The general purpose of life insurance is to protect your assets, such as a home and place of business, and your family’s standard of living. If something tragic occurs that causes your death many years before you might more reasonably anticipate, life insurance can settle debts and leave a financial legacy for your beneficiaries.
When you sign up for a life insurance policy, you pay a premium that is partly based on the policy limit. Life insurers also use actuarial tables that assess your general health, age, and general risk of death based on your occupation and other factors when determining your premium.
You might pay the premium all at once, monthly, yearly, or on another predetermined schedule that you work out with your life insurance agent.
Three Kinds of Life Insurance
There are many types of life insurance that are available that generally serve to protect your assets, financial interests, and your family’s standard of living. Your insurance agent can help you to understand which options are available and how they differ from one another. For the most part, you will have the three following options, but many subtypes also exist.
Whole life insurance is also called “permanent life” and provides your family with a financial benefit upon your passing. Many whole life policies are in force for many years and often decades before a claim is filed. Their general purpose is to leave a financial legacy for your beneficiaries.
Most whole life policies require you to pay a monthly or annual premium. A percentage of those premiums goes to the insurer and the rest to an account. That account produces the final payout when you pass on and your family files the claim with a death certificate.
Term life is a very affordable alternative to whole life policies. That is because they do not guarantee a final payout. Instead, they pay out only if you pass on during the term for which the policy insures your life.
Term life insurance is often used to protect assets and financial obligations, such as a child’s college tuition.
For example, if you were to obtain a mortgage to buy a house, you could purchase a term life policy that would last for as many years as your mortgage. If you were to die in a car accident or some other cause, the term life could pay off the mortgage. The coverage could also end when you pay off the mortgage and no longer need the additional life insurance protection for your home.
If you have children, you and your spouse might want life insurance to leave a financial legacy for them if you both die much earlier than anticipated. A survivorship life insurance policy can do that.
A survivorship policy is similar to a term life policy but for two people instead of one. It is in force for a number of years and then expires if one of you outlives the term.