All what you need to know about Life Insurance
What is life insurance?
Life insurance is a contract between the insurance company and the insurer that requires the insurer to pay a premium. In exchange for this premium, the company will pay an amount of money which is called the benefit upon death. In some contracts, terminal or critical illnesses will also result in a payment. The contract will usually involve some limitations or exclusions in which the company will not be required to pay the benefit to the family of the insured. Such limitations might include suicide, war or civil riots. The insurer will either pay the premium regularly or as a lump sum. Sometimes the failure to meet the regular payments of the life insurance policy will result in its cancellation.
What are the different types of life insurance policies?
Life insurance falls into 2 categories that people die in order to have themselves and their families protected.
Protection policies usually require the company to pay a lump sum of money as a benefit to the insured and the family. At the same time, there is another investment life insurance that aims at increasing a capital amount of money that would provide enough money to pay for college education or another situation that is more likely going to happen in the future.
Term life insurance:
In this type of insurance you are basically buying coverage for a fixed number of years, usually for a fixed amount you pay every year. When the term of the insurance policy expires, this means that the insurer is not covered anymore and they can either forget about the policy or they can buy more years for an additional sum of money. If the person dies after the term of the insurance, the beneficiaries don’t receive anything, if however, the insurer dies within the term, the beneficiaries will receive a specific amount of money that has been previously assigned.
This is probably the least expensive type of life insurance and also the easiest one to understand this is because it is some sort of all or nothing kind of policy.
Convertible term insurance:
This type of insurance can be turned to whole life insurance or universal life insurance at any point without having to go through medical assessment again. This could be pre-assigned only at a certain age.
Whole life insurance:
This type of insurance is usually more expensive as it pays a benefit to your beneficiaries no matter how old you are in the case of death. In addition to that, the cash value of the policy will keep on growing by a certain amount every year. You can choose to pay a certain amount of money every year or you can spread your payments on a life time. Some people choose to pay their premiums over a certain number of years to make sure that they have finished what they have to pay before retirement. This however might result in higher premiums that they have to pay over these years.
You can also borrow money against your insurance at any point and the amount of the loan that you haven’t repaid yet will be deducted from the money your beneficiaries will get in the case of death. Also the accumulated cash value usually goes to the company and not to the beneficiaries.
For these reasons, many people don’t prefer to buy whole insurance. It is by far harder to understand and also more expensive for the benefits it provides. This is why it is not usually the best option for many people.
Universal life insurance:
This is a similar kind of insurance to whole life insurance but it offers a greater deal of flexibility. You can change the amount of the benefit or the cash value according to your needs. Accordingly, the premium will increase and decrease according to the new benefit. To increase or decrease the benefit you will have to go through some medical testing or pay some fees. In some cases, these types of insurance plans can be underfunded because the investment chosen by the company can fail to cover the increasing premiums. Because of the complexity of this insurance policy, the administrative and managerial fees are usually very high. Although it is really expensive, some people prefer it because they have the ability to borrow against it without any credit check.
Guaranteed Universal life:
This type of insurance will offer insurance coverage until you are 90, 95 or even until death and it is usually less expensive. It doesn’t have an investment component or cash value. It doesn’t have the risk of becoming underfunded or that you have to keep on paying more to maintain the force of the insurance plan. This type of insurance is especially appealing to seniors who still want to have some coverage because it is cheaper. Some of the policies will expire if the insurer misses a payment and some of them won’t.
Why do I need life insurance?
Life insurance has a lot of purposes. Most of the time, it is will simply pay for the people you provide for by replacing the earnings in the case of the death of the insurer. In business, life insurance is the best way to protect the business and the employees. Life insurance can also provide a great way to pay for estate and inheritance taxes.
When a person dies through their earning years, their family loses their main source of income but they would still have to pay the bills, the mortgage and even save more for retirement and college. Employers also buy insurance policies to compensate their key employees or partners in case of death after the loss of services and income. Estate taxes and inheritance taxes have to be paid in cash and life insurance can provide a way to pay for them.
Who needs a life insurance?
Life insurance can provide great benefits that will pay for a lot of financial obligations, like the mortgage you have to cover or to pay for the life expenses of a child with special needs who will need someone to provide for them after the death of the parents. Most people think that life insurance is a necessity but know that they don’t have enough coverage and this means that they might have some sort of life insurance that is not enough to pay for their family needs. This is why you need to know who exactly needs a life insurance and what type of policy is the best for them.
