Purchasing life insurance is often one of the most beneficial financial decisions you can make for your family. With a quality life insurance policy, your family can be safely protected from the future unknown, regardless of what it may have in store.
Life insurance is a financial asset that is designed to promote long-term financial security and to keep your dependents protected.
However, while many people can clearly see the benefits of purchasing life insurance, the industry itself can often be rather complex. The term “life insurance” is frequently used to describe a very broad range of financial assets.
In order to know which life insurance policy is best for you, there are a number of different variables that will need to be accounted for.
This article will briefly explain the benefits of purchasing life insurance and how you can identify the policies that can best satisfy your needs. For some people, a life insurance policy is a small component of their financial portfolio.
For others, life insurance is something they depend on not only for financial security but also for accumulating wealth.
What is life insurance?
Life insurance is a specific type of contract that exists between the policyholder and the life insurance company. In exchange for a small amount of money each month (referred to as premiums), the insurance company will promise to pay out a predetermined sum (referred to as a death benefit) to your beneficiaries in the event of your death.
Life insurance is an excellent option for individuals who currently have multiple financial dependents such as their children or spouse. Many life insurance policies are worth hundreds of thousands of dollars.
An individual who earns $50,000 per year and has a $500,000 life insurance policy can effectively provide for their family for ten years after their death.
Within the broad category of life insurance, there are multiple different kinds of policies that are available. Most life insurance policies can be categorized as either “term” or “permanent” life insurance policies.
Choosing a life insurance policy will involve distinguishing between categories and identifying “riders” that can potentially be attached. The best life insurance companies will offer customizable options that can adapt to your individual needs.
What is the difference between permanent and term life insurance?
As stated, the two most common types of life insurance policies are term life insurance policies and permanent life insurance policies. As the name might imply, term life insurance policies are designed to provide you with protection for a limited amount of time (the term). These policies will usually cover you for either 10, 20, or 30 years at a time.
Term life insurance policies are generally the most affordable type of policies that can be purchased. However, the fact that they only offer coverage for a specific amount of time may cause you to consider your other options.
Permanent life insurance policies, on the other hand, will provide you with protection for however long you are alive.
Permanent policies are more valuable and, consequently, are almost always more expensive. Many of these policies (such as “whole life”) will also have a cash value that accumulates over time. This cash value allows you to not only remain secure but to also begin building equity as you age.
How do I qualify for life insurance and how much does it cost?
Qualifying for a life insurance policy can often be quite difficult. While there are many life insurance policies that accept nearly everyone who applies, others will be much more selective. The process of determining the cost of a life insurance policy is usually referred to as underwriting.
Understanding the underwriting process will make purchasing life insurance significantly easier. Generally, unless you are purchasing a guaranteed life insurance policy, the underwriting team will want to consider any variable that may result in an early death.
This means things such as your age, gender, lifestyle, and health can impact the cost of life insurance. Many life insurance policies will require you to complete a medical exam and a corresponding questionnaire. If you are healthy and young, most policies will be incredibly affordable.
The cost of a life insurance policy will depend on the variables mentioned above as well as the amount and type of insurance you are applying for.
Common causes of getting your application denied include old age, smoking, heart disease, diabetes, obesity, and many others. Purchasing life insurance involves carefully identifying which policies you qualify for and which policies make financial sense.
What is a guaranteed life insurance policy?
If you are not able to qualify for most life insurance policies, you may want to consider applying for a guaranteed life insurance policy. These policies are ideal for individuals who have serious medical issues or are of an older age.
As the name implies, acceptance for a guaranteed life insurance policy is functionally guaranteed. However, there will often be a predetermined wait time (usually 2-3 years) before the policy can actually be paid out. Though the benefits of these policies are comparatively limited, they are certainly worth considering.
What are the pros and cons of investing in life insurance?
As is the case with all financial investments, purchasing life insurance has both pros and cons associated with it. Every dollar you spend on a life insurance policy will ultimately be a dollar that you could have spent elsewhere. This means that making the choice to purchase life insurance is something that should be made on the margin.
The benefits of purchasing life insurance are obvious. With a good life insurance policy, your family will be financially secure no matter what the future may have in store. If you choose to purchase a whole life insurance policy, you will also be able to enjoy the benefit of having a usable cash value in the future.
Life insurance isn’t generally considered a risky investment, but there certainly are some opportunity costs. In terms of cash value, you will likely see significantly more growth by investing in an index fund. However, life insurance is still frequently sought after because it effectively balances value and security in a way that few other financial assets can.