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The Definition of Life Insurance

Essentially, life insurance is a contract you make with your insurance company. This contract ensures that your family (or anyone else you choose) will receive money after you pass away. As long as the policy is active upon your passing and you’ve paid premiums, your family will get the payout.

Life Insurance Explained

The process of getting life insurance is pretty straightforward. First, you will have a phone interview with the insurance company of your choice. You’ll state why you want to get insurance and discuss the possible options.

What follows is a thorough medical examination. A doctor will determine the state of your health. You, on the other hand, will be expected to notify the doctor of any pre-existing conditions and chronic illnesses.

The information on your health will be important when determining the insurance rates. Once that is finalized, you will start paying premiums. Regular premium payouts will keep the insurance coverage in place.

When you pass, your family must notify your insurance company and file a claim. They will need to submit your death certificate, as well as any other relevant documents.

Then, the beneficiary can choose how they want to receive the money. They can get it all in lump sum or opt for annual payments. Whichever option they pick, they will receive the payments tax-free.

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What Is Covered by Life Insurance?

Life insurance covers most cases of death. Therefore, natural causes, illnesses, and accidents are all included in most policies.

There might, however, be certain exceptions and conditions when it comes to suicide. Many companies exclude it from the coverage in the first few years of a policy being active. They do so to prevent insurance fraud, which is extremely common.

An insurance company might also refuse to pay the beneficiary if they suspect foul play. In most cases, they refuse to pay when the beneficiary murders the policyholder. Then the police have to investigate everything before any payment is made.

3 Types of Life Insurance

Aside from deciding your insurance rate, you should consider what type of insurance is best for you. There are two big factors that separate different types of life insurance.

The first one is the length of the coverage over your life. The second is the possibility of increasing the death benefit over time, either via cash value or other similar options.

We will explain these differences in detail below.

Term Life Insurance

Term life insurance is one of the most basic policies all companies offer. It only lasts for a set number of years, and it is the most affordable choice.

If you are still alive when the insurance expires, you must renew it. Only by doing so will you ensure that your beneficiaries get the money once you die.

Whole Life Insurance

This type of insurance is permanent, which means that you pay for it until your death. What makes this type quite popular is that it is also known as cash value life insurance.

A cash value insurance means that a percentage of every payment is diverted as tax-deferred cash value. This value accrues interest over time at a rate that you agreed upon when signing the insurance contract. The premiums you pay often stay the same through the years.

This money is separate from your death benefit, which means that you can use it while you are still alive. In a way, it is like a savings account that is a part of your insurance policy. Thus, the beneficiary will not receive both the death benefit and this additional money when you pass.

Cash value has many benefits:

  • You can withdraw it for as long as you pay for the policy and don’t surrender it
  • You pay no taxes when withdrawing it
  • It can be used to take out a low-interest loan against your own policy, which you then pay off as usual
  • You can get the money even when you surrender your insurance policies, but quite possibly with a fee

Universal Life Insurance

Universal life insurance is quite similar to whole life insurance. They are both permanent policies, and they both offer you the option of cash value. However, there is one key difference.

The cash value in whole life insurance policies depends on a fixed percentage you and your company agree on. Conversely, the cash value in universal life insurance policies is connected to a specific stock.

What this means is that your cash value is pretty much left to luck with universal life insurance. If the market underperforms, the cash value could be in serious jeopardy. But if the stock does well, the cash value could be greater than you’ve ever imagined.

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What Do Insurance Premiums Depend On?

Insurance companies take into consideration a lot of factors when determining your premiums. These factors include:

  • Age
  • Gender
  • Your personal and family health history
  • Career, hobbies, lifestyle
  • Your driving, credit, and criminal record

We will briefly dive into each of them.

Age

Age is one of the most important factors your insurance company takes into account. The amount of premium will rise with your age. So, the older you are when you start paying out the policy, the more expensive it will be.

This practice has a rather simple explanation. Younger people are generally healthy, and no one expects them to die soon. Thus, they pay less money in premiums.

Gender

Statistically speaking, women live longer than men. Since premiums are always based on mortality risks, this data is an important factor. In most cases, women pay less in premium money than men.

Personal and Family Health History

As we mentioned above, your insurance company has to conduct an in-depth screening of your physical and mental health. Those whose health is in any way compromised will pay higher rates than those who are healthier.

Your family’s health history is also important. Thus, you will have to provide information about it. That will help the insurance company predict the turn your health might take in the future.

Career, Hobbies, Lifestyle

The kind of job you do and the type of hobbies you take up are also crucial factors. Riskier jobs and hobbies call for higher premium rates and vice versa. Such careers and hobbies include, for example, pilots, firefighters, skydiving, hiking, etc.

Your Driving, Credit, and Criminal Record

These factors affect your premium rates slightly less than the previous ones. However, they still might make a difference.

If you have a history of getting into car accidents or fights, your insurance rates might be higher than usual. These increase the possibility of you dying accidentally, which is an immediate red flag for insurance companies.

Do You Need Life Insurance?

If you have someone that depends on you financially, life insurance is something you should definitely consider. The same is true if you have debt, own a business, or certain assets.

The beneficiaries can use the death benefits to pay for anything following your passing, such as:

  • Funeral expenses
  • Mortgage payments
  • Childcare
  • Student loans
  • Business debt
  • Inheritance taxes
  • Estate taxes

If you choose a life insurance policy with cash value-added, you can use that money to fund your retirement. Getting life insurance can be a rather smart investment for:

  • Those who are the only financial providers in their family
  • Single parents
  • Parents of a child with special needs
  • Homeowners with a mortgage
  • Individuals with a high net-worth
  • People paying off debt

A Few Parting Words

As you have read, there is a lot you need to know about life insurance. But no matter how complex it might seem, it is ultimately one of the best investments you can make in your lifetime. Making the future of your loved ones easier and brighter is its ultimate goal.

What can you do to make the process of getting life insurance easier? The answer is simple. Find a reliable insurance company with a great track record, and get started right away.

FAQs - Life Insurance

Can Life Insurance Be Tax-Deductible?

Generally speaking, life insurance premiums are not tax-deductible. However, there are some exceptions. Business owners, for example, can deduct premiums paid for their employees. However, if the business is named as the beneficiary on the policy or if they own the business with their spouses, they can’t do this.

Do You Pay Taxes On Death Benefits?

Death benefits are usually not taxable. If your family is supposed to receive a death benefit of $2 million, they will receive that full amount. Many people get life insurance so they can pay for future expenses tax-free. Their beneficiaries then receive the money and pay for college, their homes, and so on.
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