Life Insurance: A Guide to What It Is, Why You Need It, and Life Insurance Types

 Insurance is something you don't need – until you do. Unfortunately, it's not something you can get when you already need it. Thus, health insurance plans typically exclude pre-existing conditions. While a terminally ill person can obtain life insurance, such a plan may come with steep premiums, restrictions, and limited benefits.

 This is why getting insurance coverage as early as possible is wise, preferably while you're young and financially and physically able. A simple life insurance plan, for instance, is an excellent way of protecting against the unexpected – when (not if) it happens. After all, while people don't know when death will happen (this is why it's unpredictable), death itself is still inevitable.

 Life insurance is not the only type of insurance there is. There are many types of insurance, ranging from life, health, disability, loan protection, and general insurance. However, this write-up focuses on life insurance and discusses your many life insurance options. 

What Is Life Insurance?

A life insurance policy is a contract between the policy owner and an insurance company that obliges the latter to pay the policy's named beneficiary upon the insured party's death. The insured may or may not be the policy owner. 

The policy specifies the policy's face value: the amount the beneficiary will receive upon the insured's demise. It also indicates premiums, premium payment frequency, and specific terms and conditions of coverage. 

Most life insurance policies generally cover natural and accidental death. However, some indicate specific conditions of cover, such as death from a critical illness listed in the policy, accidental loss of life in a common carrier, etc. Most life insurance policies also have exclusions regarding death from hazardous activities, such as extreme sports, death that ensues while committing a crime, and death due to self-harm. 

Why You Need Life Insurance

Some people are reluctant to sign up for a life insurance policy because they think they won't need the money it pays after death. In truth, however, a life insurance policy protects the insured's loved ones – the people left behind when the insured dies. 

Life insurance benefits can help the insured's loved ones pay for any funeral expenses, pay for outstanding loans and, more importantly, maintain the lifestyle to which the insured has accustomed them. Essentially, it gives the people left behind precious breathing space to plan and respond to the insured's death.

 This is why you need life insurance. If you have people who depend on you and the income you bring to your household, it makes sense to get a life insurance plan. 

Aside: There are three roles to every life insurance policy. The policy owner is the person who signed up for the insurance and is responsible for paying the insurance premiums. The insured is the person covered by the insurance policy, whose death will trigger the insurance benefit payout. The beneficiary is the person or persons designated by the policy (or by law) to receive the death benefit.

 The policy owner may be the insured, but this is not always true. As long as you have an insurable interest in someone (i.e., you will suffer a financial loss if a person dies), you may be allowed to insure that person. 

Types of Life Insurance

Life insurance has two primary types. Each one serves different financial goals and risk tolerances. It's essential to evaluate your specific needs, consider your financial situation, and consult with a financial advisor so you can choose the right life insurance policy for you and your family. 

1.   Term Life Insurance

Term life insurance is simple and affordable. It pays out a specific amount if the insured dies during the insurance term. This can be one year, five years, 10 years, 20 years, 30 years, or some other term. 

If the insured passes away during the covered term, the insured's named or legal beneficiaries will receive the death benefit specified in the insurance contract. However, the policy will not pay anything if it expires before the insured dies. 

Term life insurance may be converted into a permanent life product if the terms provide for such conversion. It may also be renewable. In this case, the stated benefit may decrease with every term renewal, or the benefit may remain the same, but the premiums increase.

 

Term life insurance is for people who need coverage to ensure funds for specific financial responsibilities like a mortgage, their children's tuition, etc. They are also a good option for those who want the greatest value for money; term insurance provides a relatively bigger payout for a relatively smaller premium. As such, parents with young children, young professionals with elderly parents, and anyone who wishes to provide maximum protection for their loved ones will find term insurance an excellent life insurance option. 

2.   Permanent Life Insurance

As the name suggests, permanent life insurance provides lifelong coverage or protection for the insured's entire life as long as insurance premium payments are kept current. In other words, as long as the policy owner pays the premium according to schedule, the insurance contract will remain active and in force. 

Permanent life insurance comes in whole, universal, indexed universal, and variable universal variants. Regardless of the type, permanent life insurance policies do not expire. However, compared to term life insurance, permanent life insurance typically comes with steeper premiums and relatively lower benefits. 

That said, it has many uses, including the following: 

●     Estate planning: You can use it in estate planning. The insurance proceeds can be a tax-free death benefit, help pay estate taxes and leave a financial legacy to heirs.

●     Saving: Permanent life insurance policies have a cash value component, which accrues from part of the insurance premiums. The cash value may grow at a fixed and guaranteed rate, and the policy owner may borrow against or withdraw from this account as needed.

●     Investment: Some permanent insurance policies invest the cash value in funds, bonds and other financial instruments. These can earn dividends and interest or appreciate in value over time. Any gains made can increase the policy's death benefit. 

Life Insurance: An Investment

Life insurance is a contract that provides a payout when the insured dies. It is an investment into your loved ones' future and well-being, even as it is an investment that ensures your peace of mind.