Life Insurance for Dummies [Ultimate Guide For Newbies]
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Needless to say, a life insurance policy is one of the effective financial plans for the security of your family. Undoubtedly, investing in a life insurance policy will secure future uncertainty that your family might face after your death. If you don’t know about it, don’t worry anymore as I will explain it in this guide of life insurance for dummies.
Life insurance is a type of insurance policy to grant a monetary sum to your family member or beneficiary after your death. It will help you to realize that if anything wrong happens, your family will get death benefits.
Today, in this comprehensive article, I will discuss every aspect of the life insurance policy so that you can make an informed decision for your future.
What is Life Insurance Policy?
It is a type of financial plan which ensures the financial security of your family. It is effectively a one-off lump sum cash that is paid to your family or the beneficiary against your life insurance by the insurance providers upon your death.
Sometimes there may be some dependents who rely on your income. It could be your spouse or even an elderly member of your family.
In this case, a life insurance policy will help you to get mental satisfaction that they are going to be financially secure even after your death.
Because the money will benefit them in many ways. They can pay the remaining bills, or even they can use it to generate another source of income.
Do you don’t know how it works? No worries. Let me enlighten you up.
First of all, you buy life insurance from a company, of course. Now, your contract includes periodical installments that you are going to pay to that insurance provider.
These payments are called the Premiums. There is another crucial step during the initiation process. You have to choose a person as the beneficiary (Generally, your spouse or another family member).
The nominated beneficiary will get the death benefit at your death event. However, you have to continue the premiums to get all those benefits.
Not paying the monthly premiums may result in the cancellation of your policy and your beneficiary might fail to get the coverage amount from the insurance provider.
Let me show this with a simple hypothetical example. Let’s assume that Mr. X buys life insurance from XYZ insurer. His monthly premium is $10 per month. He chooses his wife as the beneficiary.
Let’s assume that the death benefit is $250000 if Mr. X dies. So, the math is simple here. He has to pay $10 a month to the XYZ. If he dies, his wife will get $250000 as the death benefit.
However, if Mr. X stops paying the premiums, the insurance policy could be canceled.
Well, it’s not as easy as it sounds. And that brings me to explain a lot more later on this article so that you get an insight into the topic.
The Necessity of Life Insurance
In a general sense, of course, you need life insurance. Because, as you know, the future is uncertain for your family if anything happens to you.
If your family has financial instability and can’t live without your financial help, then you might need life insurance.
The bitter truth is, in the US, countless families struggle when their primary earning member passed away. Who knows, you might come across a situation like this.
So, wouldn’t this be good if you can save some for the insurance premium that will provide financial security to your family as you die?
Yes, and it is easy to understand why. Here comes the necessity of getting into a life insurance policy regardless of your current position.
Types of Life Insurance Available for Dummies
Now, when it comes to types, you are going to find various types of policies that are available out there. You might be confused, but before you give up, let me explain every kind of insurance in easy words in this guide.
All life insurance products can be categorized into the following two types:
- Permanent Life Insurance
- Term Life Insurance
a) Permanent Life Insurance
Permanent life insurance could be an excellent solution for you when it comes to a full lifetime policy. Now, you’ll find different options for different products.
In most cases, you must pay premiums throughout your entire life. Now there are two types of permanent life insurance.
Let me dig it a little bit further.
Whole Life Insurance
The math is pretty simple here in the entire life insurance policy. The premium is fixed here. In your entire life, you have to pay this fixed amount of premium. And, your beneficiary will get the death benefit when you die. It’s as simple as that.
There are few other types of this policy.
Universal Life Insurance
The math is a bit different here. Universal life insurance offers you an investment option. For investment, a part of your premium will be used. However, it comes with an extra benefit.
You can borrow from this if you need money in the near future. This investment option is commonly known as “cash value’. So, you are getting extra benefits from this cash value option, which makes this policy costlier than the whole life insurance.
“Cash Value”- Let’s Dig It More
Is it a new term for you? Are you getting confused with this term? I know, attempting to understand many conditions at the same time is not an easy task. That’s why we are here with this article to enlighten you.
As an investor, you have the full right to know where your money is going to be put. You may see so many confusing options from different insurance providers. But, this policy will ensure maximum benefit for you.
So, to get all the benefits from the cash value, your insurance policy will start with a significant premium. Now, the bonus is your investment.
It will be accounted for in a separate account, and you’ll have full access to that account for your future planning. You may gain some extra monetary benefits from the cash value account. You may get some additional gain.
On the other hand, you can maintain insurance while stop paying premiums. However, the best option that you can choose with your gain is keeping the cash value. It will allow you to borrow in the future if you need it.
Other Benefits of Universal Life Insurance
Here is an exciting benefit of universal life insurance. Its tax benefits. You’ll get tax benefits from the yearly return on your investment of this insurance product.
After cash out the taxable gains will be reduced. The government always ensure insurance protection. Not only that, but there is also more tax benefit. The death benefit is exempted from any kind of taxation.
b) Term Life Insurance
It is a specific type of insurance policy that can provide you temporary financial protection. I would like to recommend you to get a term life insurance for the short-period return.
