What Is Life Insurance?


    What Is Life Insurance: Why It’s Important For You

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    In the event of your death, life insurance allows you to provide your loved ones with a safety net. But being insured isn’t just important for your family – your company and your business can also benefit from having your life insured. 

    But, what is life insurance exactly? In this guide, we’ll go over all the essential information about life insurance! We’ll outline why it’s important to be insured, the different types of life insurance, and how you can make the most out of your package.

    Defining Life Insurance

    In a life insurance policy, an insurance company guarantees payment to a policyholder’s beneficiary upon the policyholder’s death. The death benefit is promised to the policyholder’s beneficiaries in exchange for premiums that the policyholder pays. How much you pay for insurance premiums vary depending on the factors examined when you apply for life insurance. 

    How Does Life Insurance Work?

    When you apply for life insurance, you sign a contract between yourself and the insurance company. In this contract, you name beneficiaries of your insurance policy. These beneficiaries are commonly your family members but you can choose anyone you want to receive your death benefit. In the event of your death, they’ll be eligible to receive your policy’s death benefit. However, your beneficiaries will only receive the death benefit if you die while your insurance’s term is still active.

    This death benefit is provided in exchange for your premium payments. These payments can be made upfront or in regular installments. This cost is influenced by several factors such as the type of coverage, your age, where you live, as well as other risk factors like your family’s history of diseases. Generally, a medical exam is also required as part of determining your premiums. 

    On top of the death benefit, another feature included with your life insurance policy is the rider. These are extra benefits that you can purchase to complement your coverage so it can protect you better. By purchasing riders, you can protect yourself against risks not covered by your initial policy.

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    Who Should Get Life Insurance?

    • If you’re the breadwinner of your family, being insured would provide your family with an income in your absence. They can still pay for expenses and continue their lifestyle.
    • If you’re a parent, being insured means your spouse and children can be financially secure in your absence.
    • Even if you’re a stay-at-home parent, being insured means your family can pay for the services you used to provide. For instance, in your absence, your family can hire cleaners, babysitters, or cooks.
    • For divorced parents, your life insurance can cover your support payments. 
    • Single parents can also benefit from being insured, affording your children protection from losing their only parent.
    • Parents with a special-needs child can have peace of mind in making sure their child would be financially-supported in their absence.
    • If you’re a homeowner with a mortgage, life insurance can cover your payments and ensure that your family can stay in your home. 
    • If you have co-signed debt like student loans, life insurance can pay off the debt for you.
    • Even if you have a high net worth, you can benefit from being insured by covering your estate or inheritance taxes. 
    • If you just want to provide an inheritance for your heirs, life insurance can provide them with a small inheritance.
    • If you’re a business owner, life insurance policies can help your partners buy your part of the business as part of a buy-sell agreement. It can also be used to pay off business debts.
    • If you have insurance from your workplace, getting your own policy will still benefit you. Typically, workplace insurance has very limited coverage and protection. 
    • If you’re concerned about the costs of your funeral, your life insurance policy can help cover it.

    Why Should You Get Life Insurance?

    What is life insurance able to protect you from? Generally, you take out a life insurance policy to protect your family or loved ones. The death benefit they gain in the event of your death will help them carry on with life in your absence. The peace of mind knowing that your loved ones will be financially stable and your debts paid is one of the most important benefits of being insured. 

    But there’s more to being insured than your family’s well being – there are certain features you can benefit from in life. Some policies allow you to build up investments in its tax-deferred cash value component. This cash value can be taken out in a low-interest loan or pay for the premiums. In cases where you decide you don’t need to be insured anymore, you can also cancel the protection entirely and take your cash value instead. 

    Another way you can benefit from being insured in life is by taking advantage of riders. By adding a rider onto your policy, you’ll receive extra coverage on top of your protection. For instance, you can have a disability income rider to ensure you still have income after being disabled. Another example is an accidental death and dismemberment rider, where the amount of death benefit given out will increase if you die in an accident. These riders cost extra, but depending on your situation it might be the wise decision to add it to your policy. 

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    Different Kinds Of Life Insurance

    Term Life Insurance 

    This is one of the two main types of life insurance, giving you protection for a set amount of time. Generally, the term ranges from 10 to 30 years. If you die within the term life, then the agreed amount of death benefit is paid out. One thing to keep in mind is that if you outlive the term life, you won’t be paid anything. At the end of this insurance life, however, you can apply for another term or convert it into whole life insurance. 

    Whole Life Insurance

    Sometimes known as permanent life insurance, this is the other main type of life insurance that protects the policyholder until their death. While whole life insurance is more expensive than a term life insurance, you can take advantage of the tax-deferred cash value component as a form of investment. With permanent insurance, the cash value gains value from your premium payments during the span of insurance. This cash value can later be used to pay your permanent insurance premiums or take a loan out on for other purposes.

    Universal Life Insurance

    Universal life insurance also has a cash value component. The difference in this type of insurance is that you can alter the premium and death benefit amount without a new policy. While the flexibility may be appealing, figuring out your death benefit and premiums would take more work.

    Variable Life Insurance 

    This type of insurance combines investing and life insurance into one package. Its cash value component is put into a mutual fund where it has the potential to grow. However, unlike a regular investment, you can’t pick which mutual fund your premiums go to.

    Variable Universal Life Insurance 

    Variable universal life insurance combines components of variable and universal life insurance policies. This policy allows you to adjust your premium and death benefit amounts like universal life insurance while your cash value is being put into investments like variable life insurance. 

