, budget and objectives for the policy.
TERM LIFE INSURANCE
It offers coverage for a certain period of time: 10, 20, 30, 35 and up to 40 years. If you were to die during that time and your policy payments are made on time and in due form, the designated beneficiaries will receive the insured sum of money.
This type of “term” life insurance is a simple, flexible and very affordable option, which is why it becomes one of the most purchased by families.
PERMANENT LIFE INSURANCE
If your needs are longer term, there are so-called permanent life insurance policies, these remain in force throughout your life as long as the premiums are covered, they also have a savings component which generates interest that is generally much greater than inflation and to which you can access.
There are several types of permanent life insurance, including:
- whole life insurance
- universal life insurance
- Variable life insurance
- Indexed Universal Life Insurance
HOW MUCH DOES LIFE INSURANCE COST?
The amount you pay for life insurance is based on the amount and duration of coverage you choose, the type of policy, and your risk.
There are several types of permanent life insurance, including:
- Age
- Health condition
- family health history
- tobacco use
- Lifestyle
Since one of the most important factors that determine the cost of the premium is age, young and healthy applicants get the best rates for life insurance, so the sooner you make the decision, the greater your opportunities and benefits.
WHO NEEDS LIFE INSURANCE?
Anyone can benefit from life insurance, singles, fathers and mothers of families, retirees and more.
A life insurance policy provides everything from funeral expenses to the taxes needed to settle a $50 million estate.
Here are some considerations to help you decide if you need life insurance:
- Income Replacement: Does anyone depend on your paycheck for food, utilities, childcare, etc.?
- Debt Payoff: Share a Mortgage, Joint Credit Cards, or Signature Loans?
Education: Do you want to make sure your children can attend college even if you die? - Legacy: Would you like to leave your descendants with an inheritance or donate to a charity?
- Estate Tax: Did you know that families of high-income workers could face an estate or inheritance tax payment?
- Business: Would your business survive if you or a key employee died?
- Invest: Have you maxed out all your earnings in your retirement accounts and still want to invest more?
- Final Expenses: Do you plan for your funeral to have enough money to pay for your funeral expenses?
If you have no debt, no one dependent on you, have enough money saved to pay final expenses, and if your investments give you enough peace of mind that your loved ones won’t have financial problems when you leave, then you probably don’t have the need to buy life insurance. If not, then purchasing life insurance is a must.
HOW MUCH LIFE INSURANCE DO YOU NEED?
The amount of the sum insured in your policy will depend on your needs and the answers to the questions above can be a guide to what you really need.
It is possible that you may be interested in contracting a huge insured sum in your life insurance policy, however this will depend on the monthly amount you can pay and the conditions of the policy you contract, so we can help you find the right one. most outstanding combination between sum insured and monthly payment for you to make an informed decision.
The insurance company will evaluate the application of each person to check that the coverage that is being requested is in accordance with the real needs of the applicant.
Most agents and financial advisors suggest that you buy a policy equal to 7 to 10 times your income, you should also factor in additional expenses such as debts, funeral expenses, mortgages and college tuition, and lastly, subtract your liquid assets to get the right amount of coverage to buy.
HOW DO YOU PURCHASE LIFE INSURANCE?
The process of each company is different, these are some basic steps that we suggest you follow to acquire the life insurance policy that you need:
Research: Read reviews, get quotes, and compare multiple options to choose the right company.
Application: Your application can be completed online, on paper, by phone or at an agent’s office, and will include questions about your health and lifestyle.
Take a medical exam: Some companies allow you to skip the exam for a small additional cost, while others require you to have a blood test.
Sign and make a payment: Once your application is approved, you will need to sign your policy and make the first payment for your life insurance policy to be activated.
If you choose to purchase a traditional life insurance policy with a medical exam, the above process, known as underwriting, will take an average of 4-6 weeks.
However, some companies offer instant coverage when you skip the medical exam and apply online.
WHAT ARE THE ADVANTAGES OF LIFE INSURANCE?
In addition to protecting your loved ones, purchasing a life insurance policy provides additional benefits such as:
MONEY WITHOUT TAXES
One of the greatest advantages of life insurance is its tax structure, when you die, your beneficiaries receive the insured amount, it is completely tax-free, so the amount of money delivered is complete.
Under certain circumstances there are occasions in which the payment of taxes is justified, however the beneficiaries do not have to report the income received from the life insurance policy to add them to the payment of any lien.
FLEXIBLE COVERAGE
With all of the policy types, terms, riders and investment options, you can tailor a life insurance policy that exactly meets your needs, tailoring your coverage as life changes.
You can get coverage from as little as one year to your lifetime and insure anywhere from a few thousand dollars of coverage to millions.
Whether your goal is to see your children through college, cover your mortgage, or permanently care for a dependent with special needs, you can tailor a life insurance policy to those goals.
INVEST
Many financial advisors DO NOT consider the use of life insurance as an investment vehicle.
You will likely find traditional investment strategies to be a more viable and affordable option, so you will need to assess whether purchasing a permanent insurance policy is the best option for those purposes.
However, if you’ve maxed out all your other bills and need permanent coverage, a whole or universal life insurance policy could be a good investment.
AFFORDABILITY
Most people overestimate the cost of coverage, but in reality, life insurance (especially term) is quite affordable.
In fact, our data shows that the average cost of a $250,000 term policy for a 30-year-old man who does not use any tobacco products is about $160 a year.
That’s about what people pay for one or two of its streaming services, and it’s well worth the crucial protection it provides.
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About Jonathan Cuevas
Jonathan is the owner of yourinsurancesolutions.org. He is an independent life insurance agent specializing in helping the community with life insurance and has helped thousands of purchase life insurance online and over the phone.
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