Life insurance is among the foundations of personal finance that every household needs to recognize. I would even go so far as to suggest most of this is important.
But, given its almost universal applicability, there is still much uncertainty and even cynicism about life insurance. But this article would provide an easy-to-understand description of how life insurance and more, five items that only a few people know regarding life insurance.
What Is Life Insurance?
A life insurance policy is an insurance company contract. The insurance company provides a high payment, known as a death benefit, to beneficiaries upon the death of the insured, in exchange for premium payments.
The life insurance is usually selected based on the owner’s needs and goals. Term life insurance generally provides protection over a set period of time, while permanent insurance provides lifetime coverage, such as whole and universal life.
It is important to note that death benefits from all types of life insurance are generally tax-free on income.
Types of Life Insurance
There are three main categories of life insurance that you can subscribe to. You will find details about each type and how it can help you.
1. Term Life Insurance
Term life insurance is designed for a specific period of time, such as 10 or 20 years, to provide financial cover. With traditional term insurance, the amount of the premium payment remains the same for the period of coverage you choose.
Policies can provide continued coverage after that time, typically at a considerably higher premium payment cost. Term life insurance is generally inferior to permanent life insurance.
Importance of Term Life Insurance
Proceeds from term life insurance may be used to offset potential lost profits across working years. This can provide the children with a safety net and can also help ensure that the financial goals of the family are still met — goals such as paying off a mortgage, maintaining a business going, and paying for college.
It is important to note that while term life may be used to replace the lost potential income, life insurance gains are paid in a lump sum at one point, not in regular payments such as paychecks.
2. Universal Life Insurance
Universal life insurance is a type of lifetime policy intended to provide compensation across existence.
Unlike life-long plans, traditional life insurance policies are adjustable and can encourage you to raise or lower your premium or policy rates over your life.
In comparison, universal life usually has higher premium rates than a word, owing to its lifelong scope.
Importance of Universal Life Insurance
A universal life policy is most widely used to help preserve capital to be passed to heirs as part of a versatile estate planning approach. Another common use is the substitution of long-term employment, where need stretches past working years.
Many universal life insurance product concepts focus on delivering compensation for the death benefit and creating cash value while others focus on delivering fixed coverage for the death benefit.
3. Whole Life Insurance
Whole life insurance refers to form of permanent life insurance designed to provide compensation across existence. Due to the lifetime coverage period, premium payments are usually higher for the whole life than for the term life.
Usually, insurance premium rates are set; however, unlike word, entire life has a cash value that acts as a part of the investment and can collect tax deferred over time.
Importance of Whole Life Insurance
Whole life insurance can be used as an estate planning tool to help keep the wealth you plan to transfer to your beneficiaries.
4. Variable Life Insurance
There is also a link between variable life and market trends. Like universal life, though, you can choose the sorts of things you want to invest in.
Premiums under variable life are fixed, but you may not notice any difference in coverage if your assets do not exceed the value of the death benefit.
Other Types of Life Insurance
Life insurance can further be categorized into two categories.
Variable Universal Life Insurance
As a hybrid of discretionary life insurance and universal life insurance, flexible universal life insurance takes up the fixed universal life rates and adds them to variable life’s varied holdings.
This ensures that your premiums can increase or decrease based on how the assets do, but they must be adequate to continue to support the death benefit.
Choosing the Type of Life Insurance You Need
Many people requiring life insurance need only word, particularly if they invest their money in conventional savings accounts. For term life insurance, with peace of mind that comes for life insurance, you pay a small amount of money.
But if you buy a more costly policy, you risk falling back on your payments, and the policy can expire.
But if you are a person who each year makes the maximum contribution to their retirement account, you may find that the component of cash value allows you to grow even more of your money.
For this reason, wealthy people might prefer a fixed life insurance policy for life as a whole.
Five Things to Consider When Choosing the Types of Life Insurance
Affordable Coverage
One of the most important things you need to consider is whether you can afford to keep the coverage in place.
While weighing quotes for term insurance against more expensive universal life insurance policies, remember that you are simply buying life insurance cover with term insurance without the cash value component included in universal life policies.
Also, remember that coverage of the term is coming to an end. When the original term expires, if you want to extend it, you must pay higher premiums depending on your age achieved.
You should also not buy universal life insurance, though, that comes with premium payments that are too big for your budget today.
Speak to your independent insurance provider about using a mix of term and universal life plans to provide you with the cover your loved ones deserve, at a price you can afford.
Term-to-Perm Conversion Options
When you decide to purchase a term insurance policy now but consider your coverage requirements will change in the future, find out if there is a transfer opportunity in the contract.
If so, you should be able to convert the term policy into whole life or universal life coverage eventually, without needing to provide evidence of transfer insurability.
Not all contract plans include the transfer of policy options, so contact the insurance provider to clarify choice.
Lifetime Benefit Options
The perception that your life insurance policy supports only the recipients of your scheme is no longer strictly valid. Most insurance policies give policyholders housing coverage choices.
These benefits can take various forms, including long-term insurance benefits, disability benefits, or critical health benefits. If your life expectancy is low, you may also be liable for early payment of Insurance and need funds to help provide for end-of-life care.
If this is important to you, let your agent know so that he or she can help you find coverage, which includes opportunities for living benefits.
Gender
Furthermore, people tend to live longer than males for about seven years, which converts into a less restrictive women’s program.
The gap on that difference in life expectancy, though, is beginning to close. Age and gender will be the fundamental factors in pricing your premium for life insurance.
State of Your Health
Most of all, life insurance policies would require either a physical exam, or you will need to address certain medical questions to assess your health status.
It likely goes without saying that the better you are for a person, the cheaper the insurance policy will be.
Smoking is also a major, negative factor in life insurance pricing. When you mention nicotine, it will cost you much more.
Remember that life insurance companies appear to equate your age to your fitness. The younger you are, then, the healthier you are expected to be, and vice versa.