How Does Life Insurance Work?

Why is life insurance important? What are the benefits of life insurance? What are some life insurance choices? These were just a few of the questions that I received from my clients when I would review some risk management strategies with them. As a financial advisor, these questions provided me a further opportunity to educate my clients about life insurance policies. Herein, I want to share with you the basics of life insurance.

What is Life Insurance?

• life insurance policies offer protection for your against financial loss that results from the insured’s death
• insurance company pays the life insurance beneficiary a certain amount of money, generally the face value of the policy
• insurance quotes can be obtained from insurance agents, insurance brokers, financial advisors, or insurance companies directly

Life Insurance Choices:

• term life Insurance is the least expensive form of life insurance
  • only provides death benefit to beneficiary while the term insurance is in force
  • usually, the term of the insurance is for 10, 15 or 20 years
  • insurance premium is level for the length of policy
  • if you live beyond the insurance policy’s term and don’t renew your policy (option may not be available on some term policies), your coverage ends

• permanent life Insurance – policies are meant for the insured’s lifetime
  • death benefit paid when insured expires (policy must be active)
  • policy accrues cash value
  • examples - Whole Life Insurance, Universal Life Insurance, Variable Life Insurance, Variable Universal Life Insurance

Which Insurance Choice Works for You

Insurance through work:

• take advantage of life insurance through work, if offered
• generally, insurance benefit that is 1 to 2 times your pay is provided at no cost; additional life insurance can be purchased at additional cost
• insurance through work may save you the medical underwriting process
• life insurance benefit ends with the termination of employment

Personal life Insurance policy:

• If you need more protection for your loved ones, then get a personal life insurance policy
• requires medical underwriting
• term Insurance is most palatable option for most Americans, more than 90 percent
• “Buy Term and Invest the Rest”
• permanent life insurance is usually for more complex needs or for affluent consumers
• permanent insurance can be a tool for estate planning
• consult your financial advisor as to the which type of life insurance meets your needs

How Much Does Life Insurance Cost:

• life insurance costs depend on several factors, the following are the most important:
  • health of the insured
  • age of the insured
  • sex of the insured
  • medical underwriting results
  • term of insurance policy
  • occupation
  • personal activities, such as sky diving, bungee jumping, etc
  • habits – drugs, etc
  • type of insurance – term or permanent

Life Insurance Amount you Need:

Amount of insurance is specific to your needs; here are some factors to consider when determining need:

• short-term debt
• long-term debt
• car loan
• mortgage loans
• credit card debt
• college tuition
• other financial obligations

How it Can Help You

Life insurance is useful for the following reasons:

• life insurance is for the benefit of your loved ones, not yours
• death benefit may cover expenses including, all funeral costs, medical fees, estate administration and probate costs, and other financial obligations
• provides for your loved ones by creating an automatic tax-free inheritance
• can benefit you favorite cause or charity by making it a beneficiary
• if implemented correctly, can be a great estate planning tool for some people

Life insurance is a cornerstone of successful long-term financial planning. It is important to discover by your own research or preferably, in consultation with your financial advisor which type life insurance works for you. Don’t get too little or too much life insurance, get the proper amount. Life insurance can help you meet your life goals.