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Life Insurance 101: Basics of Life Insurance Explained

Updated: January 14, 2018

When you are attempting to understand life insurance, it is important to go back to the basics.

There are a number of questions people ask when it comes to life insurance, and the answers to these questions can help you select the best policy.

Buying a life insurance policy at an affordable rate is all about knowing your situation and what is best in those circumstances.

For example, some people will benefit more from term life insurance, while others should invest in a whole life policy as soon as possible.

Here is a look at the answers to some commonly asked questions about the basics of life insurance.

When Should You Buy a Whole Life Policy?

Considering whole life insurance is an important step, especially if you are planning on having life insurance for your entire life. It is a lot easier if you get a good whole life insurance policy in your early years, which will last until your death.

If you buy a whole life insurance policy when you are still in your 30s or 40s, you can also incorporate this policy into your estate or retirement planning.

People who get whole life insurance early in their lives end up paying much lower premium amounts than those who wait until they are in their 60s.

If you buy a whole life insurance policy when you are still in your 30s or 40s, you can also incorporate this policy into your estate or retirement planning. It is important to talk with a financial advisor about this possibility.

Buying a whole life insurance policy at a young age will also provide you with a few decades to grow the cash value of this policy with your premium payments. The cash value will also increase substantially with the impact of interest over those years.

For those who have the money to afford these policies, getting whole life as early as possible is your best bet.

How Is Whole Life Different from Term Life Insurance?

A number of individuals get confused when talking about the differences between whole life and term life insurance. To put it simply, whole life insurance lasts your entire life, while term life insurance will expire after a certain amount of time.

An older person is more likely to get sick and die, which costs the insurance company more money.

A typical term life insurance policy lasts for ten years. During this time, your dependents are entitled to the lump sum benefit if you pass away. But you must get a new policy when it expires, which often means increased premium rates as you get older.

These premium rates will change with term life insurance because insurance providers charge more to insure older people. An older person is more likely to get sick and die, which costs the insurance company more money.

But term life insurance will come with much lower premiums at any given age. For example, a 30-year-old will pay less if they get a new term life vs. new whole life policy. Similarly, a 60-year-old will see lower rates for new term policies vs. new whole life policies.

But you may not necessarily save money in the long-run with term life insurance.

Do Premium Payments Change with Whole Life Insurance?

The reason you may not save money with term life insurance is because the premium payments on whole life insurance never change. If you agree to a certain rate when you first get the whole life policy ate the age of 25, you will be paying those premiums until the day you die.

While you save money on the term life policy during the initial one or two ten-year spells, you will eventually pay more for term-life insurance.

In contrast, a 25-year-old who gets term life policies every ten years will gradually pay higher premiums when they turn 35, 45, 55 and so on.

While you save money on the term life policy during the initial one or two ten-year spells, you will eventually pay more for term-life insurance.

This is why people are encouraged to get whole life insurance, especially if they intend on having a policy active for the duration of their life.

The initial premium payments on both types of policies are impacted by the individual’s health and habits. For example, smokers pay a lot more for life insurance than non-smoking individuals. Again, these increased premiums are the result of insurance companies mitigating increased risk.

What Are Some Types of Whole Life Insurance?

There are a number of different types of whole life insurance policies. For example, there is the non-participating whole life insurance policy.

This is ideal for someone who may want to stop making premium payments at a certain age, say retirement age.

A non-participating policy has the same premium levels and face value during the entire span of its existence. For example, a non-participating policy may require $30 monthly premiums and have a face value of $500,000. These figures will never change, as long as you continue making the premium payments.

In contrast, the participating whole life insurance policy involves slightly higher premiums and may provide the policyholder with dividends.

These dividends are money the insurance company is earning from the investments it makes with your premium payments. Dividends are not a guarantee, but they are very common in these types of policies.

Another type of policy is the limited payment whole life insurance policy. This is ideal for someone who may want to stop making premium payments at a certain age, say retirement age, but wishes for the benefit to remain intact until their death.

How Can You Get an Affordable Insurance Policy?

The best way to get an affordable life insurance policy is to know what you need and want. The examples of whole life policies we listed above are only three. There are plenty more varieties of whole and term life insurance available from different insurance providers.

Policies that give the most value in the policyholder’s unique situation are the ones that will serve these individuals for their entire lives.

Saving money on life insurance means finding the right balance between the benefit your dependents will receive, the cash value if it is a whole life policy and the premium payments you are making every month or year.

For example, a person who has a whole life policy with a poorly rated company that offers limited benefit is not necessarily saving money if they have really low premiums.

Getting an affordable life insurance policy is all about finding value. Policies that give the most value in the policyholder’s unique situation are the ones that will serve these individuals for their entire lives.

One individual’s situation may call for a single premium whole life insurance policy, while another person may benefit from an indeterminate premium whole life insurance arrangement.