Life insurance works similarly to medical coverage: when you purchase a plan, you pay premiums to an insurer. As a paying policyholder, you are guaranteed a fixed death benefit to your spouse, children, or other beneficiary you have designated. The insurance company can provide this protection at a reasonable rate because it insures a large amount of people, therefore the financial risk is dispersed among many policies.
Term Life and Permanent Life
Two different types of policy exist for life insurance, which are term and permanent. Term life coverage lasts for a set period of years, while the duration of permanent life coverage can extend for the length of your life.
Term life is ideal for use on a more temporary basis. The initial rates are lower, and they increase at regular intervals over time. Coverage with a term life plan ends after a set period of time and does not build any cash value. Term life is typically a way to get the most coverage for the least costly premiums immediately, with the knowledge that rates will increase as you age.
Permanent life is designed for the long term, establishing a cash value that can build over time and be borrowed against. The initial premiums will be higher than a term life plan, though you will not experience an increase at regular intervals. Coverage can last for life, and accumulate cash value as opposed to a temporary plan.
When deciding how much insurance you will need, it is helpful to check your beneficiary’s existing resources. This can include Social Security, savings, a pension, or other insurance policies. After making a projection of their resources, consider the costs they will have to assume, such as medical bills or funeral expenses you may leave behind, in addition to their regular living expenses.
Life insurance can be used to cover costs you may need assistance with right now, or reserved to give your family’s future more security. Though immediacy may be the primary need for purchasing life insurance, it is essential to keep in mind what you wish to pass onto your beneficiaries and loved ones. A fairly small quantity of life insurance can be enough to contribute to a down payment on a house, cover a year of college tuition for a grandchild, or start a savings fund for a family member or spouse.