How does life insurance work?

Question

I'm a 21 year old college student. I know that I'm young, but we all know how bloody unpredictable life can be, and I wan't to ensure that my family wouldn't be financially burdened. I have about $40,000 in private loan debt, and my co-signer would most likely have to make 48 consecutive payments before they could even request a cancellation of my loans. My question is, how does life insurance work in America? And which firm should I consider? Thank you!

Answer 1

Life insurance is designed to protect a family against the financial burdens that accompany the sudden, unexpected loss of a breadwinner. In your case, you are concerned about leaving your family saddled with debts should you die prematurely. This means you have specific goals. The fact that you are young means you will qualify for some of the very lowest rates available. Before you buy life insurance, though, check with your lender (if you haven’t already done so) to see who is obligated to pay back the loans if you die.

If your family is liable for your debts, then you have two options: term life and whole life. Term life covers you for specified amount of time, or term. How long do you think it will take you to pay back your loans? If it’s 20 years, then you could take out a term policy for 20 years in the amount of your loans (plus a little extra for funeral expenses, if you like). For a small monthly premium, you will be assured that your debts will be paid in 20 years. The money you spend on your term life will be gone, however, when the term is up. You have purchased security, but that is all.

If you get a whole life policy, the insurance company will invest your premiums and your policy will build cash value over the years. A whole life policy will never expire, as long as you continue to pay your premiums. If you live another 20 years and one day, you will be covered after a term life policy has expired. If you live to 80, you will still be covered. At some point, your cash value can be used to make premium payments for you, to keep the policy in force. A whole life policy is more expensive, but you are young and should get a good rate. Some people say you could use the premium savings of a term policy and get a better return on your money. That may be true, but be realistic: Would you really invest the premium savings? To find out more, go here: http://www.lifeinsurancewiz.com Good luck!

Answer 2

Life insurance is protection against dying too soon, leaving unsatisfied obligations. Classically, it is bought by a breadwinner to protect his family in the event of his death, but you have an excellent case for having some. There are several different kinds:
- Term insurance, sold for periods of one year on up. You pay the premium, and the beneficiary collects if you croak. At the end of the period, you start over. Because the risk of death increases every year that you age, the premium for a new policy will increase every year, although if you buy a multi-year term policy, you can get one with level premiums.
- Cash value insurance. Costs more than term, but builds up a cash value which can be borrowed against, used to pay future premiums, or for other purposes. Usually has level premiums; the difference between the large early premiums and the small risk of payout is where the cash value comes from. Can be arranged so that after a certain number of years, the cash value completely pays for the future cost of the policy.

What to do? I recommend term insurance because it's cheap. If you invest wisely, you will make more money on your investments than the insurance company will make for you, especially if you are investing in IRAs, 401(k)s, or other tax deferred vehicles.

How to do it: contact a few insurance companies (there are lots of ads), and compare policies and premiums. It is a highly competitive business, as you can imagine.

Further study: I highly recommend Ayres' Mathematics of Finance, in the Schaum outline series. It has a mortality table in the back which is too old to be useful; get a better one on line from the IRS, Pub. 1457. Don't print the whole thing -- it runs 700 pages; just find the commutation tables for 3% and use those. That's a reasonable rate for after-inflation yield on investments.

Answer 3

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RE :How does life insurance work?
I'm a 21 year old college student. I know that I'm young, but we all know how bloody unpredictable life can be, and I wan't to ensure that my family wouldn't be financially burdened. I have about $40,000 in private loan debt, and my co-signer would most likely have to make 48 consecutive payments before they could even request a cancellation of my loans. My question is, how does life insurance work in America? And which firm should I consider? Thank you!
1 following 7 answers

Answer 4

Term Life is what you want and it is just insurance without all the bells and whistles of added features. It's insurance, and only insurance, plain and simple. They way it works is simple. If you die, then the beneficiary gets the face value of the policy. Suicide is excluded, but only for the first two years the policy is in force. Getting term life means that you will need an exam to determine your health status. But don't worry, you don't have to pay for this. It takes about 6 to 8 weeks to be finally approved for the insurance. And stay away from whole life insurance. The only time whole life insurance is good is when your health is so bad that no one will insure you for term life.

