While life insurance may not seem like an exiciting purchase, parents and caretakers can feel relieved knowing their family's financial future will be more secure during the hardest time of their life. Having this finanical protection can help take off some of the burden so your family can focus on what matters most.
To help you navigate the process, check out the top six fundamentals of buying life insurance.
1. What is a Life Insurance Policy?
You’ve probably heard of a life insurance policy, but do you know what it is?
A life insurance policy is a contract between the insured and the insurance company which is designed to pay a death benefit to your named beneficiaries when you pass away. Your beneficiary is the person, people, or organization you want to continue to provide for even after you're gone.
5 This could be your spouse, child, grandchild, family member, or even the charity closest to your heart.
2. Primary vs. Contingent Beneficiaries
When it comes to naming beneficiaries, there are two types to remember – primary and contingent. Your primary beneficiary is the first person who receives the death benefit when you pass away. If your primary beneficiary is no longer around, disqualified, or unable to contact, your contingent beneficiary will receive the death benefit.
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Once you pass, your beneficiary can file a claim with the insurance company to submit proof of your passing.
If a child is your beneficiary, a trust may need to be designated as the beneficiary, with an individual or institution to use the funds to ensure the wellbeing of your child. Another option could be to designate individuals you trust as beneficiaries, to care for the welfare of your child.
6 However, these juvenile beneficiary regulations vary by state, so it’s important to follow up with the insurance company if you have any questions.
The first step in purchasing life insurance is determining your needs. Once you figure those out, you can start to narrow down which type of coverage could be best for you.
3. Types of Insurance
There are two major types of life insurance offered – term life and permanent or whole life insurance.
Term Life Insurance
Term life insurance is a policy issued for a limited period of time. Typically, that time span is 1 to 30 years.
1 However, it has the ability to terminate at specific ages. If a policy terminates, coverage will be discontinued.
Depending on the terms of the policy, premiums will remain constant or increase each year.
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This type of insurance can pay only if death occurs during the term of the policy and usually doesn’t offer cash value buildup.
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Furthermore, there are two forms of term life insurance – level term and decreasing term. During level term, the death benefit stays the same throughout the duration of the policy. With decreasing term, the death benefit drops, usually in one year increments over the course of the policy’s term.
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Permanent Life Insurance
In addition to term life insurance, another option is permanent life insurance, also known as whole life insurance. This type of life insurance policy provides lifelong coverage, as long as you pay the premiums.
1 Unlike term life insurance, it builds up cash value over time.
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Whole life is the main type of permanent life insurance offered. If you choose to get it, you’ll likely pay the same premium your entire life.
1 The cash value for this type of policy grows based on a fixed interest rate.
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Additionally, the death benefits are active until the policyholder’s death.
Other types of permanent life insurance include universal life and variable life insurance.
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4. How to Buy Life Insurance
The first step in purchasing life insurance is determining your needs. Once you figure those out, you can start to narrow down which type of coverage could be best for you.
Comparing the features of policies from different life insurance policies will help you decide which type of policy is most suitable for your situation. Make sure to choose a company with a strong financial strength rating, and get an appointment scheduled with a local insurance agent. Prior to scheduling your appointment check with your state insurance department to make sure both the company and agent are licensed in your state.
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Once you’ve decided on a policy, make sure to fill it out accurately. Read it over and once you’ve finished, check the date it becomes effective.
5. Why It’s Important to Have Life Insurance
You might be wondering, “Why buy life insurance in the first place?”
If someone depends on you financially, there’s a strong likelihood you’ll need life insurance, as the death benefit can be an important financial resource to them.
For instance, some benefits can include, but are not limited to, helping with the following
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- Covering childcare costs
- Daily living expenses
- Funding tuition
- Income replacement
- Paying for a funeral or expenses related to death
- Paying off a mortgage or other outstanding loans
- It could mean your beneficiary won’t have to sell assets to assist in paying bills or taxes
6. Which Policy Should I Choose
At the end of the day, it’s important to remember there are different types of life insurance for everyone. Hence, it’s best to choose the type that best suits your personal needs.
Make sure to consult with life insurance companies or a local licensed life insurance agent for specific details regarding policies.
1. Acli.com,
Types of Life Insurance, 2019
2. Acli.com,
What You Should Know About Buying Life Insurance, 2019
3. III.org,
Life Insurance Basics, 2019
4. III.org,
What is a Beneficiary?
5. Naic-cms.org,
Life Insurance, 2019
6. Naic.org,
Life Insurance: Reviewing Your Policy Important to Securing Your Family’s Future, 2019