Life Insurance 101: Everything You Need to Know

Did you know that September is life insurance awareness month? Have you taken life insurance? If not, it’s high time you consider taking some form of life insurance as it could benefit your family down the line.

Some people assume that they can’t afford life insurance, but no matter your income level, you can afford to spare a few dollars to secure your family’s future.

Furthermore, you will be comfortable knowing that your family is catered for in case of anything, like passing on. 

Life insurance helps fill many voids in case of the death of a loved one, but you must work with a trusted financial advisor. This ensures that you understand how life insurance works and which is the best option for your need.

And since we are in the month of life insurance awareness, you should take advantage of the resources available to secure a better deal.

What is Life Insurance?

Life insurance is an agreement made between the insurance company and the policy owner. The insurer commits to pay a certain amount of money to the beneficiaries of the policy owner when they die.

And in exchange, the policyholder pays the insurance company premiums during their lifetime. 

The applicant must disclose your past and current health records for the agreement to be in effect.

Types of Life Insurance

There are two types of life insurance

1. Term life insurance policy

This a life insurance policy that lasts for several years, such as 10 or 25 years before ending, and there are three policies to choose from: 

• Decreasing term life insurance policy:

The level of the cover decreases over the life of the policy. It is best paired with mortgage repayments because the outstanding debts reduce as time goes by.

• Convertible term life insurance:

It allows policyholders to convert their term life insurance into permanent insurance.

• Level-term life insurance:

It pays out a lump sum amount if the policyholder dies within the policy’s life. The cover stays the same over, and it is considered the most straightforward and most affordable option.

2. Whole life insurance policy

This life insurance policy provides you with lifelong coverage. Compared to term life insurance, whole life insurance is more expensive, and it lasts your entire life and helps your money grow in value.

The three types of whole life insurance policies include:

• Universal life:

Is an insurance policy that earns interest and offers flexible premiums that can be adjusted to adopt a level or increase the death benefit.

• Variable universal life:

With this, the policyholder can invest the policy’s cash value in an available separate account. It also has flexible premiums and can adopt level or increase death benefits.

• Traditional whole life:

the death benefits and the premiums stay the same over the policy’s life. If the premiums are increased, the older generation will have difficulty keeping up with the payments.

That is why many insurers keep changing the premium in the early years and invest the money for the policyholder to help them pay the premium in their later years.

What are the Benefits of Life Insurance?

• Protects your loved ones

If you are the sole breadwinner in your family, you will live better knowing that your family is well protected if something happens to you, such as death. Actually, this is the reason most people take out a life insurance policy.

This is especially essential if you have young children, and your partner would have a challenging time meeting their needs.

Therefore, ensure that the payout will be enough to help them cover all their daily expenses and everything else you feel that your family might need.

• Acts as an inheritance

If you want to leave an inheritance to your family, you can consider purchasing a life insurance policy since it’s payable upon your passing.

Although people advise creating generational wealth, taking out a life insurance policy would also be a great way to set up a trust fund for your kids.

But make sure to name the beneficiaries on your policy to avoid family conflicts and that the right person receives the money.

• It helps pay off debts and other expenses

It will help your family pay off outstanding loans such as a mortgage, auto loans, and credit cards. It will also help in catering for your funeral expenses.

Or you can also take out burial insurance that caters to everything regarding your funeral, from logistics, catering, and burial expenses. This significantly reduces the financial burden on your family.

Read Also: How to get out of debt fast

• It gives you peace of mind

Nobody knows when death will knock on your doors, as you may be healthy today and dead tomorrow.

Although no amount of money can bring back a dead, it would make you live peacefully knowing that in the event of your death, your family will be catered to with your life insurance payout.

This way, you will not live wondering what would happen to your family.

• Provides financial security

We all want our children to live a good life even after we have passed on, and what better way than leaving them with a nest egg in the form of a life insurance payout.

This will help them start businesses or explores their passions without having to worry about money.

• The payouts are not taxable

The payout from a life insurance policy is usually tax-free. That’s you find wealthy people buying permanent life insurance within a trust to help them pay estate taxes upon their demise. This helps in preserving the actual value of the estate for the beneficiaries. 

You may wonder, isn’t it illegal to avoid paying tax? However, you must distinguish between tax evasion, which is unlawful, and tax avoidance, a strategy people use to minimize their tax liability.

How Much Life Insurance Do You Need?

Most people buy life insurance to secure the future of their loved ones, especially if they are the sole breadwinner.

So, before purchasing any life insurance, you should audit your financial situation and determine how much money would be sufficient to sustain the needs of your loved ones. 

For instance, if your children are still young, you’d want to take out a cover that will cater to their needs till they are all grown.

You should also factor in any debts that you may be having and retirement needs for your spouse.

However, you should know that the cost of life insurance premiums is affected by many factors, such as:

• Age
• Gender
• Health
• Lifestyle habits 
• Smoking
• Medical history 
• Policy duration
• Occupation
• Driving record