Contrary to its name, life insurance is actually death insurance. It will cover your loved ones financially, with an agreed sum of money, in the event of your death. This coverage can provide a safety net for your family, ensuring they have the necessary funds to cover bills, debts, funeral costs and living expenses.
When you sign up for life insurance, you will designate a beneficiary, a term length for the insurance (which can include the rest of your life) and the amount of the payout. If you die, the life insurance coverage will deliver a payout to your designated beneficiary.
A life insurance policy requires you to pay a small monthly premium. If you buy term life insurance, you will pay a premium for a set number of years, usually up to 30. If you purchase whole life insurance, you will need to pay premiums for the rest of your life to receive a payout.
There are two main types of life insurance: term life and whole life. Typically, term life insurance costs less and offers more flexibility in coverage options. Whole life insurance tends to cost more and requires a medical exam, but it will cover the policyholder for their entire life.
“Term life insurance is like your auto or home insurance — it only pays out if there is a claim made,” said Keith Hawsey, principal agent at Hawsey Insurance Group.
“Term life insurance does not offer any value other than the death benefit. Many people would like to have a policy that they could get more benefits from while living, so carriers have developed ‘term life with living benefits’ that will pay out a portion of the benefit before dying when there is a loss of activities of daily living: eating, bathing, dressing, eating, transferring, toileting and cognitive impairment.”
Additionally, term life insurance has age restrictions, with many companies limiting coverage for those 65 years or older. You can choose a 10-, 20- or 30-year term, and once that term is up, you might be able to take out another policy at a higher cost.
“Whole life insurance is a type of permanent life insurance that allows the policyholder to accrue a cash value in a tax-deferred account,” said Kate Long, consumer financial wellness advocate at Assurance.
“Whole life insurance can be a good fit for risk-averse consumers who know they will have lifelong dependents, such as a child with a disability, because they protect your money with little risk and provide coverage for your entire life.”
ConsumerAffairs is not a licensed insurance agency and does not sell insurance.
