It is important to understand the basic components of a life insurance contract. Although there are several different types of life insurance policies that are available on the market today, most life insurance policies share some common components – regardless of the other varying features and benefits.
Life insurance is one of the best purchases that you’ll ever make for your loved ones. We know that understanding all of the benefits and terms can be confusing, but it’s important that you understand all of the different parts to ensure that you’ve got the best plan to meet your needs.
If you’re looking to buy life insurance, there are several key terms you’ll need to know. This article is going to look at life insurance, how it works, and what you should look for when you’re buying coverage.
In its most basic sense, life insurance consists of a policyholder paying a premium to an insurance company and in return, the insurance company paying out a death benefit to the beneficiaries of the insured if and when the insured passes away – provided that the policy is in force at the time of the individual’s death.
The Death Benefit Component
The death benefit on a life insurance policy is defined as the amount that is payable to a beneficiary when an insured person passes away. Most life insurance policies pay out the death benefit as a lump sum – although there are other options typically available for receipt of the policy proceeds.
In many instances, the death benefit proceeds are used by the insured’s loved ones for paying final expenses – such as funeral costs and unpaid medical bills – as well as for paying off other debt such as the balance of a mortgage.
Death benefit proceeds can also be used to fund the living expenses of an insured’s survivors. This is especially the case when the insured was the primary income earner in the household and the loss of his or her income would cause significant financial hardship to those who are left behind.
The death benefit component is found on all types of life insurance. For example, a term life insurance policy consists predominantly of the promise of death benefit proceeds if the insured should pass away, in return for regular premium payments. Alternatively, permanent life insurance policies consist of a death benefit component, as well as a cash value or underlying investment component.
Cash Value Component
Permanent life insurance offers a nice bonus called, cash value. And cash value allows you to get more value out of your plan than you would with a policy that only pays out the death benefit. You can use the cash value during the life of the policy either as a withdrawal or as a loan that you will have to pay back.
The most basic form of permanent insurance is whole life. Whole life insurance offers a way to accumulate wealth as the premiums that are paid into the policy go towards both payment of the insurance portion as well as toward equity growth in a savings-type of account.
Throughout the first few years of a whole life insurance policy, a smaller portion of the premium will go towards the cost of providing the life insurance benefit. However, as the insured individual ages, the cost of providing life insurance rises. Therefore, as time goes on, more of the premium will go towards funding the cash value portion of the policy.
Over the years, the amount of cash inside the policy goes up and the term for this is cash value surrender value. If the insured decides to cancel – or “surrender” – the policy, instead of the death benefit you essentially are withdrawing a nice savings account.
The cash value component is not available in every kind of life insurance plan. This is only a part of the permanent types of coverage. If your plan is a whole life insurance policy with cash value, you should expect to pay more for the added advantage of the cash value.
Owner, Insured, Insurer, and Beneficiary
In addition to the financial components of life insurance policy, there are other entities that also play a role. These are the policy owner, the insured, the insurance company, and the policy beneficiary.
The owner of a life insurance policy is the person or entity that has the rights that are stipulated in the actual life insurance policy contract. These rights include the right to receive policy dividends (if applicable), the right to name a beneficiary, the right to surrender the policy for its cash value (if applicable), and even the right to transfer ownership of the policy.
The insured is who the actual policy is effective upon. Likewise, the insurance company is the entity upon which the responsibility of paying benefits will fall if a qualifying event occurs while the policy is in force. Do know that you can be the insured and the owner, the two however do not have to be the same person.
The beneficiary is the person or entity that is named in the policy who has the right to receive the death benefit proceeds if the insured should pass away while the policy is in force. Beneficiaries do not always have to be people, as they could also be a trust, an estate, or a business entity. To know how to choose your life insurance policy beneficiary, visit this page.
Naming the beneficiary is one of the most important decisions that you’ll make for your life insurance application. It’s the way that you will ensure that the correct person gets the life insurance plan. After you’ve bought your plan, be sure to update the beneficiary if there is any significant changes in your family.
Calculating Your Life Insurance Needs
Another key detail that you should understand about life insurance is the size of plan that you’ll need to buy. When you’re looking to get coverage, there are several different factors that you’ll need to account for to ensure that your loved ones have the money that they need.
Two main issues to be concerned about as you figure out the total cover you need to buy are the debts you owe and the income you bring in. The other factor is your annual income, which they would no longer have. If you have the right amount of insurance protection, your family will have the money that they need to pay off those debts and replace your paycheck and not have to worry about finances.
If you’re having problems deciding how much life insurance you should buy, there are plenty of calculator tools you can use which will walk you through the process. The other option is to contact one of our agents, we can ask you several sets of questions which will give you a rough idea of how much protection you should buy.
Getting Affordable Life Insurance Coverage
Don’t allow the thoughts of over-priced policies and high premiums fill your head and cause you to stop looking for cheap life insurance rates. No matter what health situation you are going through there are ways to know that you’re getting the cheapest rates available. Making a few alterations could help you save thousands on your life insurance plan.
Your age is going to play a major role in how much you play for your life insurance. The older that you are, the higher risk you are for the insurance company, which means you’ll pay more for your life insurance. If you want to get the lowest premiums, don’t wait any longer to get life insurance protection.
We also recommend that it is time to stop smoking or using any tobacco products. We understand this will be a tough task for some, and most companies want you to go without for a year before they will deem you as “non tobacco” on the application, but it really will save you money. Over the last several years we’ve seen insurance carriers quote a tobacco user more than double what the standard non-tobacco user will be quoted.
The simplest option for getting the most bang for your buck out of a life insurance policy is to work with independent agents. Since we are not tied to one specific carrier we can show you rates from excellent companies across the nation.
No life insurance company is the same, even carriers that are tied to multiple companies. They all have specific goals in mind when they decide whether or not to issue a policy. In fact, you could get drastically different rates depending on the company. Instead of wasting hours and hours on the phone talking to the agents yourself, let us do all of the work for you.
We are not your traditional insurance agency. We aren’t connected to one specific company, we work with dozens of excellent companies. We can bring a whole set of quotes instead of just one. It’s our goal to make the life insurance process as simple for you as possible.
Life Insurance and Its Components
Life insurance is the best investment to make sure your family is provided for after your time on Earth is over. Other investments or accounts could always be accessed or drop in value, but the policy you will soon buy holds its protection over time. Because you never what life is going to throw at you, it’s time to get the application started!
Our agency exists to make the life insurance process easy and simple. If we can help you make your decision we’d love to hear from you and further explore the opportunities we can provide to get you in a life insurance plan that exceeds the coverage you wanted and under budget!