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Life Insurance Policies: What to Look For

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Under 50 and haven’t thought about life insurance much? No matter how young or how healthy you are, a life insurance policy is an investment in your future and your family’s future. But what level of coverage should you be looking for? What type of life insurance is best for me? Let’s take a look at how life insurance policies works and who needs it.

What is Life Insurance?

Life insurance is a type of insurance policy contract where the insured individual pays premium payments and the insurance company will pay a lump sum to the insured’s beneficiaries following their death. That payment is known as a “death benefit” and is only paid to beneficiaries listed on the insurance policy. The “death benefit” is only paid following the death of the insured person.

It is used as a safety mechanism to help beneficiaries from the major financial burden following the death of the insured individual. Think of a person who has a $500,000 life insurance policy which will be awarded to their spouse to care for the family following their death. It is a safety net for your loved ones or other beneficiaries.

The beneficiaries can use the money any way they choose but usually, it is designed to go towards living expenses like mortgage payments or rent, food, utilities, medical bills, etc.

The Three Types of Life Insurance

There are three main types of life insurance policies people can consider: term life, whole life, and universal life insurance. Let’s take a look at each respectively.

Term Life Insurance

Term life insurance is as the name suggests, a life insurance policy that covers a set length of time. At the end of the “term” (or length of time) your fixed, level, premium paments are over and so is your life insurance coverage. Term life insurance is typically offered in 10, 15, 20, and 30-year terms. This is the most common form of life insurance that Americans purchase.

Whole Life Insurance

Also known as “permanent life” or “straight life” insurance, whole life insurance covers the insured for the remainder of their life (as long as they stay current with premium payments). It is also the original type of life insurance policy that started showing up in the 19th century.

It is a guarantee because we will all live and we will all die, there is no getting around it. Whole life insurance pays out at the time of the insured’s death. It may not be appropriate for everyone but since they often carry a cash value, it should be viewed as an investment. The guarantees on a whole life insurance policy include:

  1. A guaranteed rate of return on your money
  2. Guaranteed costs that won’t change over time
  3. A death benefit guaranteed to last for your entire or “whole” life

Cash value means that it builds value over time and can be looked at almost like a savings account, but only if the policy has an “actual cash value” clause.

Universal Insurance

Universal life insurance is essentially a term life insurance policy with a savings component. Like other types of life insurance, there are some set items you must pay every month to keep the insurance policy active. But with a universal life insurance policy that has a “cash value”, that cash value can be used to pay fees, expenses, and premiums. Interest earned on the cash value will be added to the account every year (in most cases).

The term piece of the policy works similarly to yearly renewable term life insurance in that costs increase slightly year-to-date. The policy starts very cheap and as you age gets more expensive, so this is something to keep in mind.

What Type of Insurance is Right for Me?

This will depend on several factors including your lifestyle, age, type of work, activities, medical history, and behaviors. Considering life insurance is usually purchased for certain reasons, you should first think about why you want a life insurance policy in the first place. Is it a protective measure for your family in the case of your untimely death? Is it an investment that you’ll look to take advantage of later in life? Or are you only looking to protect your children (for example) until they are adults?

The better idea you have for why you want a life insurance policy the better you’ll be able to choose the most suitable variety.

Get Multiple Quotes

A common mistake that people make when shopping for life insurance policies is not getting multiple quotes. As a rule, it’s smart to get a minimum of 3 quotes for any insurance policy you’re considering and life insurance is no different. Different insurance companies may look at different metrics or pieces of information about you differently when determining their financial risk by providing you a life insurance policy.

Let’s face it, life insurance companies are in the game to make a profit. They do their best to provide insurance only to those they determine are a low financial risk or through offering a policy at a high risk to people they determine are “high-risk”. Think of medical history for example. Some life insurance companies will not only look at your medical history but that of your parents and grandparents as well. This could be a problem for some people so for that reason it’s good to get multiple quotes.

Multiple life insurance quotes ensure you’re getting the best possible death benefit at the lowest possible monthly premium payments.

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