Everyone knows what life insurance is, but few actually know how it works and what secrets are hidden in the riders and articles of your policy. In this article, we will explain the ten things you need to know about life insurance.
We’ve selected these ten points because they will help you tackle the decision of taking out life insurance with knowledge and confidence. If you already have a policy, these tips will certainly help you reevaluate your insurance. 
1 - You need life insurance, even if you think you don’t
It doesn’t matter if you’re young, in perfect health, or think you’re invincible. At some point, sooner or later, you will need life insurance. And there’s many reasons why: you might be applying for a mortgage and find that the bank requires you to take out mortgage life insurance. You might change jobs and find that your company requires you to get it. You might get divorced and the judge could decide that you must purchase a policy...
Do these scenarios sound familiar? They are some of the common reasons why people take out life insurance and, though you might not have them in mind when you think about life insurance, they might be the final push you need to purchase a policy. And if not, you should purchase one for the standard reasons: guaranteeing your loved ones’ stability after you’re gone, saving and earning money, preparing your estate, or making arrangements for your funeral.
As you can see, there are many reasons to purchase life insurance. Think about why you want to purchase it and start requesting quotes from insurance companies. You’ll find that there are many different types of policies, one of which will meet your needs.
2 - Insurance is much less expensive than you think.
Many people have the wrong idea of what life insurance costs. It’s true that you might pay a lot each month in premiums. But it’s also true that you can get high-quality coverage for only a few dollars a month. It all depends on what type of insurance you purchase and how you set it up.
For example, if you are young and in good health and opt for term life insurance without adding any unnecessary riders, your insurance could cost you very little. In contrast, if you opt for permanent insurance (for example, universal life insurance), sign up for a lot of coverage, add on many riders, and are over 40 years old, your premiums will probably be rather high.
As you can see, the key is to make the right choice. Calculate how much coverage you’ll need in the coming years, review your calculations, and only purchase what you need.
3 - The younger you are, the less expensive insurance will be.
One of the ways you can keep your insurance costs down is to purchase it while you’re still young. Young people have high life expectancies and generally are in good health. As such, insurers don’t take on a lot of risk and can offer them insurance at a very good price. There are even inexpensive life insurance policies for students, teenagers, and children.
If you like to plan for the future, think about purchasing insurance while you’re still young. You’ll start off paying very little and, with insurance like whole life insurance, you’ll be able to maintain these level premiums forever.
If you think you don’t have enough money on hand for a permanent insurance policy, we have some advice so that you don’t spend your best years without a policy: purchase term insurance. If you take out, say, a 15-year policy, you’ll be covered for anything that happens during that time and, if your financial situation improves, you can always convert your term insurance into a permanent insurance policy.
You’ll pay more in premiums, but your beneficiaries will have a guaranteed payout when you pass away and what’s more, you won’t have to go through the qualification period.
4 - Don’t lie to your insurance company: It’s the biggest mistake you can make
The qualification process (also known as underwriting) is the trickiest step for those who want to get life insurance. Your insurer will spend weeks or even months reviewing your application and the risk the company will take on if it grants you coverage. During this difficult period, you’ll have to submit personal information, explain your financial situation, and, most importantly, prove the state of your health. This is a time when many people are tempted to lie. But not telling the truth to the insurer is the biggest mistake you can make if you want to get life insurance.
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Remember, the company has a lot of information: it can crosscheck what you’ve said with records in the healthcare system, pharmacy reports, or driving records. Sooner or later, they will find out that you lied and might cancel your policy, leaving you without insurance. So don’t lie: answer the qualification questions honestly, and you’ll find that the process is much easier than it seems.
In any case, if you find yourself uninsured because you didn’t pass the medical exams and qualification process, remember that there are ways of getting life insurance without a medical exam. You can opt for guaranteed issue insurance, final expense insurance, or other forms that don’t require medical exams. But take note: these insurance policies are more expensive.
5 - Life insurance is a risk management tool, not an investment tool
Many people focus on life insurance as an investment mechanism, but that approach can be a mistake. It’s true that there are policies with investment components, such as variable and variable universal permanent insurance. These products have associated investment accounts that are managed by the insured. The profits from these variable income investments are partly used to improve the cash value of the insurance policies.
However, experts agree that you shouldn’t think of insurance as an investment. Rather, it is a risk management tool and should be managed as such. It can be used to offer a guarantee to your loved ones once you’re gone, or to build your estate. In any case, you should always think of insurance as a long-term tool, not as an investment vehicle providing high, short-term profits.
6 - There are many tax benefits to life insurance
Taxes have much to do with the long-term period we mentioned in the previous point. Insurance policies have some of the best tax treatment of all financial products, so make sure you’re making the most out of them.
On the one hand, death benefits are given to beneficiaries tax-free. This is a huge advantage, because they receive all the money you planned on giving them, with no reductions or surprises.
On the other hand, the cash value that permanent insurance policies accumulate pays deferred taxes. This means that you can enjoy part of this money and not pay taxes until you definitively withdraw it. What’s more, loans against the cash value also have favorable tax treatment.
7 - You need more coverage than you think, but don’t go overboard
It’s a good thing that the payout to your beneficiaries is tax-free, because it allows you to determine the coverage you need without being afraid that its size will cause a problem for your heirs.
Selecting your coverage, the payout amount that the insurance will pay when you die, is a key decision. Many people are underinsured: they take out much less coverage than they need. They do this to save on premiums and pay less, but they don’t realize that their family’s needs might be much greater than what they anticipated 20 years in the future.
For this reason, you should make sure you're covered. Experts recommend taking out insurance that pays at least 10 times the yearly salary of the family’s primary breadwinner. If you can manage 20 times your yearly salary, all the better. But don’t go overboard: overinsuring is a mistake, too. In your old age, you might find yourself paying premiums that are too high for coverage you might not need. As such, make sure your calculations are correct.
8 - Periodically reviewing your insurance policy might save you a lot of money
It’s important to think about how much you’ll need in the future so that you don’t overpay. Make sure to think about it periodically, not just when you take out the policy. Get into the habit of reviewing the conditions of your policy every two to three years. Think about whether you need the coverage you have or if you can reduce it (or increase it).
Be sure to also review the riders you’ve included in your policy and get rid of the ones you no longer need: this will save you a lot of money. And if your health improves, you can also request a risk reevaluation. You could see significant cuts to your premiums.
9 - Your insurance policy can help you with estate planning
Since you’re planning to use your insurance as a long-term tool, you should also think about using your insurance to build your estate. Many people use their policies as a way to protect their estate. A simple way of doing this is naming your heirs as your insurance beneficiaries so that they can use the insurance money to pay estate taxes.
There are also interesting mechanisms that use various types of trust funds to build estates that include life insurance. Find out more to see how your insurance can be used as a shield to protect your estate.
10 - Much more than just life insurance: Explore all your options
Life insurance is much more than an agreement that your beneficiaries will collect money when you pass away. Analyze your policy carefully and you’ll see that you can get much more out of it. You can include riders with extra coverage (or delete riders that aren’t necessary). You can include other people on your policy and combine it with other types of policies. You can decide what beneficiaries you’ll name, and change them whenever you wish.
An insurance policy does not have to lie dormant until it’s ready to use. If you wish, it can be an active tool that can be continuously adapted to your needs, offering you the best coverage, the best prices, and the best services at any time.
