With a life insurance policy, you can still keep providing for your loved ones financially, even when you’re no longer physically with them. Your family can use the policy’s benefits to pay not just for funeral and burial expenses, but for bills too, such as mortgages, schooling, loans, and other expenditures. And if you choose to purchase whole life coverage, you can use it to strengthen your overall financial strategy.

Before you plunge into the world of life insurance though, keep in mind that it’s full of complexities, so you might get confused. This is why you should arm yourself with the basic knowledge of how it works. To get you started, here are some of the most important life coverage questions you should know the answers to.

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What’s the primary difference between term and whole life?

In a nutshell, term life insurance is the simplest and easiest to understand, as you only have to choose a policy value and a length of time the policy is enforced, called the “term.” As long as you keep paying your premiums, your beneficiaries will receive the pay out, known as the “death benefit,” in the event that you pass away.

Whole life, on the other hand, comes with the same death benefit, but also features a “cash value” component. For those looking for another investment vehicle, this is a good option, as it builds up wealth. A portion of your premiums will go into a savings account, which will then accumulate interest over the years. You can draw or borrow money against it for personal or emergency expenses.

Although whole life comes with higher premiums, it has the advantage of enabling the policy holders themselves to become the beneficiary.

How long a term should you get?

Most insurance companies in the United States, whether operating in Alaska, Dakota, New Hampshire, Texas, or any other state, offer the same terms for their term life coverage. The term is basically the length of time the policy covers the insured. You’ll typically find plans in 5-year denominations, for example: 5, 10, 15, 20, 25, and 30. The longer the term you purchase, the more years you’re covered, but you’ll also pay for higher premiums.

There are several factors that can help you decide how long your coverage should last. These include the following:

  • The loans you’re still paying for and how long it’ll take you to complete making the payments. Examples are mortgages, credit card loans, and car loans.  

  • The number of years you would like to keep on supporting your children. Don’t forget to factor in college.

  • How long till your estimated time of retirement.

Should everyone in your household have life coverage?

Ideally, yes. Some families even purchase life insurance for their children under 18. However, in the event that you can’t afford to get insurance for everyone in your household, it’s important that you and your spouse do. This way, you can rest assure that the loved ones you’ll leave behind will not suffer from the severe and dramatic consequences of financial burdens.

Can and should you increase your coverage?

Many insurance companies actually prefer that you do, seeing as this means better business for them. When you increase your coverage though, your insurer isn’t the only one benefitting from the change; your family does, too. There are many situations wherein you should definitely consider raising the amount of cover, and these include major life changes. The birth or adoption of another child, the onset of an illness requiring long-term care, and the addition of another mortgage (or when you refinance an existing one) are just some of them.

Purchasing and maintaining life insurance doesn’t have to be that complicated. As long as you have a complete understanding of the basics, then you can reduce your chances of either being underinsured or overinsured.

References:

http://www.insureuonline.org/consumer_guide_life.pdf

http://www.iii.org/article/what-are-principal-types-life-insurance

www.nerdwallet.com/blog/insurance/how-long-term-life-insurance-policy-should-last/