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How does life insurance work?

With life insurance, or any insurance for that matter, you are essentially renting access to the insurance company’s money.  You pay a monthly premium, and if you were to pass away, the insurer pays your beneficiary a lump sum.

Benefits of life insurance

Most of us do not have enough money set aside to ensure our loved ones would be able to continue their current lifestyle if we were to pass away. That is where life insurance comes in. It can help pay for expenses your family might struggle to afford, such as housing, tuition, debt payments, and funeral expenses. Life insurance can also include an investment component.

What kind of life insurance is there?

There are two varieties of life insurance; term and permanent. Which you select depends upon your budget (term is less expensive), how long you need coverage, and whether you are interested in the investment component included with a permanent policy.

Term life insurance

With term insurance, premiums are guaranteed to remain unchanged for the term you select, whether that be 10, 20 or 30 years, for example. Once the term expires, premiums will increase annually. At that time, you will have the option to apply for a new policy. There is more security in longer terms, as there are no guarantees that you will be able to qualify for an affordable policy in the future. Term policies tend to be more affordable than permanent.

Permanent life insurance

Permanent life insurance will stay in force as long as the premium is paid. There are many different permanent life insurance plans available. Examples are whole life, universal life, and variable universal life. Most have an investment component. A portion of the premium pays the cost of the life insurance benefit, and a portion goes into an accumulation account that, if funded properly, grows over time. You can take withdrawals or loans from the accumulation account, and can skip payments if the accumulation account can support the cost of the benefit. The portion of your premium directed toward the benefit increases with age. One benefit with Permanent Life is that the benefit can increase over time to keep up with inflation.

How much does life insurance cost?

Life insurance premiums can vary depending on the type of policy (permanent or term), the length of the term (longer terms are more expensive), the benefit, age, health, and lifestyle.  Premiums start as low as $10 per month.

How much coverage should I carry?

The first step is determining a benefit.  Here are a few options:

  • Benefit equals debt (including mortgage). This would leave your beneficiary debt-free.
  • Benefit is 5 to 10 times annual income. This is a guideline many experts recommend.

We always recommend applying for the largest benefit and longest term that you may want. Once you complete the application process, underwriting will provide a final rating, and at that time you can decrease the benefit or term to fit your budget. Keep in mind that although you can decrease the benefit or term, you cannot always increase.

How do I apply for life insurance?

The first step is to complete life insurance application. Depending on age, health, and benefit underwriting may or may not require an exam. The exam is no cost to you, and usually performed at your home. Once you receive a final rating, you can accept the policy, adjust the policy to adjust the premium, or decline the policy. There is no financial obligation to apply.

Is the policy through my employer enough?

Most view employer-provided life insurance as bonus coverage, not as a replacement for a traditional life policy. Benefits are usually small, and may not be sufficient to ensure your family can continue their current lifestyle. Also, there are usually no guarantees that you can keep employer-provided coverage, and if you lose it you could find yourself in a situation where you cannot obtain affordable life insurance due to an unexpected health condition. Imagine losing your job due to a terminal illness, and losing important life insurance as well. Keep in mind that a term life policy can be kept for whatever term you select (10, 20, 30 years) at a premium that is guaranteed to remain the same.

Life insurance alternatives

The alternative to life insurance is to self-insure. That means setting aside enough money that your loved ones would be able to continue their current lifestyle if the breadwinner(s) were to pass away.

Contact Chris Elliott Insurance Agency!

We offer both permanent policies and term policies with affordable rates through a reputable insurer. One important benefit we offer at no additional charge is a convertibility option, which acts as a safety net of sorts. It allows you to convert to a permanent policy, which is helpful if you want to maintain life insurance when your current term expires but you cannot qualify for another policy. Contact us today for a life insurance quote!