What to know about life insurance

Providing financial security for your loved ones if you are not around is what having life insurance is all about. Before buying a policy, however, there are some things you should know about the product.

What is it?
A life policy is one of the few types of insurance that actually benefits a person other than the policyholder. Since the policy usually only pays out once someone has passed away, the policy benefits go to the person named as a beneficiary in the policy. Depending on the type of policy, it might also generate a cash value that can be tapped at some point.

Who is it for?
Anyone, even a single person, can benefit from having a life policy. However, the policies usually make the most sense for people who have others who rely on them, such as parents or the breadwinners in a single-income family.

How does it work?
With an insurance policy that insures a life, it’s up to the beneficiary to claim it. That person must put in a claim with the insurance company to receive the benefits. Once it has a claim, the insurer will confirm that the policyholder has died and that the manner of death was covered in the policy. After that it will pay out the policy benefits, usually in a lump sum, to the beneficiary.

Types of coverage
There are two main types of life coverage: term life and permanent life. With a term life policy, you have coverage for a term of years, often 20 or 30. If you survive the term, the policy ends and you get no benefits. The big advantage to such policies is that they are an inexpensive way to get coverage. Permanent life policies stay in effect as long as you continue to pay premiums. Such policies also accrue a cash value that can be borrowed against or liquidated.

Major benefits
The main benefit of having life insurance is providing a financial safety net for your loved ones if you are not around. Another benefit is that the proceeds of the insurance are tax free.