Answer 5

term life is just the protection
whole life builds a savings account, too

but - for the money - get the term and put the savings account into a ROTH IRA

(the insurance co will make 3-4x what they give you back at age 70 with whole life)

the younger you get term - the lower your start up costs
with your better health - e.g. I have diabetes and I am now frozen out of cancer policies. the only way to get 'better' insurance was to change jobs and get open enrollment upon entering the new employer scheme

best of luck

Answer 6

You pay a small sum to keep a contract in force that will pay a large sum in case of your death. It's a displacement of risk.

It sounds like you should also consider disability since your chances of being sick or hurt for more than 90 days are greater than your chances of dying before age 65.

Answer 7

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Whole life insurance is a form of life insurance which has a guaranteed level death benefit until death or age 100, which ever comes first. It also builds a guaranteed cash value which will equal the face amount of the policy at age 100. So if you have coverage of $100,000 and you are still alive at age 100, the insurance company will void your life insurance policy and pay you $100,000. Premiums remain level and there are 3 ways you can pay your premiums. The most common way is called "Straight Life" or "Continuous Premium Whole Life." This is where you premiums continuously until you die or when you reach age 100. The second way is called "Limited Pay." This is where you pay a higher amount of premiums than Straight Life for a certain amount of time. Examples of this are "20-Pay Life" or "Life Paid at 60." With "20-Pay Life" you pay your premiums for 20 years. "Life paid at 60" means you pay your premiums until you reach 60 years old. The shorter the payment period, the higher the premiums and vice versa. The third way is called "Single Premium Whole Life." This is where you pay one lump of premium and never have to pay it again. As I mentioned earlier, Whole life insurance builds cash value. You can borrow it anytime and use it for any purpose. The question is "what is this borrowing part all about?" Isn't the savings suppose to be your money? The answer is no. The premiums you pay belongs to the insurance company. If you want to take money out from your life insurance, you have to borrow it. The insurance company will charge you a loan interest of anywhere between 5-8%. But in the first 2 years of the policy, no cash value is accumulated. So there's nothing you can borrow during that time. After the first 2 years, you are guaranteed an interest rate between 1-3%. When you borrow money from the cash value, your death benefit is reduced by the amount you borrowed, but the premiums remain the same. Interest charged on the amount you borrowed does not go back into your cash value. It goes directly to the insurance company. If you die someday, the insurance company keeps your cash value and pays the death benefit only. If someday, you decide you want to cancel your whole life policy, you will get most of your cash value. When you cancel your life policy, the insurance company may charge you a surrender charge on your cash value. If you borrowed money from your cash value, it is important that you pay this loan back before canceling the policy. Failure to do so will result in income tax on the loan amount. In summary, here are the pros and cons of whole life insurance: PROS 1) You are guaranteed coverage until you die or reach age 100, whichever is first. 2) Premiums remain level. 3) It builds cash value. CONS 1) It builds cash value, which makes this type of life policy very expensive. 2) Cash value grows at a low rate of return 3) If you want to use the cash value, you have to borrow it and pay loan interest of 5-8% 4) If you die, the insurance company keeps your cash value. Term insurance is designed to provide death protection for a definite and limited period of time such as One Year Term, Five Year Term, 30 year Term, or Term to 65. If the insured dies during the term, the policy matures and the insurance company pays the face amount of the policy to the beneficiary. If the insured doesn't die during the term, the policy expires. The second most important characteristic of Term insurance is that it is pure insurance. You pay premiums only for the coverage. Since there are no forced savings or cash value attached to Term insurance, it is designed to provide the greatest possible protection for the lowest possible cost. Therefore, the two key points to remember about Term insurance are that if offers (1) protection only for a (2) a specified period of time. One of the most widely marketed forms of Term insurance is Annually Renewable Term (ART). The insurance company grants the insured the right to renew the policy each year to a stated date or age. The cost to renew the policy goes up each year because the rates are based on the insured's attained or current age. The increasing in premiums can present a real problem for the insuring public. One Term product that provides a partial solution to the rising costs is Level Premium Term. With a policy of l0ng duration, the payment may be leveled out over the life of the policy to create Level Premium Term. The cost of Level Premium Term is calculated by price of the early years by the price of the later years. So in the beginning, you are making an overpayment of what the actual cost of insurance is. But in the later years, you are making an underpayment of what the actual cost of the insurance is. Why? Because the cost to insure someone is young is low compare to the cost of insuring someone who is old. Term insurance, then, in any of its many forms, is the most affordable protection available for teh premium

Answer 8

Sounds interested

Answer 9

Thx for the replies, greatly appreciated