When purchasing Life Insurance you may find there is a lot of information you will have to absorb. Your agent may introduce you to terminology you aren’t familiar with and what you thought would be a simple purchase becomes more of a lesson than an enjoyable moment. But if you have a good agent, they will help you navigate the insurance waters to get the best coverage. There’s many important elements to a policy, but we’ve put together 4 very important aspects of insurance from questions we are asked frequently.

1. Life Insurance is a contract.

When you decide to purchase life insurance, you are actually entering into a contract between yourself (the policyholder), and the insurer (insurance company). The insurer contractually agrees to pay a lump sum payout in exchange for a premium to your designated beneficiary once you die. In other words, you agree to pay a premium and the insurer agrees to pay out a lump sum benefit should you pass away. Benjamin Franklin once said, “…In this world there are two things you can be certain of – death and taxes.” While no one wants to think about death, it’s inevitable that it’s going to happen to each of us sooner or later. It’s better to plan for the unthinkable than leave the burden on your loved ones you leave behind. That’s where life insurance comes in.

2. There are different types of life insurance

There are different options when it comes to purchasing life insurance. Although, there are 3 basic types of life insurance – term, whole and universal, there are various riders that can be underwritten as add-ons to your policy to shape options that are a better fit for your individual situation.

Term Insurance

Term insurance is probably the most popular of the three types for a couple of reasons. One, the premiums are usually lower than those of the other policy types. The reason the premiums are lower is because most often term policies are what is referred to as decreasing term. You purchase the policy for a period of time/years and for a specified value. However, the cash value of the policy decreasing over the term until it reaches zero. For example, if you purchase a $10,000 term life policy over a 10 year term, the cash value will decrease by $1,000 each year over the next 10 years. If you were to die in the fifth year of the policy, the payout would be $5,000.

Whole Life

Whole Life Insurance provides what is called a Living Benefit. In other words, you don’t have to die to get the money. Your premium payments will start to build cash value in the policy for which you are able to access when needed through a policy loan. This is a good source of money to use as a down payment on a major purchase such as the down payment on a house or for emergencies. You can pay the policy loan back or have it deducted from the death benefit when you die. Another great thing about Whole Life Insurance is that the death benefit stays consistent, not decreasing like term life, So if you die today or 20 years from now, your whole life policy will pay the same amount minus any policy loan amounts to your beneficiary.

Universal Life

The good thing about Universal Life is its flexibility. It can provide a death benefit as well as a living benefit. The Universal Life policy builds cash value by taking part of your premium and applying it to the death benefit and using part of the premium for savings and investment. The policy is in effect for your whole life as long as you continue to make premium payments. Your cash value grows by a guaranteed interest rate which is set by the insurance company and based on the investment vehicle it is placed into. But an added bonus is that you can use that cash value to cover your premiums and keep your policy in force should you fall into hardship.

3. You Must Show an Insurable Interest

Before you rush out to buy insurance on everyone you know, please understand that this is not allowed. In contracting a policy you must show what is called Insurable Interest in the person for which you want to cover. A person has insurable interest when the loss of that person would cause a financial loss or hardship should they perish. A person has insurable interest with those they are in direct relationship with such as a spouse, child, self, etc. So, you couldn’t purchase insurance on a stranger or a neighbor or distant relative for example.  It is important to show insurable interest to protect both the insured, as well as, the insurer from insurance fraud. Insurable interest must be proven at the time of application by showing their relationship to the insured.

4. The Longer You Wait To Purchase Life Insurance The Higher The Cost

A person can purchase insurance at any time in their life, but as you age your premiums will be higher. The reason is because with each year added to your life you come closer to your end of life. Insurers have access to a great amount of data regarding the age at which people die, as well as, potential causes of death.  With enough date, insurers can predict the average age of a man or woman at death. This data helps them determine the cost of life insurance based on the age of the insured, therefore, life insurance costs go up as we age.  Take advantage of the lower premiums when you are younger. 

Life Insurance Doesn’t Have to Be Costly

As you peruse the various types of life insurance coverage you’ll come to realize that there are policies for every budget and situation. When you meet with your insurance agent, they will ask you probing questions to best determine your needs and your ability.

Let the underwriting process begin!

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Glenda Warren is the Owner/Agent of The Legacy Group, Inc., a life and health insurance powerhouse located in Memphis, TN. Visit her website online at www.thelegacygrpinc.com