Life Insurance
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What is life insurance?
Life insurance is a contract between you and an insurance provider who will pay a death benefit upon death and is funded through premium payments. Think of it as a kind of financial safety net that allows you to live your life fully while being financially protected for the unexpected.
The policy is purchased for a set amount of coverage, which is the amount the insurance provider will pay your beneficiary. This payout, called a death benefit, can be used to cover funeral costs or large medical bills, or expenses like housing, food, education, and anything else they might need.
How does life insurance work?
There are a wide variety of life insurance coverages. In general, your life insurance policy remains active as long as the contract terms are met. This usually means a death benefit is payable upon death as long as the premium or funding requirements are met.
Premiums and other policy characteristics can vary by many factors including the amount of coverage you need, as well as your age and health. If death occurs while the coverage is active, your beneficiaries can submit a claim to receive the payout.
What is life insurance used for?
People get life insurance to protect their families and provide financial support to their loved ones in the event of their death. The death benefit can be used for:
- Mortgage payments
- End-of-life expenses such as medical bills, burial costs, or estate taxes
- Childcare to replace the loss of a stay-at-home parent
- Supporting family members through college
- Debts such as car loans, boat loans, etc.
- Keep a family business running
- Leaving a legacy
Types of life insurance
You purchase this policy to cover your entire life, as long as you keep paying premiums. Premiums remain constant throughout the policy, and the company invests a portion of your premium that becomes the cash value. These are more expensive than term policies in the early years, but they even out because the premium does not increase.
A variable life policy generally has fixed premiums, and you have control over the investment decisions for the cash value portion. However, this is riskier because there is not guarantee for the cash value.
This policy is similar to whole life, but has the potential for higher earnings on the savings component. It is more flexible in terms of changing premiums and face value throughout the policy. There is usually a guaranteed return on the cash value. Disadvantages include higher fees and the possibility of increasing
premiums.
This is the simplest and generally the cheapest form. You buy coverage for a specific period of time. It can usually be renewed, but premiums will increase based on age and health factors. There is no cash value. All other types of life insurance are permanent, but there are several varieties. They all include a savings element that builds cash value, in addition to the death benefit. Once that cash value accumulates, it is accessible to the policyholder tax-free.
Benefits of Life Insurance
Life insurance is designed to minimize the impact of the financial loss your family may incur upon your demise. The benefits of such plans are fourfold, aptly contained within the acronym “LIFE”:
Liability Free
Life insurance gives your family the power to be independent and self-reliant. A good term plan can help them repay financial liabilities like home loan, auto loan, personal loan, or a loan on credit card. The term plan may also cover hospitalization charges and critical illness treatment, giving you a comprehensive protection package
Immediate Expenses after Demise
It will also help your family cover a part of essential expenses immediately after your demise, such as funeral costs and/or medical bills.
Income Replacement
If you are the sole breadwinner in your family, a life insurance plan becomes can provide a guaranteed income to your family every month, making sure that their everyday life is not disrupted and they remain financially stable.
Education and other expenses for dependents
The payouts from life insurance can help to pay the bills for the education of your children, as well as expenses for their wedding or medical costs if any.
How much does life insurance cost?
The cost of life insurance can vary dramatically based on a wide range of factors. These include:
- Your age
- Overall health
- Family health history
- Occupation
- Hobbies
- Gender
- State of residence
- Amount of coverage
- Type of life insurance purchased
- Tobacco status
Generally speaking, term life insurance is the most affordable type of life insurance. This is because, unlike permanent life insurance coverage, term policies are only good for a specific amount of time, usually 10 to 30 years starting from when you buy the policy.
Term life insurance can even be downright “cheap” for the amount of coverage you can buy. For example, a 30-year old man in excellent health living in California could use a company to purchase 20 years of term life insurance worth $500,000 at a cost of less than $25 per month, whereas a woman in excellent health at the same age could buy this coverage for less than $17 per month.
Why is life insurance so important?
Life insurance is a financial safety net your family can rely on in the event of your death.
Paying a regular premium helps ensure that your loved ones won’t have to deal with burdensome funeral expenses or, even worse, lose their home or college fund because they can no longer keep up with payments.
In fact, the earlier you get coverage, the more benefits you’ll have. Not only is it more affordable at a younger age, but you’ll have more options to use it. With certain types of insurance such as Universal Life Insurance (UL), the lifetime premiums also allow you to build cash value over time. These funds can be used later to buy a home, start a business, pay for college or save for an emergency.
There are also plenty of add-ons like term riders that can offer you extra protection for a certain amount of time to meet your changing financial responsibilities.
Purchasing life insurance has another unexpected benefit: Starting with you, it helps lay the groundwork for financial responsibility and stability so that every new generation will know how important it is to protect their families.
Why Buy Life Insurance?
There are several common reasons for buying life insurance, including:
- To replace your income for any dependents who rely on that income.
- To pay for funeral expenses and other final expenses.
- To provide a financial legacy for heirs.
- To pay estate or inheritance taxes.
- To provide a donation to a charity.
- To create a savings vehicle if there is, or may be, a life insurance need.
Who Needs Life Insurance?
Not everyone needs life insurance, but it’s important to figure out whether you do. You may need life insurance if:
Someone depends on your income
Typically, this would include kids or a spouse, but can be any dependents, such as aging parents or siblings. Life insurance coverage helps replace your income so they can cover day-to-day expenses if you’re not around, maintain their quality of life, and pay for any debts.
