What is Life Insurance and How Does it Work?

Life insurance is essential, but what exactly is it, and why is it so important? Here at 210 Financial, we’ve created a comprehensive guide to possibly help you determine if life insurance is right for you. We will address some common questions and provide a deeper understanding of the inner workings of life insurance. Join us as we explore the critical aspects of life insurance and how it can  potentially benefit you and your loved ones.

What is life insurance?

Life insurance is a contract between an insurance company and a policyholder. The exchange is that the insurance company agrees to pay a sum to the named beneficiaries upon the policyholder’s passing.

In layman’s terms, it’s a way to protect your family and those who depend on you for financial support. If you pass unexpectedly, a life insurance policy can provide a large, income tax-free payout to help your loved ones carry on financially.

Learn More: Episode 21 of the our podcast discusses “Why you need to get serious about life insurance,” Listen now!

How does life insurance work?

Life insurance works by providing your beneficiaries with a death benefit payout when you die. Although, your loved ones might not receive the payout if you have not paid the required premiums while you’re alive.

Premiums are what the policyholder agrees to pay for the coverage. But some stipulations might apply:

• Age
• Gender
• Health and medical history
• Coverage amount you choose
• Types of life insurance (like term life vs whole life)

Essentially, the younger and healthier you are, the better your premium payments will be. However, it’s best to speak with a financial adviser who may help you secure the best coverage at an affordable price.

Meet with 210 Financial:  210 Retirement Blueprint Financial Review!

What is life insurance used for?

Life insurance payouts can serve various purposes, as determined by your beneficiary:

• Paying for living expenses
• Paying off credit card bills, medical bills, mortgages, or car loans
• Covering funeral costs
• Handling outstanding medical bills

The primary purpose of life insurance is to financially assist your loved ones when you pass away, but it can also include a living benefit. This feature allows you to access money from your death benefit in specific instances, such as:

• Terminal illness
• Chronic or critical illness

Taking the money out of your life insurance policy would essentially cover medical bills not covered by health insurance.

What are the pros? 

Life insurance doesn’t aim to benefit you. Instead, it focuses on helping your loved ones when you are gone. The benefits of the life insurance payout help your loved ones or your beneficiary financially. Knowing that those you love will be financially cared for is priceless.

Learn More: Supporting Your Loved Ones Even After You’re Gone

What are the cons?

One major disadvantage of life insurance is paying the premiums when you don’t receive the benefit. Another disadvantage includes the required premiums that determine what you pay and the type of coverage you will receive.

For example, being young and healthy typically results in lower life insurance payments, as age plays a significant role in determining the cost of premiums.

What are the main types of life insurance policies?

Term life insurance offers protection for a specific period and is usually the cheapest option, with no cash value. The premium payments remain constant for the policy’s duration, which can be 10, 15, 20, 25, or 30 years. After the policy expires, you can renew it annually at a higher rate through guaranteed renewability.

Whole life insurance, or permanent life insurance, provides lifetime coverage and builds cash value over time. Although it is generally more expensive than term life insurance, it offers additional benefits and long-term security.

Burial insurance is a whole-life policy designed to cover your future burial and other end-of-life expenses.

Survivorship life insurance is a type of joint policy that covers two people instead of one, offering the same characteristics and benefits as individual life insurance.

Universal life insurance is a type of whole life insurance that offers lifetime coverage and builds cash value. It allows you to adjust premiums and can be cheaper than traditional whole-life insurance. However, if your investments underperform, your cash value may decrease, and your premiums could increase.

Life insurance payout options:

Life insurance payments can be structured in several ways, determining the payments received. The specifics depend on the insurance company and the type of policy you choose.

• Lump sum payout: The entirety is paid all at once to the beneficiary.
• Retained asset account payout: Beneficiaries leave the payout with the insurance company so it can earn interest. They can then access the account whenever necessary.
• Life income payment: They can choose to convert the payout to an annuity to receive lifetime payments.

Each payout option is tailored to meet the specific financial needs of the beneficiary at the time of payout. It’s crucial to understand that each option serves a unique purpose and provides valuable assistance accordingly.

How to know if life insurance is right for me: 

Navigating whether life insurance is right for you can be challenging. Start by reading informative articles to help grasp life insurance fundamentals and key terms. Ready to discuss your personalized questions? Book a meeting with one of our advisors at 210 Financial today. Let’s discuss if life insurance is the right choice for you.

 

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210 Wealth Management, Inc., d/b/a 210 Financial, is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. 210 Financial, Form ADV Part 2A & CRS can be obtained by visiting: https://adviserinfo.sec.gov and search for our firm name.  Insurance products are offered through 210 Financial, Inc. d/b/a 210 Financial.