Life Insurance
What You Need to Know
Understanding how life insurance works and how to shop for a policy can help you find the best coverage to meet your family's needs.
Life insurance is a contract between an insurance company and a policy owner in which the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies. In exchange, the policyholder pays premiums to the insurer during their lifetime. The best life insurance companies have good financial strength, a low number of customer complaints, high customer satisfaction, several policy types available, optional riders, and easy application processes.
Which Makes Sense for You: Permanent or Term Life Insurance?
In a very broad sense, there are two types of life insurance:
permanent life insurance and term life insurance.
Permanent life insurance is a type of life insurance that can stay in force for your entire life, as long as you pay your premiums in full. Permanent life insurance usually, but not always, builds cash value for you that you can use for expenses later in life.
On the other hand, term life insurance is only in force for a specified amount of time: usually 10, 15, 20 or 30 years. At the end of the term, your coverage expires and you will need to either convert your policy to a permanent life insurance plan (if available) or purchase a new policy for a new term. The advantage of term life insurance is that it's somewhat less expensive than permanent life insurance.
Types of Life Insurance
Many different types of life insurance are available to meet all sorts of consumer needs and preferences. Depending on the short- or long-term needs of the person to be insured (or their family members), the choice of whether to select temporary or permanent life insurance will be a major consideration.
Permanent Life Insurance
Permanent life insurance is more expensive than term, but it stays in force throughout the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. Some policies allow for automatic premium loans when a premium payment is overdue.
Whole life insurance is one type of permanent life insurance where the premium and death benefit generally remain the same each year. It includes a cash value component, which is similar to a savings account. Cash-value life insurance allows the policyholder to use the cash value for many purposes, such as to take out loans or to pay policy premiums.
Term life insurance provides affordable coverage for a specified period, offering financial protection to beneficiaries in the event of the policyholder's untimely passing. It is an ideal choice for those seeking peace of mind during critical life stages, such as raising children or paying off a mortgage.
What Affects Your Life Insurance Premiums and Costs?
Many factors can affect the cost of life insurance premiums. Certain things may be beyond your control, but other criteria can be managed to potentially bring down the cost before (and even after) applying. Your health and age are the most important factors that determine cost, so buying life insurance sooner rather than later is often the best course of action.
After being approved for an insurance policy, if your health improves later and you’ve made positive lifestyle changes, you can ask to be considered for a change in risk class. Even if it is found that you’re in poorer health than at the initial underwriting, your premiums will not go up. If you’re found to be in better health, then your premiums may decrease. You may also be able to buy additional coverage at a lower rate than you initially did.
Frequently Asked Questions
What is Medicare, and who is eligible for it?
Medicare is a federal health insurance program primarily for individuals aged 65 or older, but it also covers certain younger people with disabilities or those with End-Stage Renal Disease (ESRD). Eligibility is based on age or specific qualifying conditions.
What is the difference between Medicare Part A and Part B?
Medicare Part A covers hospital stays, skilled nursing facilities, hospice care, and some home health services. Part B covers outpatient care, doctor's visits, preventive services, and medical supplies. Part A is often premium-free if you've paid Medicare taxes, while Part B has a monthly premium.
What is Medicare Advantage (Part C)?
Medicare Advantage (Part C) is an alternative to Original Medicare. It is offered by private insurance companies and includes all benefits of Part A and Part B, often with additional benefits like prescription drug coverage, dental, vision, and wellness programs. It typically comes with different out-of-pocket costs and provider networks.
What is the enrollment period for Medicare?
The Initial Enrollment Period (IEP) is a seven-month window that begins three months before your 65th birthday, includes your birthday month, and ends three months after. There is also an Annual Enrollment Period (AEP) from October 15 to December 7, during which you can make changes to your plan.
What happens if I don’t enroll in Medicare on time?
If you miss your Initial Enrollment Period, you may face late enrollment penalties. For example, for Part B, you could pay a 10% higher premium for every 12 months you were eligible but didn’t sign up, unless you qualify for a Special Enrollment Period due to circumstances like continuing employer coverage.
What is life insurance, and why do I need it?
Life insurance is a contract with an insurance company that provides a lump-sum payment to your beneficiaries after your death in exchange for premium payments. It's essential for providing financial support to your loved ones, covering debts, funeral costs, or replacing lost income.