Life insurance can seem confusing, but it doesn’t have to be. In this article, we’ll go over the basics of how life insurance works and what steps you can take to make sure that you get the right policy at the right price so that your family has the financial protection they need if anything should happen to you before retirement.

Here are some questions you might have about life insurance and our answers to them below: How do I know if I need life insurance? What type of policy should I get? How much coverage do I need?

What is life insurance

Life insurance is a product that helps protect your family financially in case you die. Here’s how it works: You pay an insurance company a monthly or annual premium, and they agree to pay out a lump sum—the death benefit—in exchange for that premium.

How much life insurance you buy depends on a variety of factors, including how much debt you have, how many people depend on your income, and whether or not your spouse or partner has an income of his own. If you have dependents who rely on your income—like children and grandchildren—it’s worth considering purchasing life insurance.

There are different types of life insurance policies available, like term and whole life. Term life is designed with affordability in mind; premiums are lower than those for whole-life policies because term policies expire after a certain period of time—typically 20 years, though some can be shorter or longer (but never longer).

Whole-life policies tend to be more expensive but offer permanent coverage with no end date. Your goal may determine which type of policy makes sense for you; if all you want is financial protection against loss, then term may work best for you.

Or maybe your goal isn’t simply financial protection but rather peace of mind from knowing that should something happen to you; your family will be taken care of forever; then whole-life may make more sense for your situation.

 

How much coverage do you need

Most life insurance plans have coverage options ranging from $1,000 to $5 million. If you’re getting term life insurance, as most people do, a rule of thumb is to get enough coverage so that your beneficiaries don’t have to take out a loan to pay off your debts and cover funeral expenses.

If you need more than that amount, consider permanent insurance policies instead, which are available in increments up to $20 million. You can also shop around: Some policies cost less than others because they offer different levels of benefits or because they are backed by different companies.

 

How much does it cost

Let’s take a closer look at how life insurance works and why it costs what it does. Each month, you will pay your premium—that’s just a fancy word for your monthly payment for coverage. The price of your premium depends on a number of factors, including how much coverage you want, how long you want to be covered, and your age and health history.

Then, when you die or become terminally ill with conditions like cancer or ALS (Lou Gehrig’s disease), your insurer will start paying out to cover funeral expenses and provide support for survivors.

Your benefits could be used to help pay off your mortgage or other debts so that loved ones aren’t left burdened by them once you are gone.

 

Why you should buy it

When you’re young, it can be easy to brush off life insurance as an unnecessary expense. But by taking a few minutes to learn about life insurance, you might find that you have an important financial decision ahead of you.

If a person with dependents dies, their family will continue to have expenses—mortgage payments on their home, car payments for their car and tuition for their children’s education are just a few examples.

With term life insurance, those expenses are covered in case of death so that loved ones don’t suffer from your unexpected passing.

 

Types of policies available

There are two main types of life insurance policies: term and permanent. A term policy is basic coverage you can buy for a set period of time, such as 10 or 20 years. The premium will be higher for a 20-year policy, but it’s cheaper than buying a permanent plan because you don’t have to pay into it every year; with a term policy, your premiums are all paid up front.

Term policies typically have low monthly payments—sometimes $15 or less—and they only cover you during those 10 or 20 years.

 

Tips for buying a policy

If you’re trying to figure out how life insurance works and how to choose a policy, start by learning about term vs. permanent life insurance. These are two types of policies with major differences in payout amounts, length of coverage and premiums.

Term plans cover your beneficiaries for a fixed period of time — say 10 or 20 years — while permanent policies can be kept as long as you pay your premiums (and live).

If someone else depends on your income, such as a spouse or kids under 18, you might consider an immediate annuity to guarantee payments for life—assuming you can afford it.

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