The basics of life insurance
When planning for the future, life insurance can be a safe and reliable way to protect the ones you love. And while most people understand the importance of life insurance, many aren’t clear on how life insurance actually works — or, the different types that are available to them. Here’s some basic information about life insurance that can be helpful when deciding on a policy that’s right for you.
How does life insurance work?
When you purchase life insurance, you enter into a contract with a life insurance company that agrees to pay a death benefit to your beneficiary, which can be your spouse, children or anyone you choose. In exchange, you make payments to the insurance company. These payments are also known as your premiums — and the amount is based on a number of factors including your age, gender, medical history and the amount of life insurance you purchase.
Types of life insurance
When purchasing life insurance, it’s important to choose the policy that is right for you. Although several types of life insurance exist, two main categories of life insurance can be defined as term life insurance and whole life insurance. Learning the basic facts of each will help you make an informed decision about the type and the amount of life insurance that you need.
Term life insurance can be a great option if you need coverage for a specific period of time — which can be anywhere from one to twenty years or more, with the opportunity to renew after each term. This type of life insurance usually features premiums that increase at regular intervals until coverage ends. Term life insurance typically does not build cash value; however, it may be a good way to get the maximum coverage to meet your changing needs. For example, you may want to consider a term policy that matches the length of your home’s mortgage or lease. With term life insurance, benefits are paid if the policy owner dies during the period covered by the policy.
Whole life insurance, also known as permanent life insurance, is designed to meet the long term needs of you and your family. Unlike term insurance, whole life policies offer protection for life. With whole life insurance, premiums are usually higher than term insurance; however, they are not typically scheduled to increase during the life of the policy. Also, premiums for whole life insurance are based on your age at issue. So your rate won’t go up due to changes in your age or health. Many choose whole life insurance because they want coverage for as long as they live. Additionally, whole life insurance builds cash value over time that you can borrow against as needed.
It’s important to know that you aren’t limited to one type of insurance or the other. You may find that a combination of term life insurance and whole life insurance is the best option for you. For example, your life insurance plan may include a whole life policy as the foundation, with supplemental term insurance during the time period with higher coverage needs.
What to consider when purchasing life insurance
Whether you’re looking for first-time protection, or supplementing the life insurance that you already have, you’ll want to evaluate your needs and resources before making a purchase. Review the funds that are in place, such as savings, Social Security, a pension or other life insurance policies. Then, determine a life insurance policy that can cover the expenses your family will face — for example, everyday living and funeral costs, as well as medical bills and loans that you may leave behind.
Once you decide on the type and the amount of life insurance you need, it’s important to choose a life insurance provider that you can trust. Look for a stable company with strong financial strength ratings from the top independent rating services, such as A.M. Best, Fitch, Standard & Poor’s, and Moody’s Investors Service. Your family's future may depend on life insurance — so you’ll want to have the added peace of mind in knowing that your life insurance provider will be around when you need it most.
This article is provided by New York Life Insurance Company for informational purposes only. This article is not intended to provide tax, legal, financial, or accounting advice. Please consult your own professional for advice specific to your circumstances.
