Understanding Life Insurance: What You Need to Know

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What is Life Insurance?

Life insurance can best be defined as a monetary safety net that is supposed to offer some form of financial provisions at whatever time you might not be around anymore. The jist of it is that you pay the insurance company premiums in fixed, scheduled dates, and they will, in turn, pay out a sum of money known as a death benefit to the beneficiaries at the time of your death.

But why do you need to have life insurance? It gives them the assurance that when you’re gone, they’ll be able to live well. Now, if you’re going to give them any income or not, that’s beside the point. Life insurance helps pay funeral costs and could even settle other debts. That way, you and your family will be all right for a long time.

Types of Life Insurance

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There also exist other kinds of life insurance, which are intended to serve your different kinds of financial needs and plans. Here are some:

Term Life Insurance

Term Life: Just plain term life. Pay your premiums for a specified “term,” say, for a term of 10, 20, or 30 years, and if you die during the term, your beneficiaries get the death benefit but, on expiring the term and having survived it, the coverage ends, and you don’t get a penny back.

This is the type of insurance suitable for that person, who over a specific term of years will require coverage-for example, to age the retirement years, or until the mortgage is paid off.

Whole Life Insurance

Whole life covers you for life and not for, for example, 25 years. And whole life also builds an accumulation, or a “cash value” component that grows each year and where you can borrow money. Premiums for whole life typically are higher than for term policies, but the payoff in coverage is that it doesn’t expire and can even be part of your long-term planning strategy.

Universal Life Insurance

Universal life provides lifetime coverage like whole. However, the contract is more flexible as far as the premiums and the death benefits are concerned. For example, you can contribute more or fewer payments to the policy, which is convenient whenever your financial condition changes. It also acts like a savings plan, and over time, accumulates cash value.

How Life Insurance Works

Now, the mechanism of life insurance simply makes sense: you agree to pay a certain amount at regular intervals called premium, and the insurer agrees to pay an amount in the case of your demise to your loved ones.

Premiums: The rate depends on aspects like your age, health, and what kind of coverage you want.

Death Benefit: This is what your beneficiary receives once you are gone tax-free.

•Cash Value: Depending on your policy- whole and universal life pay a part of what you pay in premiums to a cash value account which accrues with time

Why Do I Need Life Insurance?

Life insurance is not a favorite subject that you want to discuss, yet it somehow finds its place on the list of must-haves in proper financial planning. Here are some of the reasons why:

Protecting Your Loved Ones: While you’re no longer around, your family may not be able to pay for bills or living expenses, not even a mortgage.

•Pay Funeral Expenses: A funeral can cost as much as tens of thousands of dollars. So, your family won’t have to worry if you have life insurance.

•Pay off Debts: Your life insurance may pay off the debts that you will be leaving behind, such as loan repayments or credit card balances, or a mortgage.

• Leave a Legacy: Life insurance policy can be left as a legacy to provide something for your children, grandchildren, or a favorite charity.

Find the Right Coverage

Now you must determine how much life insurance you really need. Of course, this is going to vary based on your own personal situation, but as a general guideline, the death benefit should at least be 10-15 times your annual income. And this way, your family will be able to cover expenses years after you have passed.

There are many free online calculators and resources that you can use in order to determine the right level of coverage for yourself, based on your income, outstanding debts, and future expenses including perhaps college for the kids.

Who Receives the Beneficiary

The beneficiary is the individual or group of individuals who will receive the death benefit in the event you die. Selecting a beneficiary carefully ensures your life insurance does exactly what you want it to do.

You can select multiple beneficiaries, and you may even detail how the percentages of the death benefit should be divvied up between each one. And don’t worry, you can always change your beneficiary later if you need to.

Factors Affecting Life Insurance Premiums

Several factors will determine what you will pay for your life insurance :

•  Age: Somebody who is younger pays less.

•  Health: Severe pre-existing conditions or poor health will increase the rates.

• Lifestyle: Risky recreations or vocations, such as parachuting or construction may cost more.

• Smoking: Smokers generally pay substantially more for life insurance than a nonsmoker.

How to Purchase Life Insurance

You can buy life insurance through an agent or from the internet directly. Here is what you need to know:

Agents: You will be guided step by step by an agent through the whole process of selecting your cover, but it might cost you a lot more.

Online: Very many insurers now offer life cover online which may be convenient and usually more affordable.

Life insurance quotes may always be compared from different insurers to get the best quote and policy according to your needs.

Riders

Riders are add-ons that modify your life insurance policy in order to suit better according to your exact needs. Some of the most popular riders are:

Waiver of Premium : This is a rider that waives your premiums if you are disabled and incapable of working.

Accidental Death: Supplemental death benefit in case you die due to an accident.

Long-Term Care: Helps pay for long-term care if you become seriously ill

Riders can be great add-ons which you’ll pay more for, but what will be covered and how that adds to your premiums should be explained to you .

Cost of Life Insurance

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Variations by age and health among other things and the type of the policy pay for the premium cost of life insurance. The two are less expensive compared to whole and universal life because they carry the cash value component.

 To reduce the cost of the amount for coverage purchase buy when you’re young and in good health. Quit smoking or change your lifestyle to reduce rates.

Common Life Insurance Myths

Here are three common myths floating around about life insurance:

• “I’m too young for life insurance”: The truth is, the younger you buy when, the lower your premiums tend to be.

• “It’s too expensive”: Most people believe that life insurance costs way more than it does.

• “The employer-sponsored life insurance is enough”: That is a fabulous benefit, but what you have through an employer usually isn’t enough.

Tax Benefits of Life Insurance

Life insurance can also have another great tax benefit:

Death Benefit: In most cases, whatever your beneficiaries collect won’t be taxed.

Cash Value Accumulation: In the various forms of life insurance-for example, whole and universal-life the cash value grows tax-deferred: you don’t pay taxes on the earnings unless you take them out.

When to Review Your Life Insurance Policy

Marital status, birth of children, or even buying a home are good situations to review your life insurance for whether the current policy still meets changing situations. Regular reviews, every few years, ensure enough coverage.

Life Insurance and Estate Planning

Through estate planning, life insurance is one very important vehicle. Hence, through a life insurance policy, death taxes owing will definitely be made arrangements for, and the heirs need not sell out some of their assets or even clear debts using their inheritance.

Conclusion

Life Insurance is a Part and Parcel of any Sound Financial Program It Will Provide for Your Loved Ones after You Are Gone Working 61 There are three major types of insurance that the average family would discover: term life, whole life, and universal life. And what you don’t want to do now is calculate your needs so that you can make comparisons and get a head start on planning early.

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