Life insurance is like any other insurance: you pay a premium to the provider of your choice and, in return, your provider agrees to pay a larger sum if something happens. In the case of life insurance, that lump sum is called “death benefit” and is generally paid when the insured dies. (There are some situations in which the benefit of death can be used during life; we will cover those situations in the next question).
There are two main types of life insurance that work a little differently.
- The insurance term life provides coverage for a specific period of time (or “term”), usually between 10 and 30 years and only pays a death benefit if the insured dies during that period. Term coverage is generally very affordable.
- The permanent life insurance (or lifetime) covers all your life, which means that the payment of the death benefit is guaranteed. However, it is a much more expensive form of insurance, often up to 10 times more expensive than term insurance.
What Does Life Insurance Cover?
In its most basic form, life insurance offers a lump sum benefit, which acts as a safety net for the family and the insured’s beneficiaries. It can be used to cover any financial obligation that the insured has left or act as a supplementary income for surviving family members. The death benefit of your policy covers:
- End of life expenses and funeral costs
- Outstanding debts and business obligations
- Wealth Taxes
- Mortgage payments or housing costs
- Basic living expenses for surviving family members
- Children’s education
- Among others
Most companies also offer accessories or “riders” that extend what your life insurance policy will cover. Each life insurance company has a unique selection; Therefore, if your needs go beyond a basic death benefit, we recommend that you contact one of the agents of each company you are considering to see what they can offer you.
How Are Life Insurance Premiums Determined?
Life insurance premiums are determined by a process called “subscription.” In summary, the company places your personal information (age, health, family history, occupation, etc.) in a complex mathematical formula that (as bleak as it sounds) determine the probability that you will die during the time you have the policy. The more likely it is, the more expensive the coverage will be.
Keep in mind that performing a physical medical exam is a key part of the subscription process. It is the best way for providers to obtain an accurate reading of your health. Without that, policy prices will increase because they cannot accurately determine the “risk” of insuring you. Many insurers offer a simplified subscription or “insurance without exam” that skips this step, but we generally do not recommend that route. Premiums will almost always be cheaper if you take the physical exam.