Life Insurance Basics

Establishing a life insurance policy is a great way to create an immediate estate for your designated beneficiary. The asset that creates the estate is the promise from the insurer that they will pay an amount of money upon death. This means that if you can demonstrate to an insurer that you are healthy and insurable, they will in exchange for a small premium offer you a policy for a significant amount of money. In the unfortunate event of your premature death, your beneficiary would get the proceeds or death benefit of the policy. Typical death benefits being sold today are:
 

·        25,000 or 50,000

·        100,000

·        250,000

·        500,000

·        750,000

·        1,000,000 and up

Of course there are death benefits available other than short list above but these are typical of what is being sold in today’s marketplace. Many insurers will discount your premium at these levels or "bands" as they are called in the industry. For example, it may be less expensive to buy a policy with a 250,000 death benefit than it would be for a 230,000 death benefit.

 

There are two basic types of life insurance being sold in the market place today. They are term and permanent insurance. There are hundreds of variations of these two basic types of life insurance policies being sold and a few thousand insurers are selling them. You don’t need a calculator to figure out that there are tens of thousands of names for these policies. This can lead to confusion when comparing policy types between companies. If you can just remember that there are only two basic types of policies being sold; then comparing policies will be a bit easier.
 

Term Insurance – The insured pays premiums for this type of policy in exchange for a specified death benefit. The premiums are generally not refundable and these policies usually carry no cash value. The policies are usually taken out for a specified period of time or a term. Typical terms or periods of time that many insurers offer are: 1, 5, 10, 15, 20, 25 or 30 year terms. If the insured is still living at the end of the term, then the insured must purchase a new policy and may be subject to re-qualification of insurability. This usually means that you may need a physical and must show a clean bill of health to get another policy.

The main advantages of term insurance are:     

That you can generally get lots of insurance for a little bit of money.

Most companies will also allow you to convert your term policy into a permanent policy without proving that you are still healthy. This is a big benefit!

 

The main disadvantages are:

The insurance will expire at some point and if you continue to need insurance, you will be older and often not as healthy as when you originated the policy. This would likely mean your premiums would be significantly higher or worse, the company may not even be willing to issue a policy due to an adverse health condition that did not exist when you originated the policy.

The premiums paid are generally lost.

 

Permanent Insurance – The insured pays premiums for this type of policy in exchange for a specified initial death benefit but that benefit may increase with time. The premiums for this type of policy are generally not refundable but, these policies carry a cash value. Cash value is a dollar amount of money that accumulates over time. This is an "account" of money within the policy. There are restrictions with accessing the cash value, especially in the early years. This type of policy is generally more expensive than term insurance initially, however, over time the cash value can exceed the amount of premiums paid into the policy. There may also be an option to stop paying premiums for the rest of your life and the policy will still continue. Many permanent policies sold today offer the insured flexibility in the future with the amount of insurance and the premiums paid. Death benefits can be increased or decreased. Premiums can be increased, decreased, skipped or stopped all together. All of this flexibility within the same policy.

 

The main advantages of permanent insurance are:

The policy is set up to last a lifetime, thus the name permanent.

The cash value will also grow and over time and often exceed the amount or premiums paid into the policy.

You can generally also use the cash value if you need extra money.

Many of the permanent policies sold today are flexible. 
 

The main disadvantages of permanent insurance are:

The initial premiums are usually higher than term insurance.

The policies generally take many years before the cash value starts to accumulate significantly.

If the insured cancels the policy in the early years, there may be little or no cash value for the insured.

 

Every one will need some life insurance during their lifetime. Getting it while you are still young and healthy will give you the lowest possible premium payments. Call an agent today for all of your options with permanent insurance. Many agents have a life insurance specialist on staff.