Life insurance can be a vital safety net for those who want to protect their loved ones financially in the event of their untimely death. Buying a life insurance policy can be a daunting task, especially if you’re a first-time buyer. One of the main challenges people face in comprehending life insurance is the use of technical language and jargon by insurance providers.
This article will decode seven life insurance terms you need to know before buying a policy to help you make informed decisions and choose the best policy.
1) Policy Holder
What’s a policyholder for insurance? According to Marble, in simple terms, the policyholder is the individual who buys and has legal ownership of a life insurance policy. When purchasing a life insurance policy, you become the policyholder and are typically the primary person covered by the policy.
As the policyholder, you are responsible for paying the premiums and adhering to the terms and conditions outlined in the policy.
Marble also mentions that as a policyholder of a life insurance policy, you have certain rights and entitlements. These include accessing a copy of your insurance policy, canceling or modifying the policy, adding beneficiaries, and filing an insurance claim. You can also challenge the decisions of the insurance provider you disagree with.
The premium amount is determined by various factors, including the policyholder’s age, health status, and the amount of coverage needed. In general, a person’s premium for life insurance is lower if they are younger and in good health.
As per Business Insider, the typical monthly cost of a life insurance premium ranges from $40 to $55. However, this can vary significantly depending on factors like age, gender, and the type of policy selected.
For instance, a 30-year-old man in good health might pay as little as $15 per month for a term life insurance policy that offers a $500,000 death benefit. However, a 50-year-old male with a history of health issues must pay closer to $200 per month for the same coverage.
It’s important to note that premiums can also vary based on the type of policy selected. For instance, term life insurance policies often come with lower premiums compared to permanent life insurance policies.
Nonetheless, their coverage is only for a fixed duration, typically from one to thirty years. Conversely, a permanent life insurance policy covers the policyholder throughout their life, which leads to higher premiums.
3) Death Benefit
The death benefit, usually tax-exempt, can be utilized by the beneficiaries for various purposes, such as settling funeral costs or clearing debts.
The policyholder determines the amount of the death benefit at the time of buying the policy. It is based on their income, the number of dependents, and their overall financial situation. Choosing a death benefit that will provide adequate financial protection for your loved ones in the event of your unexpected passing is necessary.
According to Forbes, financial experts typically advise individuals to have a life insurance policy with a death benefit equal to 10-15 times their current income. This amount is considered a general guideline. However, it can vary depending on the circumstances, such as age, dependents, and other financial assets.
The policyholder chooses the beneficiary at the time of purchase and can be changed at any time during the policy’s term. Therefore, choosing a beneficiary carefully is crucial to ensure that the death benefit is distributed according to your wishes. Typically, beneficiaries are spouses, children, or other family members, but they can also be trusts or charitable organizations.
When choosing a beneficiary, it’s crucial to consider their financial needs and their roles in your life. It’s also necessary to review and update your beneficiary designation regularly, particularly after major life events such as marriage, divorce, or childbirth.
The underwriting process typically involves an analysis of the applicant’s age, health status, occupation, lifestyle habits, and other factors that may impact their risk of death or injury.
The underwriting process can be complex and time-consuming, but it is essential for ensuring that insurance companies can accurately assess risk and offer coverage at a fair price. In some cases, applicants may be required to undergo medical exams or provide detailed information about their health history to help insurers assess their risk level.
According to Bankrate, the underwriting process for life insurance can take anywhere from two to eight weeks. It depends on the complexity of the applicant’s risk profile and the required information level. In some cases, underwriting may be expedited for younger applicants or those with relatively low-risk profiles, while more complex cases may require additional review and evaluation.
Riders offer policyholders greater flexibility and customization in their coverage, allowing them to tailor their policies to their needs.
Some common types of riders include:
- Accidental Death and Dismemberment (AD&D) Rider: provides additional benefits in the event of accidental death or dismemberment.
- Waiver of Premium Rider: waives premium payments in the event of disability or illness.
- Long-Term Care Rider: offers coverage for expenses related to long-term care.
- Guaranteed Insurability Rider: permits policyholders to buy supplementary coverage at specified intervals without the need for further underwriting.
Riders can enhance the value of a life insurance policy, but it is crucial to scrutinize the conditions and expenses related to each rider before deciding to add it. Depending on your specific needs and financial situation, a rider may be an investment that provides greater peace of mind and financial security.
7) Cash Value
The cash value is a portion of the policy’s premiums that the insurance company invests and accumulates over time, similar to a savings account.
Policyholders can access their policy’s cash value in several ways, including by taking out a loan or withdrawing funds. However, any funds withdrawn from the cash value will typically reduce the policy’s death benefit.
While cash value can be a valuable feature of a life insurance policy, reviewing the terms and conditions mentioned in policy documents is necessary. Depending on your specific needs and financial situation, a policy with cash value may or may not be your best choice.
Understanding the jargon associated with life insurance policies is essential when making informed decisions about your financial future. Whether you’re a first-time policyholder or an experienced investor, you must know key terms like policyholder, premiums, death benefit, beneficiary, underwriting, riders, and cash value.
As always, it’s necessary to carefully review the terms and costs associated with any policy before deciding. However, whether you’re looking for basic coverage or more complex policy features, comparing your options can help you find the right insurance policy to meet your financial goals.