Life Insurance: Is it Right for You?
As the old saying goes, life is uncertain. You may not know what will happen tomorrow, or even next month. Not knowing what the future holds can make it difficult to plan for it. But don’t worry because that's where life insurance comes in handy! It offers you financial assistance if anything happens to you or your loved ones so that they aren’t left in a lurch. Life insurance also serves as an investment vehicle to help you prepare for the future.
The life insurance industry uses the term “single premium” to differentiate between policies that provide coverage with a single premium payment, and those with a multiple premium payment, which typically cover several people (i.e., whole or universal policies, where the family is covered).
A single premium policy typically only covers a single named beneficiary. Each member of your family may have his or her own individual policy that pays out on their death, just like with traditional life insurance.
What is “Term Life Insurance”?
If you’re looking for a single premium policy that covers a loved one, term life insurance might be the answer. This kind of policy offers coverage for a specific period of time – often 10, 20, or 30 years – and pays out if you die during that term. Term life insurance is typically less expensive than other types of policies, making it an excellent choice for those who do not need lifetime protection or are just starting to think about planning for their future financial needs. A whole or universal life policy typically does provide lifetime protection in the form of an investment component (i.e. cash value), but at a cost that is much higher than a comparable term policy.
The amount of term life insurance you should buy depends on how much debt you have and what your children’s needs are. If you don’t have any dependents, the chances of your surviving to the end of the term are pretty high unless you’re very elderly or unhealthy when you get the policy. When considering how much life insurance to buy, always err on the side of too much coverage. The premiums will be less expensive in the long run and if a medical examination is required, it isn’t as hard on your body as it would be for someone who is younger or more active.
What is “Universal Life Insurance”?
Universal life insurance is considered a permanent life insurance policy. The policyholder owns the policy and has control over the cash value, which grows if they make additional premium payments or investment choices. Most universal policies require a single annual premium payment, although some policies may allow for additional premium payments or to withdraw funds from the cash value account for other expenses.
The cash value can be borrowed against as long as there is enough money in the account to pay future premiums, which can help cover unexpected expenses before you reach age 59½ when you are allowed to tap into your retirement accounts without penalty.
Universal life policies can be a good choice for someone who doesn’t have dependents, or may end up with dependents, in the future. When you begin to accumulate cash value, the policy will usually increase as you make additional premium payments. The same thing happens if you withdraw money from the account for other expenses before age 59½. The amount of cash value is already predetermined when you buy it, and it will not increase even if you take more money out than is initially paid into the policy. It cannot be withdrawn for any reason other than paying premiums due on time or making an additional payment on the policy, which can only happen once each year without penalty.
While you do not have the flexibility to take money out of a universal policy, you do have the option to discontinue making premium payments. When this happens, the death benefit will remain in effect for the life of the policy and may provide financial assistance for your loved ones if something happens to you. This can be a good choice if you’re looking for longer term protection.
A word of caution: It is possible to cancel a universal life insurance policy early if you are no longer able or willing to pay all your premiums on time. However, some companies will require that all premiums be paid before they will end the contract. This may result in you having to pay for additional years of coverage that you won’t use.
What is “Riders Life Insurance”?
There are many different types of riders available for a life insurance policy, depending on the policies that you already own or what coverage type and amount you desire. One type of rider provides a tax-free cash payout if the insured dies due to an accidental injury. If this rider is added to your policy, it will typically cover up to $20,000 in death benefits at no additional cost. It can come in handy if someone loses a parent or spouse due to an accident that was not their fault while they were at work or doing something else related to their job.
The “Riders” type of rider is not something that your policyholder must agree to purchase. A financial professional can help you determine if this kind of rider would be helpful for your situation.
Technically speaking, “Riders” are add-ons to a life insurance policy and are not considered riders at all. They are individual kinds of insurance depending on the guarantees and benefits offered by each one. You will need to contact the company where you have life insurance to determine which kind of rider is appropriate for your needs. Riders aren’t necessarily available with all types of policies, so you may not be able to get them if it isn’t already part of your coverage package.
Policies with “Riders” may come with additional benefits that make them even more attractive to buyers. For example, they may include medical riders or riders that cover a specific cause of death. It’s important to note that the rider you choose will not be guaranteed, meaning there is no promise that the policy will provide benefits in the event of a life-threatening accident or if the insured dies due to an accidental injury.
What is “Ancillary Life Insurance”?
An ancillary rider is an extra benefit added to a policy after it has already been purchased.
Conclusion
Life insurance can be a valuable supplemental insurance product for your existing portfolio of financial products. As with any purchase, you should consider your own situation and research different options to find the best fit for your needs.
As you review your options, it is also important to remember that you don’t need life insurance on everyone who depends on you financially because there are other options that can ensure they will continue to have access to money if something happens to you, such as a trust fund or a bank account from which they can draw money.
Sources
Allstate Insurance Company: https://www.allstate.com/life-insurance/life-insurance/term-life-insurance.