The life insurance can help you cover up your family expenses as it provides an income replacement. The best option would be to have a term life insurance.
A stay home parent:
Life insurance will cover the cost of paying for the services that you do for free like child care and in this case the best option would be to buy a term life insurance that would pay the bills until your young children grow up.
A divorced parent would enjoy the benefits of a term insurance because they need to pay for the divorce support payments.
Parent of a child with special needs:
Permanent life insurance is the best option in this case because it provides enough coverage to pay for the expenses of your child whenever the parent dies.
Homeowners with a mortgage:
A permanent life insurance will pay for the mortgage so that your family doesn’t have to move out after you die. This is very important to ensure that the life of your loved ones will not be further disturbed by your death.
Someone with a debt:
Term life insurance can cover the cost of the debt like a student loan. This type of insurance is very important when you have to pay for a co-signed debt.
Someone with a high net worth:
Permanent life insurance will provide enough funds for heirs to pay for inheritance or estate taxes.
What are the advantages of life insurance?
Life insurance is not an investment :
Life insurance is an expense and not an investment. Its biggest advantage is that it ensures that the people who survive you like your significant other and your children will lead a decent life despite your death. Life insurance will ensure that their bills are covered even after your income is gone.
Life insurance will protect your loved ones when you die. They will not have to move out because they are unable to pay the mortgage. And they will not struggle with paying debts like student loans.
You can rest assured as you choose from different life insurance policies that no matter how old you are when you die, the life insurance will pay for the expenses of your family. You can even have a return for the policy once it reaches a certain time frame. The options are unlimited and you will always get the advice from the insurance provider for the type you should buy.
In many cases, the amount of you get from life insurance is not taxable. Also the insurance premiums that you pay are included in your taxable income. Many financial advisors advise their clients to buy life insurance policies in order to lower their tax burden.
Term insurance is very easy to understand:
Life term insurance is one of the easiest types of insurance to understand and this is one of the reasons it is so popular. All you have to do is to pay a premium and you beneficiaries will get a lump sum of money. There are no limitations or conditions and this is why many people choose to buy it.
The coverage you buy is flexible because you can buy the term that you need. You can buy the number of years that you think will be sufficient enough for you until you have had your family comfortably covered. In some policies you can change this sum of money according to your needs.
Government protects insurance policies:
The government will always ensure that your insurance provider will always have enough assets to cover their policies. This means that the company will definitely pay the amount of money agreed upon in the contract. Even in the very rare case that the company will not be able to pay their obligations; the government will pay for them.
What are the disadvantages of life insurance?
Some people will use it as an investment option:
Sometimes insurance companies will do this because people feel uncomfortable paying for something that has an uncertain outcome. This is a wrong idea since the only universal truth is that we will all die.
High premium rates:
This is especially true for people who will buy life insurance while they are still young. However, there will be an advantage that they can choose a policy that is paid out in 10 or 15 years where they have the highest earning power. Older people will continue to pay for life insurance when they choose to buy term life insurance. This could also be a problem since they might be struggling with medical conditions that require payments and would still have to be medically assessed which can put them in a higher risk insurance which typically costs more.
The opportunity cost:
Because people usually struggle with expenses, they will always think about and struggle with the amount paid for the premium. This amount can be usually used to pay for other important stuff. However, this is not the way that life insurance should be looked at. You need to make sure that you are having the backs of your loved ones covered in case of death.
Buying life insurance at the wrong time:
Some people think about life insurance at the wrong time. Like seniors who think about life insurance when they are old. This is wrong because when you think about life insurance at the age of 80, it basically has no value.
Buying life insurance for too long:
Buying a life insurance for too long is another wrong option because when you are too old, you will not have a need for the insurance or enough earning power to pay the premium. At the same time, you will not have people who are still depending on you.
Buying expensive life insurance policies:
Some people will just buy life insurance without comparing different policies carefully and they end up paying for something that is so expensive.
Life insurance is not the best for everybody. People should do their homework and go through some research before deciding on buying life insurance. Your age, your health condition and your marital status will influence your decision. If you have your mind set on buying life insurance, then you need to make sure that you are choosing the best insurance provider. You might spend some time but this will ensure that you are buying the best and the most suitable policy. Even after you have had your mind set on a policy you need to make sure that you are choosing the right term and the right type.