Understanding Life Insurance.
Life Insurance can be a little confusing, even for someone who has been around a while. You are in good company because most people are completely unaware of what Life Insurance can do for them and how it can be used to your benefit. One thing for sure is life insurance is an important part of your financial plan no matter what stage of life you are in.
Simply stated, Life insurance pays a death benefit if you die while the policy is in effect, in exchange for premiums you pay before your death. You can use the death benefit to protect against financial hardships such as loss of your income, paying off your mortgage, funeral expenses, medical or nursing care expenses, debt repayments, and child care costs after your death.
However, while it is true that the common characteristic of Life Insurance is that there is a death benefit that is paid upon your death, death isn’t the only time a financial benefit can be realized from Life Insurance policies.
When Life Insurance is Needed
How to determine if I need Life Insurance? Here are some questions to ask yourself to help determine if there is a need for you.
- Does anyone depend on me financially?
- How much of the family income do I provide?
- Do I want my family to be able to either pay off my mortgage or make the payments if I die?
- How will my family pay my final expenses and repay debts after my death?
- Do I want to leave money to charity or family?
- If I have life insurance through my employer, is it enough to meet my financial
- obligations?
- If I leave my employer, will my life insurance continue?
- Do I want to accumulate cash value to access now or later in life?
- Do I want to cover the expenses due to the loss of my child?
- Do I have children that I want to provide coverage for today to be able to pass on the coverge to them in the future?
- Do I want to set aside funds for my children (for education, buying a car, a home, etc.), without the restrictions of an education fund, retirement accounts, or other financial planning vehicles.
The answers to these questions can help you decide if you need insurance, what type of life insurance you need, and how much coverage you need. An insurance agent, financial advisor, or insurance company representative can help you evaluate your insurance needs and give you information about available policies. Unfortunately, many insurance agents and financial advisors only understand life insurance as a death benefit and do not fully understand all the aspects and benefits of what a life insurance policy/contract can do for you. Be sure and choose an agent or advisor carefully. Also, there is a difference between a captive agent (represents a single life insurance company) and an independent agent or insurance broker (represents multiple life insurance companies). Here is an example of a life insurance broker who is an independent agent.
Types of Life Insurance
There are two basic types of life insurance, term life insurance, and permanent life insurance.
Term insurance is intended to provide lower-cost coverage for a specific period of time (“a term”). There different types of term life insurance, such as renewable or non-renewable, convertible term, and various options “riders” that can be included in the policy like Return of Premium, Accelerated Death Benefit, Residential Damage Waiver of Premium, Unemployment Waiver of Premium, Common Carrier Death Benefit, Accidental Death Benefit (riders may vary by state), to name a few.
Permanent insurance coverage is for a longer period of time, such as for your lifetime, hence the word “permanent”. Permanent insurance is a type of insurance that builds cash value over your lifetime that can be accessed while you are living, during retirement, or that may be passed on to your beneficiaries upon your death. The cash value in a permanent life insurance policy is tax-favored, and as long as the appropriate guidelines are followed, the cash value can accumulate tax-free, be accessed tax-free, and transfer tax-free. There are various types of permanent insurance including Whole Life, Universal Life, Variable Life, Non-variable, and variations like Variable Universal Life, and Indexed Universal Life. Each type is useful. It all depends on what you need to meet your goals, objectives, and risk tolerance. Whole life A key difference between Whole Life and Universal Life is how you pay for the coverage. You typically pay premiums for whole life insurance according to a set schedule. In a universal life policy, you can choose a flexible premium payment pattern as long as you pay enough to keep your policy in force.
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