Life Insurance 101
You insure your car, home and your health to protect yourself from the unexpected. Have you considered how you can help financially protect those you love? Life insurance provides financial protection in the event you were to pass away. You pay premiums to your insurance company, and in return, they will pay your beneficiaries a death benefit — which is an agreed upon sum of money — when you pass away.
Why Do I Need Life Insurance?
Do you have people who depend on you financially? Would they have enough money to cover the substantial costs of a funeral? What about a mortgage, debt and other expenses you’d leave behind? Having life insurance can provide peace of mind that your loved ones will have some financial protection to cover these expenses or replace lost income if you were to die.
But, there can be more to life insurance than just a financial safety net if you were to pass away. With permanent life insurance, such as Whole Life and MyLife, there’s the ability to build cash value, leave behind a legacy or even contribute to your retirement. Find out more about how life insurance protects your family.
What Are the Different Types of Life Insurance?
There are two main types of life insurance you’ll frequently hear about: temporary and permanent life insurance.
Temporary life insurance. Temporary life insurance — better known as term life insurance — offers coverage for a specific period of time, for example in 10, 20, or 30 year terms. If you pass away while the policy is in effect, your beneficiary will receive a death benefit. However, if your term life insurance policy expires before you pass away, your beneficiaries won’t receive a payout. Depending on your policy, you may be able to extend your term after the initial policy term ends or convert it to permanent coverage. Take a look at American Family Life Insurance Company’s Term Life and SimplyProtected Term policies to see if temporary life insurance coverage is for you.
Permanent life insurance. A permanent life insurance policy, such as whole life insurance, offers coverage for — you guessed it — your whole life (subject to policy terms). Typically, a premium for whole life insurance will cost more than term life, but that’s because not only does it provide life-long protection, but the policy also has the ability to accumulate cash value. Cash value is a component of whole life insurance that you can borrow against* while you’re still living. You can use it for things like helping with a down payment on a house, college tuition or investing in a business. Keep in mind, if you don’t pay back the loan plus interest your death benefit will be reduced by any outstanding loan and interest amounts. Learn more about the cash value of life insurance.
At American Family Life Insurance Company, we offer Whole Life and MyLife Flexible insurance for permanent protection to help ensure your loved ones have some financial protection upon your death.
Want to compare coverages? Our life insurance comparison chart shows you our term and permanent life coverages side by side, so you can compare your options and select the best coverage for you and your loved ones.
How Much Life Insurance Do I Need?
How much life insurance you need is completely dependent on your own unique circumstances. You’ll want to take into account things like your income, debts, final expenses and assets, among other things. You can read more to find out how much life insurance you need, otherwise head to our Life Insurance Needs Calculator — it’s a quick and easy tool to help you determine how much life insurance coverage you need and what it might cost.
When Should I Get Life Insurance?
Your age and health (as well as other factors) play a large role in determining your eligibility for coverage and the premium you’ll pay, so the earlier in life you apply, the better. Most policies will lock in the premium for the entire policy term, so when you get life insurance when you’re young and healthy, it can be more affordable.
When Is Life Insurance Necessary?
Having life insurance is usually a good idea, but there are certain times in your life when it’s extra important you’re covered. If you’re young and single, getting life insurance helps you plan for the future. Starting a family? Life insurance can help ensure they have some financial protection if you or your spouse were to pass away. Do you have a mortgage? Life insurance can provide funds to allow loved ones to pay off the mortgage and keep the home if you were to pass away. Are you responsible for taking care of a loved one with special needs or a disability? You can put protection in place to help ensure they could continue their current standard of living once you’re gone. Life insurance is also beneficial for seniors, since you can use it for things like leaving money to heirs or final expenses.
Life Insurance Application Process
After connecting with an agent, you’ll choose the amount of coverage and type of policy you want. You'll also fill out an application that includes some basic information about you, including info about your health and beneficiaries. You may have a telephone interview or be asked to complete an in-person medical exam, where you can choose a place that’s convenient for you, like your home, work or at a lab facility. Here’s more about the life insurance buying process.
What Is a Beneficiary?
A beneficiary is a person, a number of people or even an entity, such as a charitable organization, that receives the proceeds of a life insurance policy when the insured person passes away. After all, you’re not really buying life insurance for you, you’re buying life insurance to financially protect the people you love. Find out more about beneficiaries.
Is Life Insurance Taxable?
In general, the life insurance payout from a death benefit is not subject to federal income tax**. There are situations where proceeds may be taxable, but your tax advisor can help you better understand these instances.
How Do I Pay for My Life Insurance?
When you have a life insurance policy, you’ll pay a premium, which is the amount of money you pay the insurance company to keep your coverage in effect. Your premium is determined by a number of factors, including the type of coverage you have, like term or whole life coverage, and your age and health — among other things.
Typically, you’ll pay your premium in installments, like monthly or annual payments. Some people even choose to pay for the entire policy in one lump sum. If you stop paying your premiums, depending on the type of policy you own, your policy may lapse, which means you would no longer be covered. Most insurance companies offer a grace period, which is the amount of time past the due date in which you can pay your premium and your coverage will continue.
If you have a whole life insurance policy and wish to stop payments, you can choose to use the accumulated cash value in your policy to purchase a policy with a lower death benefit or you can choose to surrender the policy, which means you stop paying the premiums and collect the accumulated surrender value. If you choose to surrender the policy your beneficiary will not receive a death benefit and you may have to pay taxes on some of the surrender value.
Learn more about paying for life insurance.
Should I Buy Life Insurance for My Child or Grandchild?
Buying your child life insurance when they’re young and healthy has many benefits. As we’ve mentioned, the cost of life insurance largely depends on age and health, so buying a child life insurance means you can get a policy on them that is not only affordable, but it’ll lock in that low rate for the life of the policy (as long as premiums are paid) and ensure that they have life-long life insurance coverage. You can get them a low coverage limit that may simply cover the cost of final expenses, and they may be able to add coverage as they get older.
Buying a permanent life insurance policy on a child is also a simple way to start a financial safety net for them, since a permanent life policy gains cash value, which can be borrowed against* later on in life to help with things like a down payment on a home or college tuition. Not convinced? Find out more about the benefits of life insurance for children.
How Can My Life Insurance Support My Family If I Pass Away?
Life insurance helps financially provide for your family and can help ensure they have the resources to meet their financial needs if you were to pass away. It can help replace an income, pay for final expenses, cover medical bills, go towards a mortgage or pay for other expenses that your family might be responsible for. The bottom line? Life insurance is a financial safety net for your loved ones.
Sometimes it can feel like insurance has a language of its own. Check out our life insurance glossary of terms to familiarize yourself with the jargon.
*Disclaimer: Any loans taken from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim. If the loan balance grows too large for the cash value to support it, the policy could terminate.
**Disclaimer: Neither American Family Life Insurance Company nor its agents are authorized to give tax or legal advice, and this should not be construed as such advice.
Policy Form L-36 10, Policy Form L-36 20, Policy Form L-36 30, Policy Form L-33, Policy Form L-34, Policy Form L-35, Policy Form ICC 13-97 UL, Policy Form L-97 UL (AZ, ND, SD only), Policy Form L-24 (10), Policy Form L-24 (20), Policy Form L-24 (30), Policy Form L-60