There are different term periods that you can choose from. For example, you can choose a 10-years policy, or it could be an 8-years plan depending on your choice and requirement.
However, there are some specific conditions in a term policy. For a particular period of the term, there will be an extraordinary rate, and needless to say, your insurance policy will be fixed.
The beneficiary will receive the death benefits if your death occurs in the period. However, if your death event occurs after the term period, I am afraid there won’t be any kind of death benefits for the beneficiary.
As I said before, this kind of insurance policy is right for getting short term benefits. Are you still confused about what type of system you should choose? You could bookmark this guide to come back if you stuck in the middle of the road.
Now that you know different types of life insurance policies, I am sure you can choose the best option for you. However, there is another type of insurance policy that I am going to explain now.
c) Survivorship Policies
This is a new insurance policy. You can also choose a joint system with a partner which is known as survivorship policy. These policies cover multiple people.
You can select from several policy options. You can go for a joint insurance policy where the payout will be done when 1st person dies. However, survivorship policies are always expensive.
Two persons are covered here, remember? But, it is always a better option. Also, there is a survivorship policy where payout occurs after the death of the other person.
There are many options in insurance plans. But you have to make the ultimate decision. Because at the end of the day, it is your life that is going to be insured.
What Is The Cost of Life Insurance?
You’ll see many differences in insurance costs in different companies because company policy might be different in every company.
However, you’ll see some common factors in every life insurance company.
Life insurance costs depend on the risk proportion. People are categorized into many divisions based on their risk category.
In many cases, you’ll see the following risk categories for calculating insurance costs.
- Preferred plus
- Preferred smoker
- Standard plus
- Standard smoker
Let me explain it in detail.
Different Risk Categories
If you someone who has no health issues and who is a right fit person, I am happy to announce that you will be in this category.
The people in this category are ordinary people with the right health conditions. All of the lab results are normal for them. However, you can’t any disease that is long-term.
If your weight is more than average or has other severe problems, you are qualified for this category. However, you should have sound and fit health conditions.
If you qualify for preferred, but you are a smoker, you will be considered as a member of this category. The insurance provider may judge whether you smoked in the last year or not.
If you are in this category, it means your health condition is good. However, again, you need to be careful about your health if you want to stay in this category.
If you live a healthy life with some minor health conditions, you may fall into this category. Most of the people in the US fall into this category.
It could be a valid reason for you being categorized here if you have a family member who died before 60 years of age from any severe disease.
If you qualify for the standard, but you are a smoker, I am afraid this will be your category.
Risky people with severe health diseases belong to this category. If you have a significant health issue like obesity, you could be a member of this category.
Besides, there are some other factors as well. For instance, the risk factor can be varied in different age groups. And, the insurance term is essential as well. A longer duration of insurance is more expensive. So, all these factors affect the costing of the insurance policy.
What Should Be Your Insurance Requirement?
Let me become a little bit straightforward. Your minimum life insurance coverage should cover the funeral cost.
However, assuming that you are a responsible person of your family and you love them all, I must say your life insurance coverage should be sizable enough to protect them after your death.
On the other side, if you are someone like me, you most probably have different financial goals too. For instance, I have seen many parents invest in their kid’s futures.
Now, your life insurance requirement depends on many factors. However, you can start coverage to ten times your yearly earnings. So, the math is still simple here.
If you earn $10000 a year, go for insurance covering $100000, it’s as simple as that. You should think carefully before buying the policy because it’s a decision that will affect the future of your family.
Life Insurance With Pre-Existing Health Issues
Now that you already get to know about the relevance of physical fitness and insurance policy, you are maybe still worried as you got some health issues. But, honestly speaking, there is always a way out.
It might seem impossible, but still, you can buy life insurance with your health issues. However, the coverage you might get will be limited inevitably. You might have to pay higher premiums as well.
Here, I want to make this clear that despite having health issues, you can still buy a life insurance policy. But, you have to carefully investigate the contract term and match it with your needs.
Frequently Asked Questions (FAQs)
Do I need a life insurance policy?
Answer: It depends. But, in a general sense, you should buy an insurance policy to strengthen the financial security of your family when your life ends.
Are different options available to pay the premium?
Answer: Yes, of course. You may pay monthly, quarterly, semi-annually, or annually based on the available options set by the insurance providers. However, some policies include only a one-off payment.
What are the consequences if I do not pay the premium on time?
Answer: Many companies allow a grace period of up to 30 calendar days from the premium due date. However, if you continue to fail on the default premium within this period, chances are all benefits of the policy will be lost. In this case, a revival premium has to be paid should you want to restart the coverage.
You may discover many financial plans in this modern world. It is one of them that essentially used in one way to provide for your family’s financial uncertainty, especially when your life ceases.
Sometimes, it seems complicated from the outside, but in reality, understanding the math behind life insurance is easy. However, you have to be careful about choosing the right policy for you.
I hope this guide has helped you understand all the aspects and makes it easier for you.