According to a recent survey, 40% of Americans wished they had purchased their basic life insurance policies at a younger age.
Why is basic life insurance important? For many families, this can be the dividing line between financial security and crippling dependency.
Table of Contents
- 1 What Is Life Insurance And How Does It Work?
- 2 Life Insurance Types
- 3 Basic Life Insurance Definition
- 4 What Is The Difference Between Basic And Voluntary Life Insurance?
- 5 Does basic life insurance have a cash value?
- 6 What Is The Best Life Insurance Policy For You?
What Is Life Insurance And How Does It Work?
Life Insurance Definition
Life insurance is defined as a form of personal insurance that guarantees your dependents or beneficiaries to receive some financial amount after you die. It gives out a ‘death benefit’ to people you name as your heirs or dependants, so that they may not have to deal with the additional burden of insufficient finances. The beneficiary may use life insurance to cover any benefit he or she may choose – from funeral expenses to debts, mortgages, college loans, etc. The beneficiaries are eligible to get the life insurance amount in cases of natural death, deaths caused by overdose, accidents, suicide, and even murder.
How Does Life Insurance Work
Life insurance provides a safety net for your family in the unfortunate event that you pass away. After choosing a plan that is affordable for you and will probably cover the expenses that you want to cover when you are not around. The insurance company pays a lump sum amount to your named beneficiaries after you pass away. This amount, known as the death benefit, is payable in exchange for the premiums paid by you. How much do you pay in premiums and how does the insurance company pays your death benefit depends upon the type of life insurance you have.
Life Insurance Types
The type of life insurance you get can depend on the premium you are willing to pay and whether you want coverage for a long period of time or only for a specific term.
Permanent Life Insurance
Permanent life insurance provides lifelong coverage to the insurance holder. It also increases the cash value, i.e the amount that is offered to the policyholder by the insurer if the policy is canceled. For these two reasons, permanent life insurance is more expensive than term life insurance. Keep in mind that the cash value component builds slowly over time and will not be instantly available to you.
Permanent life insurance is further divided into categories:
- Whole Life Insurance: Whole life insurance provides coverage for the entire life of the insured individual. Since the insurance company also invests the money, it builds up a cash value, free from taxes, from which the insured can withdraw money to use for his or her needs. The premiums for this policy are high as it builds cash value. The insurance company may also pay out dividends to the insured that he or she may use to pay her premiums.
- Universal Life Insurance: Universal life insurance offers flexibility in terms of the monthly payable premiums and death benefits. Insurance holders can have the option of paying premiums high than their monthly amount. The excess amount is added to a savings account, which can later be used to pay the increased premiums as the insured becomes older.
- Burial Insurance: It is the cheapest and smallest life insurance policy available. It basically provides coverage for the funeral and burial cost and ranges between $5,000 to $25,000. It does not require a doctor’s exam and can usually be bought online. Very few burial insurance policies require premiums.
- Survivorship Life Insurance: Survivorship life insurance policy provides coverage to two people under one policy. However, the beneficiaries only receive death benefits when both the policyholders pass away. This type of life insurance is also called ‘last-survivor life insurance’ and is generally easier to get than a single plan as the insurance provider is less concerned about the health of each member since they both must pass away before the insurance company has to pay out the death benefit.
Term Life Insurance
Term life insurance is much more affordable as compared to permanent life insurance. This makes it the most popular type of insurance sold with almost 71% of purchasers choosing this, according to the Insurance Barometer Report.
As the name suggests, this type of insurance is only valid for a specific number of years, for example, 10,15, 20, 25, or 30 years. If the insurance holder dies within the stated term, his or her beneficiaries receive the death benefits without any overhead taxes. These insurances do not have a savings or investment component as whole life insurance does. If the stated term of the policy ends, the insurance holder can renew the coverage in increments of 1 year. This is known as guaranteed renewability. Keep in mind that the rate at which the policy is renewed is higher each year.
Depending on what your financial needs are and how you want the policy to be constructed, term life insurance has 3 types:
- Level Term: Level term life insurance provides coverage for a specific number of years from 10 to 30 years, with fixed premiums and a fixed death benefit. Since insurance providers have to account for the increasing cost of insurance through the term of the policy, the premiums for level coverage life insurance tend to be higher as compared o the other two types.
- Decreasing Term: A decreasing term life insurance matches your financial need for which you are getting insured. For instance, if you want to ensure that your family isn’t burdened with mortgage payments after you pass away or aren’t evicted from their home, you may go for a decreasing term life insurance. The death benefits decrease each year, but the premiums are paid at a set level.
- Increasing Term: Increasing term life insurance provides an increase in your death benefits per year, and the premiums are also increased as you age. The premiums can become increasingly costly with time, hence very few people opt for an increasing cover life insurance.
The type of insurance you should purchase should reflect the expected costs that it will cover in your absence. For instance, if you have a disabled child who will need care for his or her entire life, you may want to go for permanent life insurance that will provide for your child even after you die. If you have young children who plan on going to college, you may get a 20-year term life insurance that will help to pay for your kids’ tuition if you pass away. The bottom line – consider the needs of your dependents before you get a policy.
Basic Life Insurance Definition
Basic life insurance is a type of term insurance that is available to be purchased privately and may be available through your employer as well. It is customizable and provides coverage up to a certain number of years.
What Is The Difference Between Basic And Voluntary Life Insurance?
Both basic and voluntary life insurances are types of term life insurance. They are available for a certain amount of time only. Voluntary life insurance is offered by an employer, usually as part of a group life insurance. This makes it much cheaper to purchase as well. It doesn’t require a medical exam, and your employer cuts your premium from your pay so you don’t have to worry about missed payments. Voluntary life insurance offers great value for money and is available through your employer in increments that equal multiples of your salary. For instance, if you earn $30,000 per year, you may obtain voluntary life insurance of $30,000, $60,000, $90,000, and so on. It is only valid until your employment lasts.
Basic life insurance may or may not be offered through your employee. In either case, it is a little more expensive than voluntary life insurance, though still more cost-effective than permanent life insurance. The premiums are higher than voluntary life insurance, but you are able to adjust the amount of insurance you want to buy – it does not have to be a multiple of your salary like voluntary life insurance. Basic life insurance also requires you to have a medical examination prior to receiving the insurance. Unlike voluntary insurance, you have the option of getting it switched to whole-life insurance, though the cost of convertibility is too high for most people to take this option. For this reason, it is usually purchased independently.
Should you purchase voluntary life insurance or go for basic term insurance? If you have health issues, you may want to consider voluntary health insurance as it will be available to you at cheaper rates and without the need to give a medical exam. If you are unsure about sticking with your job or want to switch, you could consider basic term insurance.
Does basic life insurance have a cash value?
Only some types of insurances offer cash value i.e your ability to access the money while you are still alive. It is offered on insurance types that have some element of investment or savings in them. Since basic life insurance is a type of term insurance that does not involve any investment or savings, it does not have a cash value. Permanent life insurance, like whole life insurance and universal life insurance, offers cash value to the policy keeper.
What Is The Best Life Insurance Policy For You?
Choosing a life insurance policy can be very confusing with all the stipulated terms and conditions and pricing options that are available on the market. Whichever policy you are offered, be sure to compare costs before you purchase it. Keep in mind your health, age, profession, dependants, debts, mortgages, and any other expense you expect your family to incur in the future.