About 41 million people in the United States say they need life insurance, but they don’t have it. Why? Well, the main reason is people tend to overestimate how much life insurance will cost. For example, participants estimated that a $250,000 term life insurance policy would cost about $500 a year in one study. However, in reality, it only costs about $160. People also avoid investing in life insurance because it’s hard to understand or don’t know much about it. So we’re going to talk about some life insurance basics and how life insurance works.
What is Life Insurance?
Life insurance, in short, is a contract between you and an insurance company. An insurance company agrees to pay a lump sum known as a death benefit to your beneficiaries after your death in exchange for paying premiums. Your beneficiaries may use the sum for any purpose they choose, but common uses include paying a mortgage or putting a child through college. There are two primary types of life insurance. They are a term and permanent life. We’ll discuss those next.
Term Life Insurance
Term life insurance is the most affordable and the most popular choice among purchasers. This type of life insurance is for a specific amount of time, and you pay the same amount for a premium for the duration of the policy. Common policy lengths include 10, 15, 20, 25, or 30 years. If you pass away within your policy term, your beneficiaries can claim the death benefit tax-free. If the policy term expires, you can renew the coverage each year, but the renewal rate will be higher each year.
Permanent Life Insurance
Permanent life insurance guarantees coverage for life, but it’s more expensive than term life insurance. There is a cash value component to this kind of life insurance that accumulates over the policy’s life on a tax-deferred basis. Typically, you can borrow against the cash value or make withdrawals, and if you cancel the policy, you can receive the cash value minus any surrender charge.
These are just the basics of how life insurance works, so if you’re considering purchasing a policy, contact Arthur Blake Insurance in Plano, Texas. We can walk you through everything you need to know before buying a policy, and we can help you choose the right policy for you and your beneficiaries. So call our office today to schedule an appointment with one of our experts!