Life Insurance - Plan For Life
Life insurance is a wise investment that can help provide for your family in the unfortunate event of your death. Whether you’re just starting out as a young adult, or at the height of your career and personal life, it’s important to consider life insurance as part of your financial plan.
What is Life Insurance?
Life insurance is a contract between you and an insurance company to provide financial protection in the event of an untimely death. An individual typically pays an annual premium based on their age or health condition to the insurer in exchange for a paycheck called "the policy," which is paid out after their death. However, many plans also offer riders that allow you to modify your life insurance policy through additional coverages (e.g., term life insurance, cash value life insurance) or by investing the proceeds in different types of investments (e.g., annuities). The cost of a life insurance policy varies depending on a number of factors, such as the company providing the coverage and how much you need. The most important factor, however, is your age.
What Does Life Insurance Cover?
Life insurance covers both medical and financial expenses associated with death. Medical expenses are covered by co-insurance, meaning you are required to pay a percentage of your medical bills. For example, if a pre-term infant requires a $100,000 surgical procedure that costs $50,000, you will pay the remaining $50,000. As for financial expenses, life insurance covers the following:
Funeral and burial costs
Funeral and burial costs Debt paid
Debt paid Creditors
Creditors Estate taxes
Estate taxes Mortgage owed on home owned by deceased person
Mortgage owed on home owned by deceased person Life insurance owed to other parties (e.g., heirs)
Life insurance owed to other parties (e.g., heirs) Ordinary income taxes due at death from traditional accounts (e.g. bank savings) or retirement accounts (e.g., 401(k), Roth IRA)
Who Needs Life Insurance?
Whether you’re young or old, life insurance is a beneficial way to safeguard your financial future and provide for your family after you are gone. In fact, many people without life insurance will find themselves financially devastated after the death of an important family member. The good news? Unlike other investments, there are no minimum-balance requirements to join a plan. Just remember that it’s never too soon or late to get a life insurance policy, so start planning for your financial well-being now.
What is Term Life Insurance?
Term life insurance is the most cost-effective way to provide coverage in the event of an untimely death. It’s simple: you pay an annual premium and receive a payout if you die during the contract period (the term). Once the term ends, so does the coverage. There are two main types of term life insurance: level and decreasing.
Level Term
A level term plan lasts for a specified period (e.g. 10, 15 or 20 years) and then automatically renews under the same terms at the end.
Increasing Term
An increasing term plan has a similar period (e.g. 10, 15 or 20 years) but each year its premium period is extended by one day (or month, quarter or semester). For example, a plan with an initial term of 10 years would last for 10 years and then renew for 11 years; a plan with an initial term of 20 years would last for 12 years and then renew for 13 years; and so on.
What is Cash Value Life Insurance?
If you want to supplement life insurance with an investment, cash value life insurance is the most common type. This type of plan will cover your death benefit as well as allow you to invest any unused money in the form of cash value – and earn a return on your money. The policyholder has the option to borrow against this cash value tax-free. The interest you pay on any loan you take out (called premium finance) is deductible from your income taxes.
There are two types of cash value life insurance: participating and non-participating. In a participating policy, you receive tax benefits on interest, dividends and capital gains. In a non-participating policy, you do not receive tax benefits; however, these policies are generally cheaper than their participating counterparts.
What is Universal Life Insurance?
In the simplest terms, universal life insurance is a cash value plan that does not have an end date or death benefit limit. To illustrate this concept further:
Example: Tom purchases a universal life plan for $10,000 with an annual premium of $1,200. He has 10 years to go until retirement and proceeds to invest his cash value in CDs that earn approximately 3% annually. After 20 years, Tom’s cash value is worth $68,000. At this point he chooses to access all of his cash value and spend his $68,000 however he wishes. He can also withdraw part of his money for living expenses and invest the remainder as he sees fit.
Unlike other life insurance plans, some universal life policies allow you to keep your coverage indefinitely. This type of coverage is often referred to as "permanent life insurance."
What is Variable Life Insurance?
In a variable life plan, the death benefit and premium may change throughout the contract period (also known as the accumulation phase). In a typical variable life plan, this is known as "principal growth." During the accumulation phase you typically increase your death benefit by investing money in your policy. Your death benefit may also be based on an interest rate or an index.
Depending on the level of investment options, policy features, and open-enrollment periods, a variable life policy can have several different price tags – and that’s not even counting the extensive list of investment and rider options it offers.
What is the Difference Between Whole Life Insurance and Universal Life?
The first thing to keep in mind is that there are dozens of different variations of these two terms.
Conclusion
As you can see, there are many different life insurance products available on the market. If you’re unsure which term or cash value plan is right for your personal situation, speak with a professional insurance agent who can help you determine what type of coverage is best for you and your family. Life insurance is an important way to provide for yourself and your loved ones in the event of an untimely death. By taking the time to understand the difference between these two popular types of policies, you can make informed decisions about your financial future.
Disclaimer: This article is for informational purposes only and should not be construed as financial or legal advice on any subject matter.