Life Insurance: A Complete Guide

According to the 2020 Insurance Barometer Report from industry groups LIMRA and Life Happen, over 40 million people in the US need life insurance, but they don’t have it. This…

July 18, 2022

Written by Justin Sloan

According to the 2020 Insurance Barometer Report from industry groups LIMRA and Life Happen, over 40 million people in the US need life insurance, but they don’t have it. This can be attributed to the tendency of people to overestimate its cost. Perceptions about its affordability and value deter people from buying the insurance even though they know they need it.

More than half of the respondents in the Insurance Barometer Report said a significant discrepancy in the perceived cost versus operational cost. For this reason, it’s essential for everyone to learn the basics of life insurance to help them make an informed decision. Just as car or event insurance is important, so is life-insurance. Whether you’re looking for your first policy or updating an existing one, you’re sure to find this information helpful. 

What is Life-Insurance?

Like any other type of insurance, life-insurance is a contract between an insurance company or insurer and an insurance policyholder. In this type of insurance, the insurer promises to pay a lump sum, commonly referred to as death benefit, to a designated beneficiary upon the insured person’s death in exchange for premiums paid by the policyholder.

The strength of the life-insurance policy is highly dependent on the insurance company’s financial stability. The insured must pay regular premiums overtime or a single premium upfront for the insurance policy to remain in force. Upon the insured’s death, the named beneficiaries will receive the death benefit or the policy face value. The beneficiaries can then use the money for whatever purpose they choose, including paying the mortgage, college fees, and other bills. Life-insurance ensures the safety of your family.

How Does Life-Insurance Work

Life-insurance works like any other insurance contract like car and fire. It’s a contract between an insurance company, the insurer, and the insured, the policyholder. In this type of insurance, the insured pays premiums. In exchange for these premiums, the insurance company promises to pay a lump sum amount to the named beneficiary upon the policyholder’s death.

The most popular type of life-insurance is term life which only lasts for a given term. The beneficiaries will only receive the death benefit if the insured passes away within that period. If the insured outlives the specified time, the best option is to renew the contract. Permanent life-insurance is another type of life-insurance that lasts for the policyholder’s entire life. As long as the insured pays the premium, it can accumulate cash over time.

Types of Life Insurance

Life-insurance isn’t a one size fits all type of contract. There are different types of life-insurance to meet all sorts of individual preferences and needs. The major types are term and permanent life-insurance, which you can choose depending on your short or long term needs.

Term Life Insurance

According to the Insurance Barometer Report, term life-insurance has over 71% of purchasers and, therefore, the most popular type. It’s also the most affordable type, which may be the main reason behind its popularity.

As the name suggests, this type of insurance covers the insured for a set term. It provides coverage for a particular term period with the available choices being 10, 15, 20, 25, or 30 years. The policy ends when the period expires. The death benefit is only paid to the beneficiaries if the insured’s death occurs during that specific period.

If the insured outlives the policy period, there’s an option of guaranteed renewability which allows you to renew the policy in yearly increments. In other words, the renewal for each year will be at a higher rate. This type of life insurance is further divided into:

  • Decreasing term life-insurance
  • Convertible term life-insurance
  • Renewable term life-insurance

Permanent Life Insurance

As the name suggests, permanent life insurance provides lifelong coverage. It stays in force for the insured’s entire life unless one surrenders the policy or defaults on premium payments. It’s more expensive than term life-insurance because it usually builds cash value and lasts for one’s life.

The cash value component accumulated on a deferred tax basis over the policy’s life acts as the policy’s saving portion. This means you can typically make a withdrawal or borrow against the cash value. You can also get cash value minus surrender charges if you decide to end the policy. In some policies, the cash value builds up slowly over several years.

Some varieties of permanent life-insurance include:

Whole Life-Insurance:

In addition to paying a death benefit, it contains a savings component if the cash value accumulates. The policyholder can use the cash value to pay policy premiums or as a loan source. Many insurance policies under this category pay out dividends which can add to your cash value or reduce premium payments.

