The Basics of Life Insurance

Life Insurance

Life insurance is an agreement between an insurer and a policyholder in which the insurance company promises to pay a designated beneficiary a sum of money, known as a death benefit, upon the insured’s death. Policyholders typically pay a premium, either regularly or in one lump sum, to maintain their coverage. The beneficiaries can be named as one or more people, a trust or estate, or even a charitable organization. In some cases, the beneficiary can change or be removed with a simple process.

There are many different types of policies, and it’s important to choose the right one for your needs. A financial professional can help explain the differences, assist in calculating how much coverage you need, and present potential options that may meet your unique circumstances.

Buying life insurance is a smart move for anyone who has family or others who depend on them financially. The money from a life insurance policy can help pay off debt, cover ongoing expenses and future plans, and can provide income for your loved ones after you’re gone. In addition, some life insurance policies build savings that you can access during your lifetime.

While everyone’s situation is unique, a good rule of thumb for determining how much life insurance you need is to multiply your annual income by 10 or more, to account for debts, ongoing living expenses and other costs that would be left behind when you die. A financial professional can help you calculate this amount and determine what types of life insurance policies or combination of policies may be right for your needs.

After the application is complete, the underwriter for the insurance company will review your materials and decide if you are approved for life insurance coverage. If you are, the underwriter will also set your monthly premium based on the type and amount of coverage you choose.

Once you have purchased a life insurance policy, it is important to keep it current by paying the premium on time. A late payment could result in a loss of coverage or a lapse of the policy. If this occurs, you can usually reinstate your policy by paying the outstanding premium and going through a new medical exam.

Most life insurance policies have a two-year contestable period, during which the insurance company can review the information on your application to see if there was any misrepresentation. If the policy is found to be void due to misrepresentation, the company must return any premiums paid.

Some types of life insurance offer riders, which are additional features that can be added to the base policy for an additional cost. These can include the ability to add additional coverage without a new medical exam, riders that can help pay the premium if you become disabled, and more.

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