“You know what I mean right?”… Well actually, I don’t. How many times have you had a conversation only to walk away not really understanding what was said? Probably more times than any of us care to admit. We don’t ask questions because we don’t want to look dumb; especially when it comes to financial products and services. And while you can try to google during your conversation, we’re giving you the facts up front to give you the information you need in a way you understand.
Understanding what is being said is important. You know what I mean, right? What is Life Insurance?
Life insurance is insurance on your life. Yes, it’s that simple. It is a lot like insurance on your car. Just like the type of car and where you live play a part in how much your car insurance costs, your health, age and type of life insurance play a part in determining how much it costs.
Take-Away:
Life insurance is insurance on your life
Cost is based on your age, health, and the type of life insurance
How does it work? You pay the insurance company money (premium) and they pay a sum of money later. So when exactly does the insurance company pay? There can be a couple of different ways. One of the ways the policy can pay out is when you die. That may be bad for you but really, really good for your loved ones, right? While they are grieving and missing you, they can keep the lights on and Netflix streaming. There are also other ways life insurance policies pay benefits. Many policies today have riders on them (just like having towing or glass coverage added to your car insurance) that can help you if you become ill and depending on what kind of life insurance policy you have, it might be able to provide you with income in retirement. As with everything in life, there’s no free lunch. If you use rider benefits for an illness, it affects how much is left in the policy for benefits for your heirs or for you in retirement. However, it gives you financial options.
Take-Away: • Life insurance can financially provide for your family (or your business, or your legacy) if you die • Life insurance can provide benefits to you while you are alive.
Now what about those confusing terms?
Life insurance is a contract between an insurance company and the policy owner. The policy owner pays a premium (money) in return for a death benefit being paid out when the insured dies.
Policy Owner: the person, who owns the policy, is responsible for paying the premium and has control of the contract.
Insured: the person being covered by the insurance.
Death benefit: the money that is paid to the beneficiary of the life insurance policy.
Beneficiary: the person that receives the death benefit.
Underwriting: the process used by the insurance company to look at the individual who wants to be insured to determine what the premium should be. The health of the person is taken into consideration and in some cases, might require a physical. For example; a person who is a smoker may pay more in premiums than someone who doesn’t smoke because of the health risks associated with smoking.
Premium: the payment the owner of a life insurance policy makes to the insurance company to purchase the policy and keep it in place.
Term Life Insurance: life insurance that only guarantees a premium for a specified period of time, such as 1, 5, 10 or 20 years. At the end of the term, the premium increases, often significantly. It pays a death benefit if the insured dies while the policy is in force.
Permanent Life Insurance: life insurance lasts for the life of the insured as long as you pay your premiums, and it builds cash value. Watch this video to understand the difference between term and permanent life insurance.
Cash Value: the money available in the policy that would be paid out to the owner if the policy was cancelled before the insured dies.
Rider: these are extra options you can add to your policy to get additional protection. You may have to pay extra for some riders while others are added at no cost.
Surrender Charge: On permanent life insurance policies, there is a charge if you take out the cash value during the early years of the policy, so you should think of this as a long-term financial product.
Understanding what life insurance is and how it works is the first step. In our next post; we’ll cover how to figure out if you need life insurance and if so, how much.
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