What Is Life Insurance And How Does It Work?

On the surface, life insurance might seem simple; an insurance policy to protect your loved ones in the event of accidental death. But, when it comes down to getting a life insurance policy, it’s not as simple as it seems. There is term life insurance, whole life insurance, supplemental life insurance, and a seemingly endless list of different coverage levels, options, and policy types. Which life insurance is the best for you? Read on to sort through all the details

Term Life

Term life insurance is the most simple and easy to understand type of life insurance. It is like car insurance, but instead of for your car, it is for your life, and instead of car accidents, it covers your death. If you die during the “term” of the life insurance policy — that is, a period of time, the “term,” your loved ones will be paid a death benefit, which is the amount of money you pay for with your policy. You pay a monthly “premium” of tens or hundreds of dollars, and in return, if you die, your family will receive the death benefit, usually in the tens or hundreds of thousands of dollars. The older you are, the more expensive it is to get a term life policy; thus, it can be a good idea to get a policy when you are longer, covering a longer period of time. When the term of the policy is over, you don’t have any more coverage, and you will need to get a new term life policy, with a new, likely higher, monthly premium.

Whole Life

Whole life insurance can be a bit misleading and difficult to understand. Many insurance companies use term life insurance policies as vehicles to get people interested in a whole life policy, which is more of an investment tool than a traditional insurance policy might be thought of. With whole life, you pay a monthly premium for the rest of your life (your “whole” life), a premium which does not change. When you die, a benefit is paid out. In between, the amount of money you pay is partially inserted into an account of sorts, which increases in value with time. Many investment gurus argue against whole life policies, arguing instead for term life policies, and then investing your extra cash elsewhere, in the stock market, a high interest savings account, or mutual funds.

Other Kinds of Life Insurance

Beyond the two major kinds of life insurance, term and whole, there are a variety of other types of life insurance, many of which are just variations on the two primary kinds. Like whole life insurance, universal life insurance is a permanent, life-long life insurance choice. Universal life insurance may offer you the possibility to change your monthly premium, however, based off the value of your account. Another kind of life insurance is final expense insurance, which is basically another form of term life insurance, designed to cover the costs of your funeral if you die (hence, “final expense”).

In Conclusion

If you are primarily concerned with the best way to provide money to your loved ones in the event of an accidental death, term life insurance is probably your most simple option and best bet. If you are looking for ways to diversify your investment portfolio and have an abundance of extra money, a lifelong life-insurance policy might be an option to consider, once you have maxed out other traditional retirement options.

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