Universal Life-Insurance:

It’s more flexible than whole life-insurance with a cash value component that earns interest. The premiums are flexible, and unlike whole life, the policyholder can adjust premium payments and death benefits over time but within given limits. This category includes two policy types that are indexed and variable universal life-insurance policies. The cash value build-up will depend on the type of policy.

Survivorship Life-Insurance:

It ensures two people under one policy, usually a married couple, and is also known as the second to die life-insurance. The policy pays the death benefit to the named beneficiaries upon the death of both spouses.

Burial Insurance:

This is a small whole life policy that is only designed to cover funeral expenses and final costs. It’s usually between $5,000 and $25,000.

Who Needs Life-Insurance?

Life-insurance offers financial support to the insured’s beneficiaries upon death. It’s helpful for people who want to provide security to their family members in the event of their passing on.

Here are examples of people who may need life-insurance:

  • Parents with minor children
  • Stay-at-home spouses
  • Business owners
  • High net worth individuals
  • Families who can’t afford burial and funeral expenses
  • Student loan co-signers
  • Married pensioners
  • Parents with special-needs adult children.
  • Single adults starting out
  • Adults who own property together.
  • Homeowner
  • Wealthy families who expect to owe estate taxes.
  • Children or young adults who want to lock in low rates

Benefits of Life-Insurance

Life-insurance has many benefits. Here are the top 5.

The Death Benefits are Tax-free

The payouts are paid as a lump sum, and since they aren’t considered beneficiaries’ income, they aren’t subject to federal income taxes.

Funeral Expenses and Other Final Costs

For families who can’t afford burial and funeral expenses, the burial policy can help them. Such expenses are often significant and can be avoided with this policy.

Family Financial Support

Your beneficiaries can use the death benefits, including paying bills, mortgages, and even college fees. 

The Policies Can Supplement your Retirement Saving

In addition to death benefits, permanent life-insurance has a cash value addition that accumulates over many years. This can increase other savings upon retirement.

Coverage For Terminal and Chronic Illnesses

Many companies offer endorsements known as riders which can be added to adjust or enhance the coverage. Some of these riders allow access to your death benefit under certain circumstances, such as when you’re diagnosed with a terminal illness andand expected to live less than a year.

What Affects the Cost of Your Life-Insurance?

The cost of life-insurance varies depending on various factors. However, the most significant factor affecting life-insurance cost is the type of policy selected. Some policies like permanent life-insurance are more expensive than others like term life-insurance.

Some of these common factors include the following:

  • Age: The younger you are, the less you pay for insurance because your chances of dying are smaller.
  • Sex: Males pay more than women because, according to the National Center for Health Statistics, the life expectancy of females is 5 years longer than that of males. However, in some places like Montana, companies offer gender-neutral policies.
  • Lifestyle: You should expect to pay high insurance rates if your occupation and hobbies are considered dangerous.
  • Health: This is a significant determinant of your life insurance rates. The insurer will calculate your life expectancy by reviewing your past and current medical records. This information will then be used to determine the rates of payments.
  • Family medical history: Your family’s medical history will be reviewed to calculate the possibility of you developing certain hereditary diseases.

Nesso Insurance – We Make The Complex Simple

With many life insurance companies today offering different life insurance policies, it’s challenging to decide which provider and which policies to buy. The only way you can make an informed decision that you won’t regret in future is by researching the policy options and company reviews. However, at Nesso Insurance, we make the insurance experience enjoyable. We understand that many available options may confuse you, so we’re here to simplify the process and make everything clear for our clients.

At Nesso Group, we’re dedicated to guiding individuals, families, and business owners to make well-informed decisions with regards to insurance services. We gather all the necessary information to assess the risks involved, identify any gaps in your coverage, and present the best option that suits your needs and preferences.

We guide multi-dimensional areas of expertise for individuals and businesses. We work well together with your interest in mind to provide the best solution that’s right for you. Contact us today and let’s talk about what’s important to you.

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