The Basics of Life Insurance
There are a lot of reasons why you might want to get life insurance. The most obvious is to provide a financial safety net for your family after you die.
Life insurance pays a death benefit that is generally tax-free to your beneficiary. This payout can help cover mortgage payments, living expenses, other debts, and funeral costs.
Term life insurance is one of the most popular forms of coverage. It offers substantial death benefits at a relatively affordable cost. Unlike whole or permanent life insurance, it has no investment component. This allows companies to offer considerable coverage at lower rates than other types of life insurance.
Unlike permanent policies, which combine interest and market fluctuations with life insurance proceeds, term policy premiums, and death benefits are fixed for a certain period, known as the “term.” This makes it easy to understand and compare prices from different providers.
You can choose the length of your policy, ranging from one year to 30 years. The longer the term, the higher your premiums will be. A good rule of thumb is to choose a long term to cover your family’s financial obligations until your children are grown and independent.
You can also name beneficiaries who will receive your death benefit. Typically, the beneficiary is a spouse or child, but you can designate anyone you want. You can use a calculator to determine how much coverage you need or speak with a life insurance professional who can help you decide on the best coverage for your situation.
Whole life insurance is a permanent life insurance that lasts your entire lifetime as long as you continue to pay the premium. Part of the premium goes toward a savings component that accrues cash value over time, and you can access that cash value at any time while you’re alive (although borrowing against or withdrawing from the policy’s cash value will reduce your death benefit).
Whole-life policies generally have level premiums that don’t change throughout the policy, even if your health changes or inflation increases. You can also surrender the policy anytime and stop paying premiums, although you’ll owe income taxes on any amounts you take out this way.
If you choose a “participating” whole life insurance policy, you’ll be eligible for annual dividends that can be used to purchase additional coverage. This supplemental coverage is called paid-up additions and is designed to equal the original amount of underlying insurance coverage over time.
You can also designate contingent beneficiaries who will receive the death benefit if all primary beneficiaries die before you do. Review your beneficiary designations every year to ensure they reflect your current wishes. You can also buy a family whole life policy that covers the entire household under one contract instead of individual contracts for each spouse and child.
A type of permanent life insurance coverage, universal life (UL) policies offer the flexibility to customize your policy upfront and make adjustments. UL premium payments are typically split into two parts – one goes toward the cost of the coverage, and the other is allocated to a cash value component that acts as an investment or savings account that you can borrow from or withdraw funds from at any time.
Unlike whole life, which offers fixed premiums and guaranteed returns, universal life insurance policy premiums are based on current market conditions, which can fluctuate over time. Depending on the type of universal life policy you choose, it may earn an indexed or market-rate interest, allowing your money to grow over time. Often, you can use your policy’s accumulated cash value to pay for your premium payments or even surrender your policy to receive the accumulated cash value plus any additional investment gains.
Like whole life, universal life also builds a cash value savings component, which you can borrow against or take out as a policy loan. However, because the underlying investments can change over time and your premiums can vary, a UL policy is usually more complicated than a whole life or term life policy. It’s important to review your UL policy often to determine if you need to increase your death benefit or if the policy needs to be re-paid for any reason, such as a withdrawal or loan.
Final expense insurance
Final expense insurance is a type of life insurance that helps cover end-of-life costs, including funeral and burial expenses. It’s designed for people who may be unable to afford a traditional whole or term life insurance policy due to their age or health. The policy can be purchased in various ways, including online and from financial advisors. It’s typically more affordable than a regular life insurance policy and doesn’t require a medical exam.
These policies often have a waiting period before the death benefit can be paid out. This allows the insurer to assess the applicant’s health risks and determine if they are a suitable candidate for the policy. Some policies also have a modified or graded death benefit, meaning that the beneficiary will only receive a portion of the death benefit, not the total amount.
Beneficiaries can be named in a final expense policy and can leave instructions for how the proceeds are to be allocated. They can also allow the insurance company to decide on their behalf. It’s essential to choose a beneficiary who has an insurable interest in the policyholder’s life. In general, this is a relative or spouse. You can also consider naming an estate planning attorney or a fee-based financial advisor as your beneficiary.