Life insurance is one of those financial products that seem simple but requires a surprising amount of thought before purchasing a policy. At its core, life insurance exists to mitigate the financial impact caused by the death of the policyholder.
An untimely death can be tough to discuss, but failing to prepare a contingency with life insurance can add immense insult to injury if it happens. Thankfully, there are many different life insurance policies on the market that are affordable and flexible.
Today we are going to dive in and discuss how life insurance policies operate and how you can build one that fits your needs.
Introduction to Life Insurance
A simple term life insurance policy with a $500,000 premium over a 20-year term is probably what most consumers associate with life insurance. While this is a common and affordable option, there are many other types of insurance policies that may fit your needs better.
The goal of life insurance is to replace income if a breadwinner dies, cover funeral expenses, or even pay for medical bills if your policy accumulated cash value.
If you have a life insurance policy or are considering taking one out, it is vital that you don’t miss a payment or allow your coverage to lapse. Most insurance providers require a health screening before they will sign off on life insurance coverage.
Term Vs. Permanent
The two primary types of life insurance or term insurance and permanent insurance. All other forms of life insurance fall into one of these two categories. Term insurance is fairly straightforward and is the most common choice for many consumers. Still, permanent life insurance has some unique benefits that can be extremely valuable over the long term.
- Term Life Insurance
Term life insurance gets its name because you purchase coverage for a specified time period, and once the period ends, So will your life insurance coverage. Most term life insurance policies do not have any extra frills, and what you see is what you get.
If we go back to our earlier example of a $500,000 premium for a 20-year period, Coverage will begin when you pay your first premium, and you will have the same $500,000 death benefit until the last day of the policy. In the event that the policyholder dies during the herb, the names of beneficiaries will receive the death benefit To cover funeral expenses, education costs, and lost income.
Term life insurance policies become more expensive the longer you wait to bind coverage With your insurance provider, so if you can secure a high premium earlier in your career, you will have more coverage for a lower premium.
Term life insurance policies are especially beneficial for families with children because they will be financially secure if the primary breadwinner dies. There are also convertible term life insurance policies that stipulate you can convert a Term Policy into a permanent life insurance policy if you prefer.
- Permanent Life Insurance
Permanent life insurance policies are more complicated because policyholders can build cash value, earn interest, and even invest money with their life insurance policy.
There are many different combinations of permanent life insurance policies, but whole life, is universal coverage are two of the most common.
When you pay your premium for a whole life policy, parts of the payment are allocated to paying for the death benefit, and the rest goes into building cash value for the policy. Since permanent life insurance does not expire, You will retain the government as long as you pay your monthly premium and not allow your coverage to lapse.
Universal Life policies also accumulate cash value, but you can earn interest or invest the cash balance into the stock market or a mutual fund depending on your insurance provider. As you can imagine, permanent life insurance policies cost more than their term life insurance counterparts, but they come with a host of other features.
Finally, if you need to withdraw the cash balance, you can either withdraw it and pay taxes on it, or you can take out a loan against the cash balance.
Most Popular Life Insurance
- Up to $3 million of coverage
- Very low premiums for young people
- Easy online applications
Building Your Policy
Now that you understand how life insurance policies operate, let’s discuss how you should go about building and choosing the best life insurance policy for your needs:
- Your Current Situation
Your first step in choosing an insurance policy is to identify your current financial needs and situation. Consumers who are earlier in their career may have different needs than older people who are further along in life.
People who have a mortgage, student loans, or other debt may want to purchase a term life insurance policy because the proceeds from the death benefit will cover their outstanding debt if they die.
Suppose you are approaching retirement and want to mitigate the impact of assisted living expenses for medical expenses. In that case, you can utilize a permanent life insurance policy to accumulate some extra cash that can hang out as a living benefit so that you don’t need to go into debt to pay for your living and medical expenses.
- Goals
Although your personal goals may not seem related to your life insurance, there can be considerable overlap.
If you have children, do you want to pay for their education?
Do you want to leave a legacy for your family?
Both of these are noble goals, but In the event of your untimely passing, you would not be able to accomplish them without life insurance. Life insurance can help you make sure that you have enough money to leave behind.
- Budget
Some term life insurance policies cost $17 per month, while a robust Universal policy May cost $700 per month for the premium or more. Insurance policies vary greatly in price because they are dependent on you, your age, and your health. Actuaries help create insurance rates by analyzing enormous data pools, and if you are trying to save money on your premium, the earlier you can lock in a rate, the better.
Important Considerations
Once you identify your goals and budget for your life insurance policy, you need to ask yourself some tough questions to make sure that you’re not paying too much and that you are covering all your bases.
- How Much Insurance
In the story of Goldilocks, there is a bowl of porridge that is cold, a bowl of porridge that is too hot, and a bowl of porridge that it’s just the right temperature.
Life insurance premiums are very similar because you can either purchase too much insurance Andover pay on your premium, or you may not purchase enough insurance, in which case your debts may be more than the death benefit provides, leaving a financial burden on someone else.
Take the time to identify how much life insurance coverage you need to cover all of your debts and ensure that your family will have enough money to get by.
Final Thoughts
Thinking about death benefits from life insurance policies may not be the most fun topic, but you should feel rest assured that no matter what happens, your family and finances will be protected.
If you want to learn more about life insurance or check out some of the top providers, make sure to head over to our other guides and reviews!
* This content is not provided by the financial institution or the offer’s provider. Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and does not constitute a financial or expert advice.