Life insurance is one of the most important types of policies that we use to protect our clients, but it is not always revered as such. The vast majority of us understand how important it is to insure our homes, our cars, or our businesses; however, do we really understand how important it is to insure the financial security of our loved ones? The misconceptions of life insurance being not as important or more expensive than other insurance policies are often rooted in a misunderstanding of how life insurance actually works.
Life insurance is a way for you to protect your loved ones financially when you are no longer able to protect them physically. If you have family members that are dependent upon your income to function, then life insurance should not be a consideration but a necessity. In simple terms, life insurance is essentially a deal that you make with your insurance company of choice. Your side of the deal is simply agreeing to pay your premium as often as your policy requires. The insurance company then agrees to pay a death benefit of an agreed upon amount to your chosen beneficiaries (your financial dependents). This money can ultimately be the deciding factor in what happens to your family after you pass on. Whether or not they can pay the bills, remain in the home you built together, pay funeral expenses, get out of debt or even afford education moving forward can be decided by your life insurance choices made while you’re here.
There are three main types of life insurance that are important to understand in trying to gain insight on how life insurance works.
#1. Term Life Insurance
- Term life insurance provides protection for a specified period of time. If you do not currently have life insurance, term can be a good place to start. It’s generally less expensive than permanent (whole) life insurance, and is available in varying time periods with fixed premiums from a one year (annual renewable term) to 20-year (level term) period. Furthermore, term life insurance is sometimes convertible to permanent coverage, providing you with flexibility as your needs change.
#2. Whole Life Insurance
- Whole life insurance is a form of permanent life insurance that remains in force for your entire lifetime, provided premiums are paid as specified in the policy. Whole life insurance can be an investment opportunity, as many whole life insurance policies also build cash value over time.
#3 Universal Life Insurance
- Universal life is a form of permanent life insurance characterized by its flexible premiums, face amounts and unbundled pricing structure. Universal life can build cash value, which earns an interest rate that may adjust periodically, but is usually guaranteed not to fall below a certain percentage.
Life insurance is not overly complicated nor is it overly expensive. The more we seek to understand things we do not fully know, the more our misconceptions seem to fail us.