A life insurance policy is a contract that includes a guaranteed death benefit if you continue to pay the premiums. Each policy includes a death benefit payable to your beneficiaries when certain conditions are met, such as passing away or meeting the eligibility requirements for an insurance rider.
The Basics of How Life Insurance Works
Life insurance allows you to pay a premium to an insurance company in return for the promise that they’ll pay your beneficiaries a death benefit when you pass away.
You continue paying a monthly fee to keep the policy active. When you pass away, a beneficiary submits a claim. After reviewing the claim and verifying your passing, the insurance company issues the payment. The payout can be used however your beneficiaries choose. They may use it to cover burial costs, debts, or living expenses.
Some insurance policies also include access to other features, such as insurance riders, cash value accumulation, and adjustable death benefits. The variety of options ensures that you can find a policy that best addresses your situation and concerns.
Who Needs Life Insurance?
Life insurance offers peace of mind for anyone worried about the financial burden that they leave behind. For example, if you have dependents, they may struggle should you pass away unexpectedly. Your life insurance policy can provide them with stability.
Having kids, getting married, anticipating retirement, and taking out major debt, such as a home loan, are a few examples of major life changes where you may want to consider getting life insurance. These situations could leave your loved ones without the finances needed to maintain their current way of living.
Life insurance is also recommended for those without dependents or major financial debt. For example, if you’re close to retirement and without major financial obligations, you may still want to consider getting final expense insurance to cover your burial costs.
How Much Does Life Insurance Cost?
The average cost of life insurance is about $20 to $30 per month for a healthy adult between the ages of 20 and 40 looking for a 10-year or 20-year term life policy with a $250,000 to $500,000 death benefit.
Keep in mind that term life insurance often costs less compared to permanent insurance options, such as whole life insurance and universal life insurance. These policies can provide lifelong protection, but typically with a lower death benefit and higher premiums.
Your age and the amount of the death benefit are two of the biggest factors that affect the cost of life insurance. You pay more the older you get. You also pay more for a larger death benefit.
In most cases, women pay less than men. Nonsmokers pay less compared to smokers. Certain health conditions, such as diabetes, may lead to higher rates.
What’s Covered by a Life Insurance Policy?
Life insurance policies are intended to cover the life of the policyholder. If you die while the policy remains active, your chosen beneficiaries can file a claim and receive a death benefit.
Some life insurance riders may extend coverage to other situations. For example, you may add an accelerated death benefit rider. This allows you to receive a portion of the death benefit while you’re still alive if you’re diagnosed with a terminal illness.
FAQ
Can You Get a Life Insurance Policy with Pre-Existing Conditions?
You can get life insurance with almost any pre-existing condition. However, some health issues can limit your available options. This includes chronic and serious health conditions, such as:
- Cancer
- Heart disease
- Diabetes
- HIV/AIDS
Risk occupations and hobbies, substance abuse, and mental health issues may also be considered disqualifying conditions for certain policies. Term life, whole life, and universal life insurance policies are less likely to accept applicants with some of these conditions.
For those with pre-existing health issues, you can apply for guaranteed acceptance life insurance policies. These plans don’t require a medical exam and won’t turn you down for any reason. However, you’re also likely to pay more.
What Type of Life Insurance Policy Should I Choose?
In most cases, you’ll want to choose between term life, whole life, universal life, and final expense insurance.
Term life insurance policies provide coverage for a specific period. They’re often cheaper and a top recommendation for younger adults and those starting new families.
Permanent life insurance lasts the rest of your life if you keep up with the payments. The most common types of permanent life insurance include whole life insurance and universal life insurance.
Whole life insurance includes a fixed death benefit and rate. Universal life insurance allows you to adjust the death benefit and premiums as needed.
For seniors looking to cover their final expenses, consider getting final expense insurance. These plans often have a smaller maximum death benefit as they’re meant to cover your end-of-life costs, such as the funeral and burial or cremation.
That covers the basics of how life insurance works. Working with a life insurance agent can help you find answers to any other questions while matching you with a policy that fits your needs.
