Life insurance policies pay off when you die -- but death comes in several forms, and your policy may not cover all of them. Different policies offer different types and duration of coverage, and some offer coverage in addition to death. Be absolutely clear what coverage you're buying before you take out a policy.
Life insurance comes in two primary forms: term and whole life. Term life covers you for a set period — 40 years, say -- then expires. Whole life covers you until you die. You pay the same premiums on whole life every month. Term life insurance is more complicated: with some policies you pay the same premiums during the entire term, but with "annually renewable" term insurance, the premiums go up the older you get. Whole life supporters note that term life gives you zero coverage if you die after the policy expires, and it has no cash value. Term life fans note that after you reach retirement, your family typically doesn't need coverage to replace your lost income, to pay off your mortgage, or to put your kids through college.
Your policy covers your life for whatever amount you want to insure it for. If you want your policy to support your family, one common rule of thumb is to take out coverage equal to at least five to seven years of your income. for example, if you make $60,000 a year, $300,000 is the minimum you want. With some policies, you don't buy a flat amount of coverage: Decreasing term life insurance is very cheap, for example, because the amount it pays shrinks as you grow older. Universal whole life invests your premiums and adjusts the death coverage according to how well your investments do.
A typical life insurance policy doesn't cover all deaths. If you commit suicide, for example, many insurers won't pay; likewise, some won't pay if it's right after you took out the policy. Other insurers will reimburse a suicide's family for the insurance premiums, but no more. If you're killed during a war or a terrorist attack, or while performing extreme sports or other risky activities, your policy may not cover you. If your insurer discovers you concealed a pre-existing condition such as terminal cancer, your family may not see a penny of coverage.
For a price, you can add riders to your policy, special clauses guaranteeing you extra coverage. A "double indemnity" clause gives your family double the policy value if you die in an accident, for example. Other riders provide coverage before you die, such as if you become permanently disabled, you need long-term care or you're terminally ill with less than a year to live. Child coverage pays off if your child dies before reaching a certain age.
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