Life insurance — Student guide
Does life insurance insure your life? Not exactly. But you're insuring a very big part
of your life . . . your income and the financial stability it gives your family.
Think about it. If you took out a car loan and you died, who would pay back the loan?
Who would pay for the funeral? If both of your parents work and one of them dies, who would
support you? Would you be able to live in the same home? Who will pay the taxes? In any
situation where you are financially responsible for someone or something, life insurance helps
make sure you have enough money set aside to pay your bills and meet your family's needs after
you are gone.
I'm too young to need life insurance!
You're probably years and years away from dying. But, the simple fact is anyone at any age can
die. Car accidents, natural disasters, fires, and some diseases are not picky when it comes to the
age of their victims.
When you buy life insurance, you pay your insurance company money (your premium)
and they agree to pay a death benefit to whomever you choose when you die (your beneficiary).
A beneficiary is usually a spouse, a child or a parent. Your beneficiary can use the money for any
purpose, but the main reason for buying life insurance is to make sure any money you owe is
paid, all bills are settled, and your family is taken care of. Simply, the intent of life insurance
is to replace income lost by the death of the insured.
Fast Fact
A simple funeral can cost more than $10,000.
The guessing game
Age is a key factor in how much you'll pay for life insurance. Statistics show that generally,
your chance of dying increases each year. Gender is also a factor. Using statistics from years
of research, insurance companies determine the cost of your insurance.
Factors such as your job, hazardous activities or hobbies, weight, tobacco use, current health,
drug and alcohol use and medical history are called risk factors. If the insurance company looks
at you as a high risk, they might not insure you at all or they may charge you more for coverage
than others at lower risk categories.
Life Lesson 1
If you are a 400-pound skydiver with a history of cancer, are you a higher or
lower risk than a 180-pound teacher with no medical problems?
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How many types of life insurance are there?
Life insurance policies will fall into one of two general types of coverage: term life insurance
and permanent life insurance.
Fast Fact
Permanent insurance provides coverage throughout the insured's lifetime as long as
premiums are paid as required. It provides insurance coverage and a cash accumulation
element (cash value).
Permanent insurance has a cash value which builds over time. You get this money if you cancel
the policy. Permanent insurance includes whole life, universal life, variable life and variable
universal life. The premiums can be flexible or fixed, and the cash value can vary.
Term insurance generally has no cash value, and you generally receive no money back if you
outlive the term or cancel the policy. People buy term insurance when they need to complete
payments on a house, cover other loans or while raising children. In other words, they use term
insurance to cover a specific period when their income is particularly critical to those they’d
leave behind.
Fast Fact
Term life insurance is for a specified period of time. It is life insurance that provides
a death benefit if the insured dies during the specified period. The policy term is the
specified period of coverage provided by the term insurance policy. It can be as short
as an airplane trip or as long as 40 years. It is sold for a number of years — one, five,
10, 20 or until a certain age is reached.
Insurance policies may include supplemental benefits to tailor a policy to an individual.
These may include disability benefits which cover financial losses relating to sickness or injury,
or accidental death benefit riders which pay an additional death benefit to the beneficiary if the
insured dies as the result of an accident.
Young people pay less; old people, more
Insurance costs vary from company to company because so many different policies are offered.
But as a general rule, life insurance costs less for a young person and more for an older person,
and the longer you wait to buy insurance, the more expensive it gets.
Why? Generally, the probability of dying increases each year. Because of this, term insurance
premiums may increase over the term; they may also increase if you renew the policy or buy
a new one. (Not all term insurance policies offer a renewal feature.) You may end up buying
several term policies, one after another, to cover your whole life.
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On the other hand, you can buy one permanent life insurance policy to cover your whole life.
The premium is based on your life expectancy at the age you buy the policy, and permanent
insurance is available where the premium remains the same throughout the life of the policy.
A term insurance policy may contain a right to convert the policy to a permanent insurance
policy, typically before a specified age.
Term vs. “Perm”
Term life insurance
Permanent life insurance
Provides a death benefit
Provides a permanent
for a specified period
death benefit
Used to provide coverage
for temporary needs such as:
• mortgages;
• educational expenses; and
• family income
Used to provide coverage
for permanent needs such as:
• final expenses;
• outstanding debts; and
• estate costs
Generally no cash value
Builds cash value
Terms to know
Accidental death benefit — If a person dies as the result of an accident, the insurance company
will pay an additional death benefit to the beneficiary.
Beneficiary — The person or people designated to receive the death benefit from a life insurance
policy at the death of the insured.
Cash value — In a permanent life insurance policy, the amount of money that the policy owner
will receive if the policy owner cancels the policy and surrenders it to the insurance company.
Claim — A request for payment under the terms of an insurance policy.
Death benefit — The amount of money paid or due to be paid when a person insured
under a life insurance policy dies.
Policy — A written document that serves as evidence of an insurance contract and contains
the pertinent facts about the policy owner, the insurance coverage, the insured, and the insurer.
Premium — The amount you pay for an insurance policy.
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