Life insurance is something almost everyone will need at one time or another, in one form or another. This is because mortality is 100% on every actuarial chart. Like your estate plan, your insurance needs will vary, depending on what is appropriate for your unique circumstances at any given stage of life. For example, a college student will have different insurance needs than a young couple with minor children, a blended family, or a retired widow. There are three basic types of life insurance, depending on your circumstances and stage of life: term, whole, and universal.
Term life insurance is typically the most affordable type of life insurance. It allows you to cover a larger risk with a lower annual premium. It covers a specific time period, or “term” (such as 10 or 20 years or to a specific age, such as 80). When the term ends, the coverage ends. However, if you pass away during the term, while the policy is in force, the insurance company will pay the policy “death benefit” to the policy beneficiary (or beneficiaries) that you designate. Term insurance is customarily used to cover a specific need (e.g., pay off the mortgage and pay for college) for a specific time period.
Term life is a wise investment, if you have a young family that depends on your income. Without your income, term life insurance creates an “instant” estate without you. “Term conversion” is an important policy benefit for those considering term life insurance. Make sure your policy has an option to convert the contract to a “permanent” policy, without evidence of insurability. This means you can convert the term policy, without the requirement of another medical exam or answering health questions, provided you do so within a certain time frame or by a certain age. There are two primary types of permanent life insurance: whole life and universal life.
A whole life insurance policy will cover you, for as long as you live. There are usually options to pay the same amount in monthly premiums, without an increase or to pay a one-time lump sum. Whole life has a guaranteed pay-out when you die. There are also several benefits to this type of policy that you can use while you are still around. First, the cash value you build in the whole life policy grows tax-deferred and can be used during your lifetime. Depending on the insurance contract, you may be able to use the cash value to secure a down payment on a new home, to pay for a child’s college education, or to help fund a new or existing business venture. If you no longer need the insurance protection, then the cash value can supplement your retirement income. Finally, you can also use the insurance policy to create a legacy for your heirs or donate to charity.
Like whole life, a universal life policy allows you to build cash value. It will usually have flexible premium payments and schedules. A universal life insurance policy may be the right option for you, if you want coverage that can last your whole (entire) life. You can build tax-deferred cash value inside the policy to meet other financial goals. Like other life insurance types, universal life insurance can protect the financial security of your loved ones. This type of policy provides you with additional flexibility in premium payments, death benefits, and in ways to save.
Life insurance is a sensible way to protect the life that you and your family enjoy. There are a variety of other insurance products that an experienced agent can recommend. Do your homework and consult with your estate planning attorney to see how any life insurance policy fits within your overall estate and financial plans. Make sure that it is there when you need it.
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