What is Life Insurance?
New to buying life insurance? Learn how it works and what you need to understand to choose your coverage.
A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured's death.
Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It's important to note that death benefits from all types of life insurance are generally income tax-free. There are new life insurance policies that have riders built into to them that returns all your premium, that builds cash value, Living Benefits and double accidental coverage.
There are many varieties of life insurance. Some of the more common types are discussed below.
How Much Do You Need?
Here are some questions to ask yourself:
How much of the family income do I provide? If I were to die early, how would my survivors, especially my children, get by? Does anyone else depend on me financially, such as parent, grandparent, brother of sister?
Do I have children for whom I'd like to set aside money to finish their education in the event of my death?
How will my family pay final expenses and repay debts after my death?
Do I have family members or organizations to whom I would like to leave money?
Will there be estate taxes to pay after my death?
How will inflation affect future needs?
Term life insurance
Term life insurance is designed to provide financial protection for a specific period of time, such as 15, 20 or even 30 years. With traditional term insurance, the premium payment amount stays the same for the coverage period you select. After that period, policies may offer continued coverage, usually at a substantially higher premium payment rate. Term life insurance is generally less expensive than permanent life insurance.
Needs it helps meet: Term life insurance proceeds can be used to replace lost potential income during working years. This can provide a safety net for your beneficiaries and can also help ensure the family's financial goals will still be met—goals like paying off a mortgage, keeping a business running, and paying for college.
It's important to note that, although term life can be used to replace lost potential income, life insurance benefits are paid at one time in a lump sum, not in regular payments like paychecks.
Universal life insurance
Universal life insurance is a type of permanent life insurance designed to provide lifetime coverage. Unlike whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower your premium payment or coverage amounts throughout your lifetime. Additionally, due to its lifetime coverage, universal life typically has higher premium payments than term.
Needs it helps meet: Universal life insurance is most often used as part of a flexible estate planning
strategy to help preserve wealth to be transferred to beneficiaries. Another common use is long
term income replacement, where the need extends beyond working years. Some universal life
insurance product designs focus on providing both death benefit coverage and building cash
value while others focus on providing guaranteed death benefit coverage.
Whole life insurance
Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage.
Because of the lifetime coverage period, whole life usually has higher premium payments than
term life. Policy premium payments are typically fixed, and, unlike term, whole life has a cash
value, which functions as a savings component and may accumulate tax-deferred over time.
Needs it helps meet: Whole life can be used as an estate planning tool to help preserve the
wealth you plan to transfer to your beneficiaries.
Final Expense Insurance
Final Expense is a form of whole life insurance that goes all the way to age 100 or even 121
with certain carriers. It is designed for the age group of 55-85. The death benefit can be as low as $2000 and up to $40,000 with certain carriers. Its for that individual that has no coverage or looking to add extra coverage. Clients use it to leave a legacy for their love ones or relieve that burden from their love ones when their time has passed. Like all insurance it can be used by your beneficiary for whatever purpose they seem fit. And yes its Tax free to your love ones.
How cost is determined
Insurers use rate classes, or risk-related categories, to determine your premium payments; these categories don't, however, affect the length or amount of coverage.
Your rate class is determined by a number of factors, including overall health, family medical history and your lifestyle. Tobacco use, for example, would increase risk and, therefore cause your premium payment to be higher than that of someone who doesn't use tobacco.
The choices in life insurance policies can seem bewildering, and they are difficult to understand at first glance. It's hard to know exactly where to start.
You should start with a deceptively easy-sounding question: Do you need life insurance at all? Your detailed answer to that question can help you decide what type of life insurance to purchase, assuming you decide you do need it.
If you decide you need life insurance, then your next step is to learn about the different types of life insurance and to make sure you're buying the right type of policy.
The Purpose of Life Insurance and Reasons You Might Need It
Life insurance needs vary depending on your personal situation—the people who depend on you. If you have no dependents, you probably don't need life insurance. If you don't generate a significant percentage of your family's income, you may or may not need life insurance.
If your salary is important to supporting your family, paying the mortgage or other recurring bills, or sending your kids to college, you should consider life insurance