You have young kids
Coverage is essential if you have kids, even if you don’t work outside the home. Stay-at-home parents may think they don’t need life insurance, but if you weren’t there, your family would likely have to hire help to manage everything you do for free. According to one estimate, the salary for a stay-at-home parent’s typical tasks would add up to over $160,00 a year. By getting covered, you can make sure your family can carry on and even give your partner the flexibility to take some time off work if needed.
You have outstanding debts
If you have a mortgage, credit card balances, school loans, or other debt, life insurance helps ensure your loved ones could take care of it if you weren’t there. This is especially important for any co-signed debt, since your loved ones could be liable for any payments once you’re gone. By covering your mortgage, you can also make sure your family doesn’t have to move if you pass away.
your estate goes entirely toward paying off your creditors. That could leave any loan co-signers on the hook for debts you agreed to pay. Life insurance can help pay off your debts so they won’t affect your heirs.
You want to cover end-of-life expenses
The average funeral costs around $10,000. Add in medical bills and other end-of-life expenses, and that number can creep even higher. Life insurance will help you plan ahead for those expenses, making sure the money is there without burdening your family.
You want to leave a legacy
Want to pass on something to the next generation? Life insurance can help make sure there’s money to leave behind to relatives or even your favorite charity. If you’re looking for an extra cash cushion that’s guaranteed no matter how long you live, permanent insurance is a great way to go.
You’re a business owner or partner
As an entrepreneur, you may be responsible for running a business, possibly with a partner as well. If you plan for the business to keep running after you’re gone, a life insurance policy can help. By naming your business partner as a beneficiary, they can take control of the finances or use the funds to buy out remaining shares.
Who Doesn’t Need Life Insurance?
You may not need life insurance if:
- You don’t have children or other dependents counting on you financially
- You don’t have a mortgage, school loans, credit cards, or other debts
- You and your partner have enough income and assets to care for yourselves independently
Even if you think you don’t need it, make sure to consider all the expenses that could crop up over time, like medical bills for your partner in their later years or end-of-life expenses. A life insurance agent can help walk you through your needs and options.
Life Insurance at Every Age
Single adults
When you’re younger, you’ll usually have more affordable policy options. Term life insurance can be a great choice for long-term coverage, especially if you plan to start a family down the road.
Starting a family
Take care of your family now and as it grows. Having a plan in place can help make up lost income, cover childcare costs, alleviate the stress of unpaid debts, and even support your children’s future. Term life insurance offers affordable protection that’s a great fit for many families.
Leaving a legacy
Permanent life insurance policies don’t just provide financial protection, they may also build cash value over time. This extra financial support can help make retirement easier or become part of your estate plan.
Just married
If your spouse depends on your income, term life insurance or permanent life insurance can help them maintain their quality of life and manage their finances without you. That includes covering a mortgage, paying for day-to-day expenses, and managing unexpected costs.
Planning for retirement
Once the kids are grown and the mortgage is paid off, life insurance can still be an important part of your financial plan. A term, permanent, or final expense policy can help support your surviving partner and cover end-of-life expenses.
How to get life insurance
Get started with these three simple steps.
What is term life insurance?
Term life insurance lasts a certain “term,” usually ranging from 10-30 years. If you die while your policy is in force, your beneficiary receives a death benefit as a tax-free lump sum.
If you reach the end of your term and do not need the coverage, you and the insurance company simply part ways. If you still need life insurance, you can choose a new term length (this may come at an additional monthly cost) or change your coverage to permanent life insurance. Converting to permanent life insurance could increase your premiums, but this is a good option for individuals who know they will need a lifetime of coverage.
What is permanent life insurance?
Permanent life insurance is the “umbrella” term for whole and universal life insurance; all of these policies offer guaranteed coverage that won’t expire. Permanent life insurance has several benefits beyond offering lifetime coverage, you can also enjoy flexible payments (avoiding a lapse in coverage if you don’t pay on time) and a tax-deferred cash value savings account built into your policy.
With these benefits comes a bit of a higher price tag than a term life policy; however, you will gain benefits that you wouldn’t find in a term life policy.
What is the difference between whole life and universal life insurance?
Universal life insurance is generally more affordable than whole life insurance because it lasts an average human’s lifespan rather than your lifespan.
Both options include the cash value component in which you can make partial withdrawals or even use the funds to cover your premium payments in certain circumstances. Some policies also offer the option to surrender your policy and receive a sum of funds equivalent to the surrender cash value.
Policy pricing
In terms of affordability, term life insurance is generally the most affordable type of life insurance for most individuals. Term life offers premiums that can be as low as $20 a month, and that rate stays fixed throughout the life of the policy.
Permanent, whole and universal life insurance policies can provide a fixed premium in some cases, but the premium price is generally more expensive than a term life policy.
Term vs. permanent life insurance: who each policy is best for
There are pros and cons to each type of life insurance. For those looking for an affordable monthly premium and a customizable coverage amount, a term life insurance policy would be a good fit. For individuals who prefer lifetime coverage with a savings component, whole or universal life would be a good fit.
You’ll also want to consider your dependents and loved ones: term life insurance can provide your young children with a death benefit if you pass away or face a critical illness or disability while they’re financially dependent on you.
If you are looking for long-term coverage and want to build cash savings that could later be used to fund a child’s education or supplement retirement income for you and a spouse or partner, whole life could be a good fit. If you are looking to provide estate liquidity for taxes or leave an inheritance for loved ones, permanent life insurance will likely be a better fit than term life.
Are you still wondering what life insurance plans are best for you?
Find out how we can protect your family and your future. Speak to an agent today to discover how we can help you with your life insurance needs. Call Today!