Back to Square One: Life Insurance Explained
In 2020, over half of all Americans had a life insurance policy. If you’re not completely sure what a life insurance policy is or whether it’s necessary, you’ve probably googled it and were immediately overwhelmed with the amount of information out there. Most of that information is provided by life insurance companies, life insurance agents, life insurance brokers, or some other professional that benefits from selling you a life insurance policy. As you might imagine, unbiased, accurate, and truthful information is unlikely to come from these sources. However, it’s essentially the only information available and easily accessible. The purpose of this post is to change that.
A life insurance policy is a contract between you and a life insurance company which provides a life insurance benefit (generally in the form of a lump sum of money) upon the death of the insured person. The terms of the contract are set by the insurance company and are generally non-negotiable. The owner of the policy will pay a monthly or annual premium for the life insurance coverage on the life of the insured person. The owner will also determine who will receive the benefit after the death of the insured person, also known as the beneficiary. A life insurance policy can be used by the beneficiary for:
- Final medical expenses
- Funeral costs
- Debt resolution
- Income replacement
- Child support
- Spousal support
- Financial stability
The benefit amount varies depending on the purpose of the policy (usually one of the above) and what the owner of the policy can afford. Companies also offer a variety of additional benefits to be added to the policy for free or a small additional premium. Some of the additional riders include:
- Accelerated Death benefits
- Critical Illness benefits
- Chronic Illness benefits
- Hospital Indemnity
- Accidental Death and Dismemberment
- Cancer benefits
Additionally, life insurance policies can be structured in a number of different ways. Generally, you can expect to see a participating or a non-participating policy. A participating policy considers an owner of the policy to be a partial owner of the company which causes the policy and its provisions to be more complex. A non-participating policy is much simpler but has some down sides. The type of policy you choose will determine your premium payment schedule, your options for taking a loan against the policy, surrendering the policy, and whether you will receive dividends. Although it may seem that these options are less important, they are actually very important decisions not to be made lightly. Below are a few reliable resources that may help to educate you further on the types of life insurance policies out there:
- NAIC Life Insurance – https://content.naic.org/consumer/life-insurance.htm
- NAIC Consumer Glossary – https://content.naic.org/consumer_glossary.htm
- NAIC Life Insurance Buyers Guide PDF – https://www.naic.org/documents/prod_serv_consumer_lig_lp.pdf