    Simplified Issue Life Insurance 

    This type of policy cuts out the medical exam from the underwriting process, simplifying your insurance application. While this may seem appealing, keep in mind that your premiums are directly connected to your health, your age, and your chances of outliving the policy. If you’re young and healthy, opting for this type of insurance may net you worse premiums than going through the medical exam.

    Guaranteed Issue Life Insurance 

    This type of policy forgoes any health exam and questionnaires entirely. As long as you can pay the premiums, this insurance will cover you. This kind of insurance is appealing for older people with more health issues. That said, this insurance will cost more than other policy types.

    Final Expense Insurance 

    This is a policy for covering costs related to your death. It covers medical bills, your funeral or cremation, and other costs that may arise. These policies are generally only issued for people over a certain age, used to cover for their funeral costs. 

    Group Life Insurance

    Group life insurance is a term insurance that a company provides for its employees. Usually, this kind of insurance has limited coverage and lower death benefit. While this is better than not being insured at all, you’ll be better protected if you have your own life insurance.

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    What Kind Of Life Insurance Is Right For You?

    Choosing between the two primary life insurance types can be confusing. However, this decision is one of the most important parts of getting insurance. Here we present some considerations to help you choose which type of life insurance is right for you. 

    If you need to be insured just for a certain period, consider term life insurance. With term life insurance, you can determine how long you want to be protected by insurance. The lower premiums on term life insurance will also help those with lower budgets stay protected. After the term has expired, you also have the option to renew the policy or convert it into whole life insurance.

    Whole life insurance would be the best choice if you need to get protection for as long as you live. Whole life insurance also allows you to invest in its cash value, giving you an extra source of funds for various purposes. If you accumulate enough, you can even pay your premium cost with the cash value. This cash value is also tax-deferred, which means you pay no tax on this investment.

    Another thing to keep in mind is that premiums usually rise as you age – so, it’s wise to apply for life insurance earlier.

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    Applying For Life Insurance

    Before applying for life insurance, you need to determine what kind of policy you need. You’ll also need to determine your death benefit amount. When determining this amount, think about how much your beneficiaries will need to keep financial stability after your passing. An insurance broker may help you decide what kind of policy you need and how much your death benefit should be. Once you’ve decided on the type of insurance policy and your death benefit amount, you’ll fill out an application form.

    On the application form, you’ll be asked basic information such as your physical dimensions, age, lifestyle habits, and financial information. Be sure to fill this out honestly and accurately, since the insurance company may increase your premium and/or cancel your policy outright if they discover the form was filled dishonestly. 

    Next, the insurance company will arrange for a medical exam to check your medical history and habits that may affect your health. They will also check your family’s medical history for possible hereditary diseases or conditions. Some policies may let you bypass the medical exam, but they generally cost more on premiums.

    Your application and medical exam results will be next reviewed by an underwriter. They’ll determine how much risk the company is taking on by insuring you and decide how much you’ll be charged for coverage. After the review process is completed, you’ll be informed as to whether the insurance company approves or denies your application.

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    Tips For Getting The Most Out Of Your Life Insurance

    • If your application is denied or you think the premium is too high, reduce your risk factors. Improve your health by changing your lifestyle – quit smoking, drink less, lose weight, and generally live a healthier life. This will make you less risky in the insurer’s eyes and may net you a more favorable premium.
    • If you’ve recently lost weight or made a big positive change to your health, get a new quote from your insurance company. Improved physical health may convince the insurer to offer you a better premium.
    • Review how much insurance you actually need. Paying for more death benefit than your family needs will saddle you with higher premiums. 
    • If you’re looking to apply for a term life insurance policy, think about why you need this policy. Maybe you want a term life insurance to protect your son until he finishes college? Or maybe you want to take out the insurance so your family is safe until your retirement? Whatever your intention, estimate how many years of protection you’ll need and choose your term accordingly.
    • To save costs on whole life insurance, consider switching to term life insurance. Depending on your age and needs, you might benefit by switching to a shorter insurance term.
    • Conversely, depending on your condition, changing your term life insurance into a whole one may net you a better premium rate. 
    • When your insurance term life expires, look into qualifying for another policy instead of renewing the same one. If you’re still in good health, you might get a better premium by re-qualifying compared to renewing. 
    • Consider getting insured earlier on in life. Getting insured young means you’re likely to have fewer health issues and receive better premium rates.
    • Review your policy regularly. A policy that you applied for at 30 years old may not work as well for you at 55 due to different health conditions and financial needs. Be sure to review your policy after every major life event like marriage, having children, and changes in health. 
    • Shop around for insurers to make sure you’re getting the best coverage for your budget.
    • When choosing your insurance riders, think about what is life insurance protecting you from. Review your policy riders and make sure you only pay for the ones you really need.
    • Ask about payment discounts. By paying your premiums annually, you may get better rates compared to paying them monthly. 
    • If you have a medical condition, do some research to find insurers that are experienced in handling people with the same condition. They’ll likely give you better rates compared to less-experienced companies.
    • If you’re married, consider joint life insurance policies. Depending on your age, it could save you more to be insured together instead of having two separate policies. 
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    Having life insurance is essential, but it’s equally important to choose a life insurance policy that’s right for you. The right policy will offer you peace of mind and keep your family financially stable even after your death.

    If you need help choosing the right kind insurance, reach out to Wesley LLC today. Our team will advise on what insurance fits your needs the best. Contact us for more information.

    Written By Cameron McDowell
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