Life Insurance Basics

People buy life insurance to ensure that their beneficiaries have enough money to maintain their standard of living after the policyholder dies.  Beneficiaries are the people you designate to get the money from the life insurance policy after you die. This money is called a death benefit.

You may designate one or more beneficiaries.  If you designate more than one, you must decide how to divide the money. You may also choose a secondary or contingent beneficiary to receive the money if the primary beneficiary dies before you.
Life insurance isn’t an investment.  An investment is a financial risk — you might make money but you also might lose some or all of your money.   In contrast, life insurance pays a guaranteed death benefit.

Some types of life insurance like whole life, universal life, and variable life, can build a cash value that you might be able to use for retirement income.  Agents and companies may not refer to life insurance as an investment or retirement income source. If an agent or company tries to sell you a life insurance policy as a good investment, be wary.  Also, don’t confuse life insurance with annuities.  People often buy annuities for retirement because they can provide steady income over a long period.

Insurance companies use a process called underwriting to decide whether to sell life insurance to someone and how much to charge them.  The company will consider several factors to determine the premium to charge.  Those include:

• your age

• gender

• medical condition

• whether you smoke

• your hobbies and occupation.

Younger applicants and people who are in good health, don’t smoke, and don’t have a hazardous hobby or job will be charged lower premiums because the company expects that these policyholders will live longer. Applicants who are older, have health problems, smoke, or have a hazardous hobby or job will probably pay more.

Companies may charge you a higher premium or decide not to sell you a policy because of your potential risk.  If a company won’t sell you a policy, keep shopping.  Underwriting guidelines vary by company.  You might be able to find coverage with another company.

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