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What is Life Insurance?

We’ve all heard the old saying – “nothing is certain in life except death and taxes.” While death is indeed certain, it’s death’s timing that is obviously completely uncertain. Life insurance is purchased by people with a wide variety of objectives to help manage this uncertainty:

• To provide money to their survivors in order to allow them to maintain their lifestyle (keep their home, pay for college, etc.) after the insured dies.
• To help families pay for final expenses, like funerals, caskets, remaining medical debt, etc.
• To provide a savings vehicle that builds wealth at the same time it provides for families in the event of untimely death.
• Access benefits while alive if diagnosed with a chronic or terminal illness (often called Living Benefits).

There are a number of different types of life insurance policies because, as you can see above, they can be used to accomplish a number of different goals.

A life insurance policy is the contract between an insurance company and a policyholder that states that you will pay premiums to an insurance company over time, and, in exchange, the company may pay a lump sum amount to a designated beneficiary upon your death. The funds from your life insurance policy can help pay bills, funeral costs, and help support surviving family members’ lifestyle. People often adjust the amount of life insurance they have as their life circumstances change.

What are the different types of life insurance available?

Whole (or universal) life insurance policies

These kinds of policies are often referred to as “permanent” because they do not expire – they last your whole life. As long as you pay the premium, the policy will continue to cover you, regardless of your age. These plans also accumulate cash value over the life of the policy, meaning that some of your premium is actually put aside as savings for you. You may be able to borrow this money, if you need to.

Final Expense Life Insurance is a type of whole life policy that is specifically designed to pay your surviving family members very quickly upon your death so that they can have funds to cover all the expenses associated with your burial, although they can use the funds wherever they are needed.

Term life insurance

You’ve likely heard that term life insurance is less expensive than whole life. That’s true because this type of life insurance is only in effect for a certain period of time, or term. If you have this type of policy and pass away during the term that the policy is in effect, the insurance company may pay a benefit. If you live past the time that the policy is in effect, the insurance company won’t pay a benefit or give you a refund. There is no savings component to this kind of life insurance, so once the policy is expired, it no longer has value.

Things to consider when buying life insurance

The most basic reason people buy life insurance is to to help provide financial security for their families upon the death of the insured person.

If this is your reason, you need to calculate the amount of money you believe your family will need to continue their lifestyle. Think about your current obligations like your mortgage, auto loans, and other types of debt. Think about future obligations as well such as college tuition expenses for your children.

Most people will also want to make sure that their final expenses (hospital bills, burial costs, etc) will not have to be paid by their family out-of-pocket.