Beginners Guide to Life Insurance

Life insurance makes the inevitable easier (on everyone else).

In the United States, life insurance started with arrangements made through churches, starting with Presbyterians and Episcopalians, to help widows and children of deceased ministers. The practice of pooling funds to help the people listed in the “Survived by” section of the obits quickly spread out of the clergy and is a major part of financial planning today.

Simply put, life insurance pays out a lump sum, the death benefit, upon the death of the covered individual. With a few exceptions, usually geared to making it impossible to kill someone else or oneself for the insurance money, payout is guaranteed.

The death benefit is meant to pay any remaining debts, like medical bills, mortgages or credit cards, and to provide a financial cushion to ease the survivors’ transition into life without the deceased. Life insurance is as important for a stay-at-home parent as for a breadwinner, since putting children in paid daycare can eat into a family budget as much as losing the primary income.

There are four types of life insurance: term, whole, universal and variable. Term life insurance usually has lower premiums for a set number of years (the term), and then premiums increase dramatically once the term expires. Whole life insurance starts off with higher premiums, but the premiums stay steady. In both universal and variable policies, the premiums and death benefits can be adjusted, but adjustments should be done carefully and with the advice of an investment representative.

Term insurance is used best as a temporary measure, suited particularly parents of small children who need a higher payout if they die while the children are still at home relying on their support, but won’t need as high a death benefit after the children leave the nest. Whole life, true to its name, is meant to be kept for a person’s entire life and be the policy that pays out when the person dies. Universal and variable insurance policies’ death benefits work like whole life, but have added features making them attractive as investment accounts. Unlike term and whole policies, universal and variable policies carry some risk of losing the benefits.

Pet life insurance is new on the life insurance scene. More property insurance than life insurance, pet life insurance is meant to pay for replacement of the animal upon its demise and is best suited for high-value (monetary, not sentimental) animals like show cats and champion dogs, rather than the family pet.

While it is possible to buy life insurance directly from an insurance company, the right insurance agent can make the job easier. The National Association of Insurance and Financial Advisors has resources to connect people with reputable insurance professionals. When choosing an agent, independent agents, who represent many different insurance companies, are usually preferable to captive agents, who are employed by a single insurer and limited to the policies that company offers. Do not feel shy about asking a prospective agent whether he or she is captive or independent.

Buying life insurance forces people to confront their mortality, so most people put off looking for life insurance. This is a mistake. The older a person is when applying for life insurance, the more expensive the premiums are, and certain medical conditions can make it impossible to find life insurance at all.

Like all insurance, the time to buy is before it is needed, ideally when a person is young and healthy. Healthy trumps young for people under age 55. Before middle age, if you don’t have a chronic condition and realistically-that is realistically-think you can be healthier within 10 years, buckle down, lose the spare tire, and apply when your BMI is under 25 to get lower premiums. Beyond age 55, take the plunge regardless of current health. Providing for loved ones is worth the discomfort of facing one’s own mortality.