by Oscar R. Mondragon
How Does Life Insurance Work?
You must have thought about buying life insurance quite a few times in the past, but now with the pandemic and the newfound perspective, it is natural to give the prospect a bit more thought. The purpose of life insurance policies is to help you set up a ‘shield’ for your family, protecting them from financial burden.
This protection comes into play immediately after your death so that your family can pay off any debts, bills, or more as and when need be. For long-term financial protection, you can also look into other options. In this article, we will look into life insurance in depth, specifically how life insurance works.
But First, What Is Life Insurance?
Life insurance is just like any other insurance plan where you have a contract between yourself and an insurance company. You will make regular premium payments to the company and in case anything happens to you, the insurance company will pay a sum to beneficiaries.
The money is theirs to do with as they please – be it reinvesting, paying bills, or even buying a car!
There are two main types of life insurance; term life and permanent life insurance.
Term Life Insurance
This is the most affordable (and therefore popular) type of life insurance; term life insurance is the most popular type of life insurance sold (71% of purchasers) according to the Insurance Barometer Report. These insurance plans are active for a set amount of time, for which you pay a premium. These policies may span anywhere between 10 and 30 years.
Upon your death, beneficiaries will get the amount payable under the policy, tax-free. If, however, you outlast the coverage, you may be able to renew your plan at a higher rate. This higher rate may be based on your new age and new health conditions – that’s why it’s important to stay healthy.
Permanent Life Insurance
Permanent life insurance policies are more expensive, but typically last throughout your life and build cash value. This type of insurance can act as savings allowing you to take loans against your policy or withdrawing funds for any reason. Ending the agreement early may mean you have to pay a surrender charge, and sometimes these can be hefty.
Best Practices for Choosing Life Insurance Coverage Amount
Most financial advisors recommend that when choosing a life insurance coverage amount, two things to consider include the total expenses you want to cover for your family and subtract the amount your family can get from other sources, such as savings.
We recommend not considering your retirement savings in the latter concern – it may come in handy for any unseen expenses.
The thing about life insurance is that claims are much quicker – even more so than the money you leave behind in your will. Life insurance companies won’t contact your loved ones; they’ll have to call and inform of your death. The beneficiary will need a certified copy of the death certificate and to have done all the necessary paperwork.
Despite rumors, your family doesn’t need the original life insurance policy for their claim. A simple phone call is enough to imitate the claim.
After you pass away, your family may have a lot on their plate and might be overwhelmed by all the moving parts associated with death and processing such claims. That is why you may need a third-party involved who can keep their head in times like these. Centric can help you in that regard. Whether you simply need advice on your financial planning or simply need someone to keep an eye on your finances for your family after you’re gone, call us to see how we can help!