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 policy holder 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.
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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 an insurance component that pays a stated amount of proceeds upon the death of the insured, while at the same time providing a cash value or investment component that accumulates cash value that the policy holder may withdraw or borrow against.
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 policy’s cash value component grows, and the policy begins to accumulate what is referred to as a cash surrender value. If the insured decides to cancel – or “surrender” – the policy, he or she would be able to receive the accumulated cash surrender value that has built up inside the policy.
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 the person whose death will cause the insurance company to pay the death benefit proceeds to the beneficiary. 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. It is important to note that the insured and the policy owner may be the same person – however, they do not have to be.
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 about 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. Not having enough life insurance coverage is one of the worst mistakes that you could make for your loved ones. 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.
The two biggest factors that are going to go into your life insurance needs are your debts and your salary. If you were to pass away, your family is going to be responsible for all of your debts and final expenses, which can easily equal hundreds of thousands of dollars, which can leave them in a giant pit of debt. 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
One of the most common reasons that people say that they don’t have life insurance is because they think it’s too expensive, but it most cases, that couldn’t be further from the truth. Regardless of your health or any pre-existing conditions that you have, there are a couple of different ways that you can confirm 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.
Next thing that you should do is remove tobacco in your life. If you’re a smoker on your life insurance plan, you can expect to pay much higher premiums for your life insurance plan. If you smoke cigarettes, you’re a much higher risk for a variety of different health complications, and the insurance company is going to offset that risk by charging you more every month for your coverage. If you want to get the most affordable life insurance plan, you’ll need to kick the cigarettes once and for all.
The best way to ensure that you’re getting the best insurance plan for your family is to work with an independent insurance agent. Unlike a traditional insurance agent, independent brokers work with dozens of excellent companies across the nation. That means that they can bring you quotes from several companies at once.
Every insurance company is different, which means that you could get drastically different rates depending on which company that you get the quote from. 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 that you’ll ever make for your loved ones. It’s one of the only ways that you can guarantee that your family has the money that they need, regardless of what happens tomorrow. Because you never know what’s life going to throw at you, you shouldn’t wait any longer to get the protection that your family will need.
If you have any questions about the different components of life insurance or about the different options available to you, please contact one of our agents today. We would love to answer those question for you, and help connect you with the best plan to meet your needs. We know that finding a quality and affordable plan can be a long and confusing process, but it doesn’t have to be. We are here to make it as easy as possible for you.