Life insurance compensates beneficiaries for the amount of the life insurance policy in the event the insured person dies. Most people buy life insurance to ensure that their family members are financially secure if they were to die in an accident, or when they pass away. Life insurance is also known as a death benefit because the insured’s beneficiaries receive a “benefit” in the event of a death.
It’s important to understand the basics of how life insurance works and what the benefits of carrying life insurance are, before you sign a policy.
Types of Life Insurance
Most insurance providers offer two different kinds of life insurance: term insurance and permanent insurance.
Term life insurance only provides protection for a certain period of time, ranging anywhere from one year to a few decades. Most people purchase term life insurance when they know that they are going to die within a few years. Still, the insured does have the option to renew the policy if he or she is alive when the policy expires.
Permanent life insurance doesn’t expire, and the insured is protected as long as he or she continues to make the premium payments. If you decide to get permanent life insurance, you do have the option to cancel the policy and receive the cash value of the policy as a lump sum payment. There are also a few different types of permanent life insurance policies: whole life insurance, adjustable life insurance and variable life insurance. Each of these has different policies on how premiums are allocated, and the amount of the death benefit could change depending on certain factors.
Benefits of Carrying Life Insurance
There are a number of reasons to purchase a life insurance policy. Some of the top benefits of carrying life insurance include:
– Covers many costs associated with the actual death, including funeral expenses, estate administration fees, federal and state death taxes and outstanding debts
– Covers the cost of mortgage payments, basic living expenses and education expenses for the family of the deceased
– Serves as a source of cash and income when the primary income-earner in the household dies
– Permanent policies do permit withdrawals from the cash-value of the policy. This is usually subtracted from the face value of the policy.
– Policy value can be used as collateral when insured wants to take out a loan
Whether you elect to purchase term life insurance or permanent life insurance, it’s important to calculate how much life insurance you actually need. Some people calculate the amount based on what they make, and others review their expenses.
Talk to your insurance agent about calculating the total amount of life insurance you need to protect your family.