Life insurance is a type of insurance that pays a predetermined amount of money to a person’s heirs once the policyholder passes away. There are different types of life insurance policies and many providers, and each type has several forms of specialty coverage. Here is what you need to know about life insurance, how it works, what affects the costs, and how to buy it.

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Types of life insurance

Generally speaking, there are two types of life insurance: term life and permanent life insurance.  Term life insurance lasts for a predetermined length of time, also known as the term of the policy. Term life insurance policies typically last 10, 20, or 30 years and expire at the end of the period.

Permanent life insurance is in effect for the policyholder’s entire life as long as they continue to pay their premiums. Since permanent life insurance coverage doesn’t end, it tends to be more expensive than term life insurance.

How does life insurance work?

Life insurance has three key components: the premium, the death benefit, and the cash value (for permanent policies). 

The premium is the amount you pay each month or year for life insurance. You pay the premium to the insurance company, much like your car or home insurance. Once you pass away, the death benefit is the money the insurance provider disburses to your beneficiaries. The death benefit is often referred to as the face value of the policy.  

The last main component of life insurance is the policy’s cash value. As we mentioned, only permanent life insurance policies have a cash value. The cash value is like a savings account the insured can use while alive. You can borrow against the policy’s cash value, use the money to pay your premiums, or purchase additional insurance.  

The insurance company typically keeps the policy’s cash value when the insured person passes away. This means the policy’s cash value is not disbursed to your beneficiaries with the death benefit.

Term life vs. permanent life insurance

Term life insurance has a predetermined date when coverage ends, which makes it much cheaper than permanent life insurance. This is because, as long as you pay your premiums, you will continue to be covered by permanent life insurance.  

Often, people with young children may take out term life policies so that if anything happens to the policyholder, their spouse and children will have enough money to take care of themselves while they grow up; however, term life insurance is not just for people with growing children.

Although permanent policies tend to be more expensive than term life policies, there are special types of permanent life insurance, like final expense insurance. Final expense insurance is designed to provide enough coverage to pay the policyholder’s burial expenses. Policies like this are designed for older adults who do not want to financially burden their surviving loved ones with the cost of burial.  

What affects the cost of life insurance?

Multiple variables affect the cost of life insurance. When you apply for life insurance, the provider considers nearly every aspect of your life. The provider evaluates details like your age, lifestyle, driving record, and general health.  

For example, those who use tobacco products will pay higher premiums for their life insurance since using tobacco is detrimental to their health. Those who have more risky hobbies or jobs may also pay higher premiums. Women applicants can probably expect to pay less of a premium than a man of similar age and lifestyle because, on average, women tend to live longer than men.  

When purchasing life insurance, it’s important to remember that the cost of your coverage can change over time. As your age, health, or hobbies change, the insurance company can adjust your premiums.

How do I buy life insurance?

If you’re interested in purchasing a life insurance policy, buying it through a trusted broker is essential. Life insurance can get pretty complex, so it’s best to have a professional to help guide you through the process.  

A trusted broker can also help make recommendations for the type of coverage that will best fit your needs so you are neither overinsured nor underinsured. You can also discuss the options for using money from your policy based on the type of plan you purchase. In some cases, you will be able to use funds to pay for senior care. Talking with your broker to learn your options can help you choose the right coverage for your situation.