Is There a Simple Definition of Life Insurance?
You came for this, and the short answer is no. Life insurance is complicated, but I will do my best to simplify it… … and I’m going to add a little color and interest along the way:It All Starts with a Contract
Life insurance is a contract with an insurer, which is why it’s so important to work with an independent agent. As with all legal documents, you must know what you are getting into before signing on the dotted line. These contracts are complicated, and they outline EXACTLY what the company and you expect. So you must understand what all of this means to you.1. Coverage in Exchange for Premiums
If you’re looking for a simple definition of life insurance, you need to understand that the coverage you receive is defined in a contract, otherwise known as a policy. The life insurance company you select lays out how much coverage they provide in exchange for your premium payments. This coverage is called a death benefit, the money your beneficiary receives should you die during your term. You’ll undergo a medical exam for traditional life insurance to determine your premium payments. Premiums vary radically depending on your age and health. This is yet another reason to speak to Policy Architects TODAY.2. Your Beneficiaries Inherit the Money Tax-Free
Another concept you need to understand when it comes to the definition of life insurance is the word beneficiary: So what is a beneficiary (ies)? It’s the person, people, or charitable organization you select to inherit the money paid out should you die during your term. I’ve written a great article about this and some of the issues that come up here. This payout is typically provided in a lump sum but is not always true. You can opt to have the coverage paid out over time. Most insurance companies have a compassionate terminal illness benefit in the event a doctor diagnoses you as having less than two years to live. In this situation, the insurance company pays an advance on the death benefit, so you and your beneficiaries have some money before you pass away. Another fantastic perk for life insurance? The death benefits are provided to your beneficiary TAX FREE.3. There are TWO Main Types of Life Insurance
No Simple Definition of Life Insurance is complete without letting you know you have some choices to make. Sadly, many people go into this process blind and rely on an agent to inform them of what’s available. That’s great – but only if you have an honest agent. Some are tied to the life insurance companies they represent, which creates a conflict of interest. How can you possibly advise someone about their options if you have a horse in the race? No captured agent will tell you to go to another insurer because they can better serve your needs. Some agents will sell you a completely wrong policy for your circumstances because they get a better commission. OUCH! I want to say this never happens, but it does. So, let me explain what I mean right now. Let’s start with the most common and affordable type of life insurance – Term.Term Life Insurance
This type of coverage is the bee’s knees. It works for most people, most of the time. Term life insurance is affordable and flexible. It offers temporary protection for the number of years or “term” you select. My clients usually choose 10, 20, or 30-year terms, but you may customize this period to meet your needs. The most common reason people buy term life insurance is to cover the loss of income. Coverage is terminated at the end of your term, but typically, you can convert it to a permanent policy before that point within certain limits.Permanent Life Insurance
No simple definition of life insurance is complete without talking about permanent coverage.
Term insurance doesn’t cover you until the day you die, which poses a problem for some people. That’s where permanent life insurance comes into the equation.
If you purchase a whole life or universal policy, you are protected until your death as long as your premiums are paid promptly.
This also means your premiums are substantially more expensive than term. This is because the life insurance company WILL have to pay out death benefits.
Cash value is also typically part of a permanent life insurance policy. This is when a portion of your premiums is set aside and accumulates.
As the policyholder, you can borrow against these funds or withdraw them to use as you like. The cash value can also be left for your beneficiary. The thing is, cash value takes quite some time to build up.
Permanent life insurance is a VERY COMPLICATED product and has many variations. Buyer beware: it’s not for someone who wants to set it and forget it.