Life Insurance Basics

Life insurance guarantees that your dependents are taken care of when you are gone. Many people understand the need to have life insurance, even those who haven't purchased a policy yet. But not everyone understands what it means to own or acquire a life insurance policy. The costs involved, choosing the right type of policy or the amount of coverage needed might not be obvious to many life insurance shoppers.

It's essential to understand the basics of life insurance because, with this knowledge, you can make a rational decision regarding what option is best for you.

Though different insurance companies have different terms and conditions, certain principles are standard industry practice. With an understanding of these standard practices, you can better understand the various offers available in the market.

In this piece, we will outline for you some of the key facts of life insurance that will help guide you in the right direction. The first question you should ask yourself is whether you need insurance or not. The answer to this question is most often yes, but a certified adviser can confirm the contrary. Once you and your adviser have established whether you need life insurance or not, you need to decide how long to maintain the coverage and how much you should insure.

Finding the answers to these questions might seem complicated, but here at emma.ca, we've tried to simplify it for you. Read on to get a good grasp of what life insurance is.

What Is Life Insurance

Most people have a general idea about what life insurance is and how it works. Nerveless, here is a quick recap. The idea is to protect a family's financial well-being if one of the main providers or caregivers were to pass away. Life insurance is an agreement between an insured (consumer) and an insurance company. In the contract they form, a coverage amount is established in exchange for monthly or annual payments known as premiums. If the insured dies while the contract is in effect, the insurance company signs a check for the agreed-upon amount to the beneficiaries or estate of the deceased.

Some of The Common Terms You Will Encounter

When shopping for life insurance, you will come across some reoccurring terminology. It can be quite useful when making inquiries or shopping around to have an idea of what these words refer to.

Insurance Policy

The actual contract between the insurer and the insured which outlines the amount that the beneficiaries are entitled to. It also contains the terms of the insurance.

Policyholder

The policyholder is the person who owns the insurance contract. More often than not, the policyholder is also the insured. However, it is not always the case. Take a parent who purchases an insurance policy for his child. The parent owns the policy, but the child is the one whose life is insured. While the contract is in effect and the insured dies, the insurance company pays out an amount to the beneficiaries designated in the contract.

Insurance Coverage

Insurance coverage is the risk (or the liability) for which the insurance company covers a policyholder.

Premium

The premium is the amount that the policyholder pays monthly or annually to keep the insurance active.

Death Benefit

The death benefit is the amount paid out to the beneficiaries when the life insured dies, and the policy is in force.

Beneficiary

The beneficiary is the person or entity that receives the payment of the death benefit when the insured dies. The beneficiaries can be multiple, in which case the death benefit is divided accordingly. The beneficiary can also be a non-profit organization or an institution.

Types of Life Insurance

Life insurance comes in many forms. The two main types of life insurance are term life and permanent life insurance.

Term life insurance expires after a given duration. The number of years before the expiration is known as the term, hence the name. The beneficiaries get the death benefit if the insured dies within the agreed term. For example, if you have a 20-year term life insurance, you will be covered throughout this period. If you outlive the term, your beneficiaries don’t get the death benefit paid to them.

Permanent life insurance covers you for your entire lifetime. It has no expiry and will remain active for as long as the policyholder pays the premiums on time. Permanent life insurance also has an added feature called the cash value. The cash value is an account that complements the life insurance, and the money accumulated here can be borrowed against or used to pay for premiums later on.

Deciding between term life insurance and permanent life insurance can be a dilemma for some insurance shoppers. But with a good understanding of the two and their respective provisions, it can be easier to make the right choice. If you need a second opinion, here at emma.ca, we have experts available 7 days a week.

What Is The Cost of Life Insurance

The actual cost of buying life insurance is pretty murky to the majority of insurance shoppers. Most people tend to think that life insurance is more expensive than it really is. Before jumping to a conclusion on how much you think it will cost, speak with your insurance representative. Everyone has unique financial needs and different health records. Fixing the amount you expect to need or to pay based on your friend’s policy is a recipe for disaster. It is comparable to trying to fit a round peg in a square hole.

The cost of life insurance is determined by many factors, both on your end and the insurer's end. From a consumer's perspective, factors that influence your quote include your health, your income, your lifestyle, your age, and your smoking status. These factors are used to calculate the mortality risk that a person represents to an insurer (likelihood of the insurance company having to pay the death benefit). Lifestyle habits such as smoking can make the insured pay a little more in terms of premiums.

The amount you need to insure should be calculated based on the needs of your defendants, the period that your family will need to replace your income and any other goals you may have, such as estate planning.

A popular rule of thumb is to multiply your annual income by ten to estimate how much you need to ensure. This might not be true for everyone, and the accuracy of the formula has been put to question on several occasions.

Using online calculators can also give you an idea of how much you need to insure. The final price, however, can only be provided by the insurance company that is selling you the policy once your file has been fully analyzed.

Who Needs Life Insurance?

Life insurance is viewed as a financial safety net and is essential for anyone who has people depending on them. These could be children who are going to school, sick parents, or a family that needs their day to day bills covered. In case of premature death, the resulting loss of income may have an adverse effect on the lives of the surviving family members. The goal of life insurance is more often than not to supplement the missing income and allow your dependents to maintain their lifestyle.

In most families, it is the breadwinner that sees the need to own life insurance. However, it is worth mentioning that even the spouse who stays at home should consider getting life insurance. While they may not bring in money to the household, they have roles and responsibilities that allow the family to save on expenses such as daycare. If they were to pass away, someone would have to assume the role. This would result in a lower income if the working spouse were forced to either stay at home or to pay for a caregiver. It is, therefore, a good idea to have life insurance for both spouses.

If you have family property secured as collateral for a loan (a fancy way of saying mortgage 😉), it can be an excellent idea to have life insurance that can cover the entirety of this debt. If you pass away, the loan and required payments do not just magically disappear. If the surviving family members cannot make the payments, they may be evicted or forced to sell, leaving them homeless. The same principle applies if you co-signed your children's student loan, they are left with the burden of paying the whole amount on their own in case you pass away.

Why You Need Life Insurance

Life insurance is good for the family and any of your dependents. What’s more, you will have the peace of mind knowing that your loved ones will be taken care of financially if the unthinkable happened.

• With life insurance, your income is well replaced if you die.
• Life insurance helps reduce or eliminate the payment of mortgage and any debts that you might have left behind.
• Life insurance ensures that your family can sustain their current lifestyle when you are gone.
• Your final expenses are catered for, and the family won’t have to stress about the burial costs during a trying time.

Do I Need a Life Insurance Quote?

Getting a quote is an important step in the process of shopping for life insurance. Many insurers offer a free quote after a couple of questions. Shop around and get a few to analyze them before making a choice.

At Emma, you can get a quote anytime. Our goal is to make the process of shopping for life insurance as convenient as possible.

With these life insurance basics, you will be able to decide what is best for you. With a greater understanding of the different policies, you and your agent will be able to better asses your needs.