What Is Life Insurance?
Life Insurance is a contractual agreement between you and an insurance company, wherein you pay a premium to the insurance company and they are then obligated to pay out a lump sum of money to the designated beneficiaries upon your death.
Buying life insurance typically involves three parties. You, the life insurance company, and the beneficiary(s). This money can be used in whatever means necessary once it has been paid out. There are no restrictions or obligations for how the money can be spent.
What Are the Different Types of Life Insurance?
A life insurance policy could help to support your family should something happen to you. You can check with your benefits provider to see if they offer a policy, or you can reach out on your own for a quote.
According to Forbes, there are two primary types of life insurance. Term life, and permanent life.
- Term life insurance is the most inexpensive form of life insurance, and also the most popular.
- These policies range in length from 10,15, 20, 25, to 30 years. The payments are based on this number and stay the same for the duration.
- If you pass away within the time frame of the policy, then the beneficiaries are permitted to make a claim and receive the death benefit tax-free.
- Permanent life insurance offers coverage for life. This however, comes at a price as it is generally more expensive.
- One interesting aspect of permanent life is that it can build a cash value over time. Typically this is on a tax-deferred basis.
- Unlike term life, permanent life can break down into several distinct varieties:
- Whole life insurance:
- Fixed death benefit, cash value that can grow with guaranteed rate of return
- Universal life insurance
- More flexibility, can alter premium payments and death benefit over time, attached to fund
- Burial insurance
- Designed to cover funeral costs, smaller death benefit than the other options
- Survivorship life insurance
- Insures two people under a single policy, benefit is paid out upon both parties passing away
- Whole life insurance:
According to Fidelity, there is a hybrid life insurance option, which is an additional benefit typically added onto a whole or universal plan. This benefit can help someone pay for long term care.
How Do Employers Offer Life Insurance?
Employers can offer an optional health benefit known as voluntary life insurance. According to Prudential, you pay a premium deducted from your paycheck, and if you die while covered, the insurer pays out the death benefit to your beneficiaries. Oftentimes you can take advantage of a group rate that offers lower costs as opposed to buying a plan individually.
Many organizations will also offer what is known as group term life insurance. Prudential describes group term life as a commonly offered health benefit that, unlike an individual plan, covers a group of people all working for the same organization. Because the coverage is dispersed amongst a group of people, it is generally cheaper than an individual plan. The coverage at its most basic level is often free, with many employers offering coverage up to one years salary. From here an employee can typically purchase more coverage at a lower rate than what a typical individual plan might cost.
Group term can certainly save employees money over time, but there are several downsides to be cognizant of. The most significant of these is that your coverage could end should employees leave that job or organization. As opposed to an individual plan, these plans are attached to the organization. If a person is no longer a member of said organization, then the coverage may very well end. It is also a possibility that premiums may go up as a person ages, as opposed to most individual plans whose premiums will likely remain the same.
That said, group term life insurance is an excellent investment that employees should inquire about as they begin working. There is typically a buying window when a person starts a new job or signs up for benefits. Be sure to be transparent with your employees about what offerings they have. Offering a quality life insurance policy can impact both your recruiting process as well as your overall retention rates. Offering quality benefits can often lead to a more positive company culture.
What Factors Affect the Cost of Life Insurance?
The most common factors affecting the cost of life insurance are age, sex, health, and lifestyle. These factors all play a role in determining cost. The reasoning is based on the data that suggests these are all factors linked to when a person is more or less likely to die.
Age and health may seem obvious, but companies will also take into account factors like driving history, criminal offenses, dangerous occupations, and even hobbies. Beyond this, Females have a higher life expectancy than males by nearly 5 years. These factors can all affect the overall rates a life insurance company will offer. The higher their risk in insuring you, the higher their premium is likely to be.
How Do Beneficiaries Make A Claim?
If you are the beneficiary of a policy whose policyholder has passed away, you should reach out to the insurance company right away. The company will likely not know that the person has passed away.
Once you have contacted the insurance company you will need to verify the death of the policy holder with a death certificate. Upon verification of the certificate you will need to fill out the claim forms and complete any paperwork needed to claim the death benefit.
Typically claims can be paid out in a quick fashion. Once you have completed all of the paperwork and verified the death certificate, it shouldn’t take more than about a week to receive the payment.
Related Terms: Employee Health Benefits