Understanding Life Insurance

Life insurance, often misunderstood, is an essential financial tool that offers a safety net for your loved ones in case of your untimely passing. In this article, we’ll break down what life insurance is, how it works, and the types available, leading you step-by-step through the process of purchasing a policy.


What is Life Insurance?

Life Insurance is a legally binding contract between you (the policyholder) and an insurance company. In exchange for regular monthly payments, the insurer promises to pay a predetermined amount of money, known as the death benefit, to your named beneficiaries upon your death.

Before we dig in, here are some key points to remember:

  1. Life insurance is an agreement that ensures financial protection to beneficiaries upon the policyholder’s death.
  2. Regular payments are required to keep the policy active.
  3. The death benefit is paid to the policy’s named beneficiaries.
  4. Policies can be term (expire after a set number of years) or permanent (remain active until the policyholder’s death, premium cessation, or policy surrender).
  5. The financial strength of the issuing insurance company determines the dependability of a life insurance policy.

Types of Life Insurance

Life insurance policies cater to a wide array of needs and circumstances. The choice between temporary or permanent life insurance is crucial, depending on the short- or long-term needs of the individual to be insured.


Term Life Insurance

Term life insurance is a temporary policy designed to last for a specific number of years (commonly 10, 20, or 30 years), after which it ends. If you pass away during the term of the policy, your beneficiaries receive the death benefit. If you survive the term, the policy simply expires unless it is renewed or converted into a permanent policy.

Forms of Term Life Insurance

Decreasing Term Life Insurance: The coverage decreases over the policy’s lifespan at a predetermined rate.

Convertible Term Life Insurance: Allows policyholders to convert a term policy into a permanent one.

Renewable Term Life Insurance: Offers a quote for the year the policy is purchased, with premiums increasing annually.


Permanent Life Insurance

Unlike term life insurance, permanent life insurance offers lifelong coverage, as long as the premiums are paid or the policy isn’t surrendered. It is generally more expensive than term life insurance due to its cash value component.

Forms of Permanent Life Insurance

Whole Life Insurance: A type of permanent life insurance accumulating a cash value to last the insured person’s lifetime.

Universal Life Insurance (UL): A permanent policy with a flexible premium, a cash value component earning interest.

Indexed Universal Life (IUL): A universal life variation that lets the policyholder earn a fixed or equity-indexed rate of return on the cash value.

Variable Universal Life (VUL): Allows policyholders to invest the policy’s cash value in a separate account.

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Deciding Between Term and Permanent Life Insurance

Term life insurance is generally much cheaper than permanent life, making it a popular choice for most individuals seeking affordable coverage. However, the choice between term and permanent life insurance ultimately boils down to your specific financial situation, coverage needs duration, and budget.


How to Buy Life Insurance

1: Determine the Coverage Amount: Start by evaluating your financial situation and determining how much money would be required to maintain your beneficiaries’ standard of living or meet the purpose for which you’re buying the policy.

2: Know Your Personal Information: Life insurance applications generally require personal and family medical history, beneficiary information, and in some cases, a medical exam.

3: Compare Policy Quotes: Once you’ve gathered all the necessary information, compare life insurance quotes from different providers. Prices can vary significantly between companies, so it’s essential to find the best combination of policy, company rating, and premium cost. Using an unbiased, independent broker like Leverage can simplify this process greatly. A broker can shop your options at multiple companies and provide expert advice.  

Benefits of Life Insurance

Life insurance offers numerous benefits, including providing financial support to surviving dependents, paying off debts, covering funeral expenses, and more. Moreover, for wealthy individuals, the tax advantages of life insurance can provide additional strategic opportunities.

The death benefit of a life insurance policy is usually tax-free. The tax-free death benefit allows wealthy individuals to use permanent life insurance within a trust to pay estate taxes, thereby preserving the value of the estate for their heirs.


Who Needs Life Insurance?

Life insurance is most beneficial for individuals whose death would cause financial hardship to their dependents. This group includes parents with minor or special-needs adult children, adults who own property together, seniors looking to leave money to adult children, young adults who want to lock in low rates, and businesses with key employees, among others.

Considerations Before Buying Life Insurance

Before you purchase life insurance, it’s crucial to conduct thorough research on policy options and company reviews. Consider how much death benefit you need, why you’re buying life insurance, and whether investing the money that would be paid in premiums elsewhere could earn a better return over time.

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Life Insurance Riders and Policy Changes

Insurance companies offer policyholders the ability to customize their policies, in order to meet their specific needs. Riders are the most common way policyholders can modify or enhance their coverage. The availability of riders depends on the provider, but here is a list of some of the most common ones:

Accelerated Death Benefit Rider (ADB): This rider allows the policyholder to receive a portion of the death benefit before they pass away if they are diagnosed with a terminal illness. It can help cover medical expenses or improve the policyholder’s quality of life in their final days.

Waiver of Premium Rider: If the policyholder becomes disabled and unable to work, this rider waives the premium payments for the life insurance policy. It ensures that the policy remains in force even if the policyholder can’t pay the premiums due to disability.

Child Term Rider: This rider provides a small amount of life insurance coverage for the policyholder’s children. It is usually added at a relatively low cost and can help cover funeral expenses or other unexpected costs if a child were to pass away.

Spouse Term Rider: Similar to the child term rider, this provides life insurance coverage for the policyholder’s spouse. It can help cover funeral expenses or other financial obligations in the event of the spouse’s death.

Guaranteed Insurability Rider: This rider allows the policyholder to purchase additional life insurance coverage at specified future dates without the need for a medical exam or proving insurability. It’s useful for increasing coverage as the policyholder’s needs change, such as after getting married or having children.

Accidental Death Benefit Rider: If the insured dies due to an accident, this rider pays out an additional benefit on top of the policy’s death benefit. It provides extra financial protection in the event of accidental death.

Qualifying for Life Insurance

Insurers evaluate each applicant on a case-by-case basis. Most anyone can find an affordable policy that at least partially covers their needs. Age, health, and lifestyle choices significantly impact life insurance premiums, so buying life insurance as soon as you need it is often the best course of action.

Key Takeaways

Life insurance provides a safety net for your loved ones and peace of mind for you. Thus, it’s crucial to understand the nuances of life insurance and make an informed decision when purchasing a policy. Working with a broker like Leverage can greatly simplify your search for the right life insurance. Let our experts find the best policy for you at the best rate. 

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Last updated December 12, 2023

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