So, you think you know about life insurance?

Insurance is confusing. There's a reason so many people make a career out of being an "insurance expert." There's a lot going on, and it's not as simple as a "contract between the insured and the insurer." Different products, policies, and types of coverage work differently, offer different protection, and have different terms of agreement. Why is it so important to understand your life insurance? Well, because you wouldn't want to pay all your premiums for nothing. You'll want to have a good idea of what you're covered for, where there might be gaps, and why you're paying the amount you're paying. It's complicated, to say the least. You don't need to know everything there is to know (that's why we have insurance brokers!), but it helps to know the basics.

So, you think you know about life insurance? Here's what Panda7 has to say.

A basic description of "life insurance"

Life insurance is essentially an agreement between an insured party and an insurer. A life insurance policy is designed to provide the insured with a specific sum of money to whoever has been designated as the beneficiary of the policy, in the event of the insured's death. This is done in exchange for "premiums," which are monthly or annual payments made by the insured during their lifetime.

Now, there are different types of life insurance within the broader definition of "life insurance." Depending on your needs and financial situation, you might benefit from a short-term or long-term plan. There is term life insurance and permanent life insurance, and sub-variants of both.

What is term life insurance?

Term life insurance fits the description of life insurance as outlined above, but it only lasts for a specific number of years. When you purchase term life insurance, you specify the term you want. Terms are usually 10, 20, or 30 years. You will want to determine how long you will need your term life insurance policy for when you buy it. There are several types of term life insurance.

Renewable term life insurance offers a quote for the year the policy is purchased. Premiums increase annually thereafter. Renewable term life insurance is usually the least expensive policy to buy initially.
Term life insurance decreases a "revolving life insurance" except that the coverage decreases over the term of the policy at a predetermined rate.
Convertible term life insurance allows the policyholder to convert their contract into a permanent contract at the end of the term, if they wish.

Work with a broker to determine the best option for you regarding term life insurance, and whether term life insurance is the right choice for you.

What is permanent life insurance?

Permanent life insurance is designed to provide coverage for the insured's entire life, unless premiums are stopped or the policy is surrendered. It is more expensive than term life insurance and has different sub-variants that offer different benefits and come at different costs.

Whole life insurance is a type of permanent life insurance that accumulates the cash surrender value over the life of the policyholder. The policyholder can use the money for any purpose, such as paying premiums or as a source of loans.
Universal life insurance includes a cash surrender value component that earns interest and features flexible premiums. Premiums can be adjusted over time.
Indexed universal life insurance allows the policyholder to obtain a rate of return that is either indexed or fixed to the surrender value.
Variable universal life insurance allows the policyholder to invest the surrender value in a separate account. It also features flexible premiums.

What type of life insurance should you buy?

The question, "Should I buy term or permanent life insurance?", largely depends on your finances and why you need life insurance. What expenses would you need to cover in the event of an unexpected death? Think about things like mortgages, tuition, long-term debt, student loans, and so on. If you are the sole breadwinner, you'll also want to consider replacing the income of your partner or dependents.

Work with a broker if you're still unsure. If you're on the fence, a convertible term life insurance policy is never a bad option for those who qualify for permanent life insurance but aren't sure if their situation will change in a few years.

How much does life insurance cost?

Your age
Your sex
Existing health problems
Your smoking status
Your family medical history
Your lifestyle
Your profession
Your driving record

Obviously, things that increase your chances of dying during the policy period will negatively impact your rates. Men tend to pay more for life insurance than women, and older people tend to pay more for their life insurance. Smokers will see an increase in risk-based premiums, as will those who engage in riskier activities, such as skydiving, construction, auto racing, and so on.

How do I take out a life insurance policy?

You can do this through a broker, like the ones we have here at Panda7. We understand that life insurance can be confusing, and that's why we're here to break it down. Many people use their life insurance to provide money to beneficiaries who would otherwise face significant financial hardship upon the insured's death. For wealthier individuals, having life insurance to accumulate tax-deferred cash value growth can be particularly strategic. It can also aid in estate planning.

Are you considering taking out a life insurance policy? Start by contacting Panda7 for a free quote today. One of our experts can work directly with you to address your individual needs.