How life insurance works

Three types of life insurance can protect your family’s income and way of life if something happens to you. The coronavirus pandemic has a lot of Consumers members paying closer attention their family’s financial wellbeing. You might be wondering what happens to your family if the virus took your life. Or your spouse’s. If your family’s income would be adversely affected, you may want to consider life insurance. Broadly speaking, life insurance works like other insurances. You pay premiums to a company that promises to pay out a certain amount if an adverse event happens. With life insurance, the benefits are paid to the people you name (called beneficiaries) in the policy if you die. When you start shopping for life insurance, you’ll discover three common types: term, universal and whole life. Each is used differently; let’s take a brief look. Term life insurance You can view term life insurance as a safety net for a set number of years. It’s used to protect your loved ones from a loss of income during your working years. It typically costs less than the other two types because it covers a limited period. Term life insurance doesn’t build equity like universal or whole life insurance can, but it will help your family pay bills, pay off a mortgage, cover tuition or keep a business running. Term life insurance pays out a set amount that you choose upfront. If you outlive the policy term there is no payout. Universal life insurance Universal life insurance is considered permanent, and it offers people flexibility. With this policy, you adjust your coverage (which will raise or lower your premium) based on needs throughout your life. For example, you might want more coverage when your children are young and less as they get older. When considering universal life insurance, there are many options. Some policies are designed to build cash value, while others guarantee a set benefit amount. Many people use universal life insurance as part of their estate planning strategy as a way to transfer wealth to their beneficiaries. Whole life insurance Whole life insurance is also considered permanent because it provides lifetime coverage. Premiums are fixed and the policy has a guaranteed cash value. Many people use whole life insurance as a savings tool that allows them to transfer wealth income tax-free to their beneficiaries. With all three types of life insurance, the money paid to your beneficiaries is generally income tax-free. The cost of life insurance The cost of life insurance depends on the company, their coverage and personal factors. Every insurer has their own criteria for setting rates. In general, they look at: age, health, family medical history, tobacco use and occupation. The healthiest people get the best rates because they’re less likely to die. Companies that issue policies without requesting a medical exam limit coverage, and you’ll probably pay more compared to policies that require an exam. Not surprisingly, with all three types of life insurance, the more coverage you choose, the higher the premium. As with any insurance product, shop around, check company reputations and compare costs. Which type and how much life insurance do you need? To determine how much life insurance you may need, start with our life insurance calculator. For more personalized answers about which products best fit your family’s needs, contact our partner, Nulty Insurance. Consumers provides banking services for more than 100,000 members. If you have banking questions, call us at 800-991-2221. We make it easy to bank how you want, when you want. During the coronavirus confinement, we’re available online, by phone and by appointment at select offices equipped to maximize safety. Federally insured by NCUA