Don’t know how life insurance works? Here’s what you need to know!
Many individuals focus on saving for retirement, but life insurance is important too. Life insurance policies help provide financial stability to your family if something should happen to you earlier than expected. However, after the death of a policyholder, most life insurance policies are paid in a lump sum. Therefore, it is essential to know what to expect in terms of payout and how life insurance policies work.
Before anything else, it is essential to understand the basics. Within the policy, various terms will be defined ahead of time by both parties involved – the insured and the insurer. The insured (policyholder) is the person who is covered under the policy, and the insurer (the company selling the policy) is responsible for paying out if needed. In addition, there are various types of insurance such as term life and whole life. It is integral to understand the differences between these policies and how they work before deciding which one is the most sensible choice for you and your family.
TYPES OF LIFE INSURANCE POLICIES
- Term life insurance: This is the most basic type of policy. Term life insurance only offers coverage for a certain period or term. If you die during this time, your family will receive a payout. However, once the term has ended, nothing else comes out of the policy besides what has already been paid into it.
- Permanent Life Insurance: A permanent life insurance policy offers coverage for your entire life, as long as you continue to pay the premiums. Permanent policies provide a cash value and, therefore, can be used as collateral for different needs. An option that comes with permanent life insurance is converting the whole policy into a term or cash value.
- Whole Life Insurance: A type of permanent life insurance, this type of policy is guaranteed to be in effect for your lifetime. Whole life policies allow you to choose exactly how much money you want to put into the policy.
- Universal Life Insurance: This type of policy allows you to choose how much money you put into the policy and how much coverage you want. From there, the insurance company will charge an affordable premium for that specific amount of coverage. Universal life is most beneficial for those who want to make changes after taking out the policy or changing their premiums per the current market.
- Burial Insurance: This type of policy generally pays for funeral expenses. In many cases, this type of insurance is only offered by specific companies, and the policyholder can be required to show proof that they are going to bury their loved one before a payout occurs.
- Survivorship Life Insurance: This type of policy is a joint policy, meaning that upon the death of one insured party, the other will receive a payout. Survivorship policies are usually taken out by couples who want to ensure financial stability for each other if something should happen unexpectedly.
THINGS TO CONSIDER WHEN BUYING LIFE INSURANCE
- Coverage: The first step to buying life insurance is determining how much coverage you need and what kind of policy will best fit your needs. Several factors will go into this, such as education costs, outstanding debt, and many others.
- Type of policy: Some policies offer payout after a certain period, such as 5 or 10 years; others payout immediately. Different companies offer different policies, so it is necessary to thoroughly research each company before deciding what is suitable for you and your family.
- Premiums: The amount of money put into the policy on a monthly or yearly basis is known as the premium. Be sure to understand how much each type of coverage will cost and compare that price to other policies and companies before deciding.
- Riders (optional): Most policies come with riders that will allow you to customize your coverage. These options can increase or decrease the payout of your policy. Before choosing a particular type, be sure to understand if any of these are right for you and how much they may cost.
CHOOSING A LIFE INSURANCE COVERAGE
A good rule of thumb for life insurance is to calculate the amount of money you will need in savings if something happens to you. Whether it be funeral expenses, outstanding debt, or monthly bills, make sure to add up everything that your family would need without a provider. Next, determine how much coverage is necessary for your children’s future education and living expenses.
CHOOSING YOUR BENEFICIARIES
- Spouse: The most significant factor for many people when choosing their beneficiary is to ensure their spouse and children will be cared for if something should happen.
- Children: Since most parents would like to ensure their children have provisions, this is often a popular choice.
- Parents: Parents are the most common choice for those who have no spouse or children.
- Siblings: For those with multiple siblings, choosing one to be your beneficiary may not seem fair. In this case, research into benefits allows you to select more than one person as a beneficiary and assign different payout percentages.
- Friends: Many people choose friends when they have no immediate family or spouse. Be sure to discuss this with your friend if you decide that they would be an appropriate beneficiary for your policy.
- Business partner: A business partner may be ideal for those who have a company they want to provide for in the unlikely event of their death.
- Other: You can choose others as your beneficiary, including charities, colleges, and others. Be sure to do your research before choosing someone not on this list.
FILING A CLAIM
If your beneficiary is the one filing a claim, you will need to provide several pieces of information for verification. It includes a death certificate, proof of relationship between you and the beneficiary, and other documents depending on what kind of policy was purchased. If you have not already set up your policy as a trust, be sure to let the insurance company know that this is how you would like them to handle your payout.
LIFE INSURANCE PAYOUT OPTIONS
- Lump-sum: A lump sum payout is the most common form of policy payout. It means that when an insurance company receives proof of your death, they will provide one large payment to whomever you have chosen as your beneficiary. The advantage to this is that it gives immediate relief for your loved ones and ensures they are free of all outstanding debts.
- Annuity: An annuity is a series of payments made when met with specific criteria. For example, an annuity may be paid out when your beneficiary reaches 25 or 30 years old. It ensures their financial future is taken care of while giving them peace of mind knowing they will have enough money to last them for many years to come.
- Monthly payments: Like an annuity, monthly payments provide your beneficiary with a stream of income used for their living expenses. While not as common as lump-sum payouts, these policies still offer the same benefits and additional flexibility for your loved ones.
- Retained asset: A retained asset payout means that the beneficiary will receive all of the money in your policy except for a small percentage set aside to pay off any outstanding debt. For example, if you have only 5% left on your house, this would be used to pay off your mortgage upon receipt of the life insurance payment.
Although each life insurance policy may have its unique provisions, they all offer the same primary benefits. When a person dies with a life insurance policy in place, the payout from that policy is given to their beneficiary. The amount of each payment and how it is paid out will depend on the type of policy purchased and what options were chosen at the time of purchase. The more information provided to an insurance company regarding your death, the faster they can pay out a claim to your beneficiary. Of course, one can always approach an insurance agent for further questions.