Life insurance 101: Basics you should know
Getting life insurance is an important decision with a lot of factors involved. It's important to know why you need it and how it's going to help you. But insurance companies often have the bad habit of thinking that you speak fluent insurance.
Having a better understanding of how life insurance works will help you make the best decision for you and your loved ones.
Video Transcript: Life insurance 101
- Video duration: 2 minutes 7 seconds
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Do you speak life insurance? To many people, talking about life insurance may seem like another language. The good news is: We speak it fluently and we can help.
First things first: Life insurance is really for those you care about and who depend on your income. It can give money to your family and others you feel would need it when you die. That money can help with things like paying off the mortgage to replacing your paycheck that your family depends on.
Next, there are two types of life insurance: Term and permanent.
Term insurance lasts only for set number of years or to a certain age. It offers fixed costs that can make it easier to fit into your budget. In the event of an unexpected death, term policies are meant to handle one-time and short-term financial obligations for your loved ones.
On the other hand, a permanent life insurance policy is designed to last as long as you live. If you die while your permanent policy is active, the money paid out can cover expenses like:
- Funeral costs
- Health care costs for a surviving spouse or partner, or
- Leaving an inheritance
Finally, here's a few life insurance terms you may want to know.
Death benefit — It's the money that's paid out to the policy beneficiary if you die while your life insurance policy is active.
Beneficiary — This is the person or persons who'll get the death benefit.
GuaranteedSee notea period — This is the term of your policy. During this time the recurring amount of money you'll pay to keep your policy active won't go up. Also, your death benefit can't go down.
Riders — These are additional benefits or features that come with your policy. Basically, riders can let you customize your life policy to fit your needs. Riders may or may not cost you extra.
Bottom line: Your life insurance should reflect your unique needs.
If you need more help, visit usaa.com/advicecenter for helpful articles and other resources.
Description of visual information: [a Guarantees apply to certain insurance and annuity products and are subject to product terms, exclusions and limitations and the insurer's claims-paying ability and financial strength.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
Life insurance and annuities provided by USAA Life Insurance Company, San Antonio, TX and in New York by USAA Life Insurance Company of New York, Highland Falls, NY. All insurance products are subject to state availability, issue limitations and contractual terms and conditions. Each company has sole financial responsibility for its own products.] End of description.
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What does life insurance do?
Life insurance provides a benefit to your family, loved ones or entities who may need financial proceeds in the event of your death. It can serve multiple purposes, including covering final expenses, paying off debts, replacing lost income and covering education expenses.
Every life insurance need and financial situation is unique. It's helpful to know the basic information, so you can plan and identify what you need.
Two types of life insurance
Term life insurance
This is a type of policy that has benefits payable within a set time, such as 10 or 30 years, or before a specified age. Typically, term insurance is the most budget-friendly, with costs that stay level during the stated period or gradually increase until the end age.
Term insurance is ideal for paying for things that tend to decrease in cost or impact to the household. For example, debts can be paid down, and kids grow up and become financially independent. You'll be able to save money for bigger goals like retirement because the monthly cost is lower. Term insurance is designed to help pay one-time or short-term expenses if you died unexpectedly.
Permanent life insurance
This is a type of life insurance that can last your entire life. There are different kinds of permanent life insurance like whole or universal life insurance. These types of policies can gain cash value. The cash value can be used in various ways during your lifetime. Or it can do things like increase the death benefit amount.
Permanent insurance is ideal for providing money for things when you eventually die, like funeral costs or an inheritance. It can also help offset costs that your surviving spouse or partner may need with rising health care costs, long-term care or income shortfalls in your retirement years.
Now that you're familiar with term and permanent insurance, it's important to understand some key components of life insurance policies.
Common life insurance terms
Death benefit or coverage amount
This is the amount of money that's paid to your beneficiaries if you were to die while your life insurance policy is active.
Insured
This is the person that the life insurance policy is covering.
Owner
This is the person or entity that owns the life insurance policy. They make the decision to use benefits or riders of the policy. They also decide the beneficiaries and who can cancel or change the policy.
Payor
This is the person or entity that handles paying the premiums for the life insurance policy.
Although uncommon, the insured, owner and the payor can all be different people. Most of the time, the person who owns the policy is also the insured and payor of that policy.
Beneficiary
This is the person, people or entity who will receive the death benefit if the insured dies while the coverage is active.
Guaranteed term period
This is the period that the life insurance policy features remain fixed. This includes premiums and the death benefit amount. During this period, premiums won't increase and coverage amount won't decrease.
When the guaranteed term period ends, the premium could increase or the death benefit can decrease. It depends on your contract.
Premium
This is the amount of money required to keep your policy active. Most policies are paid monthly, quarterly, semiannually or annually. The cost of life insurance can vary depending on the amount and type of coverage you choose.
If you miss a payment, your policy could lapse. This means that coverage isn't active and won't be applied until the balance is paid.
Riders
These are additional benefits or features attached to your policy. Riders offer the policy owner the ability to do different things like convert to a different type of policy or increase the coverage amount. You can use these benefits to customize the life insurance policy for your specific needs.
Riders may or may not add to the premium you pay.
Cash value
This is a component of permanent life insurance policies. Policy types, like whole or universal life, can gain cash value over time. Cash value can work in various ways.
Depending on the policy, it can increase the death benefit amount or contribute to the premium.
Surrender charges
These are fees charged for canceling a permanent life insurance policy during a specific period of time. Policy owners who cancel will get back the surrender value. That's typically the cash value minus any applicable surrender charges.
Medical exam
This is a physical examination that's required for some types of life insurance during the underwriting process. The medical exam may include tests, such as blood work, urine analysis and a review of medical history. The exam results help insurers to set premiums based upon current health status.
Financial situations, lifestyles and medical needs differ from person to person. Your life insurance should reflect your unique needs. It can be helpful to work with a trusted advisor or life insurance specialist to help support your decisions.