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Life Insurance is the foundation of financial security for you and your family. It helps protect your financial resources against the uncertainties of life so you can plan for the future. There are many options with coverage, depending upon your situation.
The main categories of life insurance are:
1) Term Life
2) Whole Life
3) Variable Life
4) Universal Life
Term life is the simplest and least expensive type of policy. It's pure insurance with no cash value account. A term life policy has only one function: to pay a specific lump sum to whoever you've designated, upon a specific event - - your death. The death benefit and the policy limit are the same - - a $250,000 policy pays a $250,000 death benefit. The policy helps protect your family by providing money they can invest to replace your salary, as well as to cover final expenses incurred by your death.
Whole life insurance provides permanent protection for your dependents while building a cash value account. It pays a death benefit to the beneficiary you name and offers you a low risk cash value account and tax-deferred cash accumulation. It provides a fixed premium which cannot increase during your lifetime as long as you continue to pay the planned amount. It allows the insurance company to exclusively manage the cash value account in your policy. It provides you the option to receive dividends from your policy or apply them to reduce payments. It offers you the right to withdraw from the policy during your lifetime.
It doesn't offer the account flexibility to invest in separate accounts such as money market, stock, and bond funds. It doesn't allow you the account flexibility to split your money among different accounts or to move your money between accounts. It doesn't offer premium flexibility. It doesn't offer face amount flexibility.
Variable life insurance provides permanent protection for you and is the type of life insurance with account flexibility for the more risk-oriented policy holder. It pays a death benefit to the beneficiary you name and offers you low-risk, tax-free cash accumulation. It allows the death benefit to vary in relation to the fund returns of the cash value account. It allows you to borrow from the policy during your lifetime.
It offers no guarantee to the amount of cash value during your lifetime. It doesn't offer you premium flexibility. It doesn't offer you face amount flexibility.
Universal life insurance provides permanent protection for your dependents and is more flexible than whole or variable life. It pays a death benefit to the beneficiary you name and offers you a low risk cash value account and tax deferred accumulation. It allows you to earn market rates of interest on your cash value account. It offers the right to borrow or withdraw from the policy during your lifetime. It allows you premium flexibility. It offers face amount flexibility.
It doesn't offer you the account flexibility to invest in separate accounts such as money market, stock, and bond funds. It doesn't allow you the account flexibility to split your money among different accounts or to move your money between accounts.
Universal Variable life is the type of insurance which gives you more control of cash value account policy features than any other insurance type.
It pays a death benefit to the beneficiary you name and offers you low risk tax deferred cash value options. It offers separate accounts for you to invest in such as money market, stock, and bond funds. It offers premium flexibility. It allows you to make withdrawals or to borrow from the policy during your lifetime. It stipulates that if you terminate the contract in early years you will receive less cash value total return than in a whole contract.
It requires you, the policyholder, to devote time to manage the accounts. The policies long term success is contingent on the investment you make. It doesn't work well with small premium amounts because your premium must cover your insurance and your accounts.
Do you need life insurance?
Depending on your situation, if you answer yes to several key questions below, you may want to consider purchasing life insurance.
1. Do you currently have major financial obligations? (mortgage, multiple loans)
2. Are you married?
3. Do you have dependent children?
4. Do you have other dependent relatives? (seniors, disabled)
5) Do you own a business?
6) Do you possess a sizable amount of estate?
A good life insurance policy would handle the financial responsibilities you leave behind so family members wouldn't be burdened. Unlike the funds from an estate, the benefits from a life insurance policy will be distributed directly to the beneficiaries, without any roadblocks. A good rule of thumb is to aim for a policy that will cover 2-6 times your annual income. It also depends on your personal situation. Take into consideration the rate of inflation, potential college tuition costs, or large loans and home mortgages.
Which type of life insurance should you choose?
There are two basic types of life insurance: term and permanent. Term insurance is purely life insurance while permanent ("cash value" or "whole life") policies include a savings element.
Benefits of a Term Life Policy
1. It is straightforward. If you die during the term of your policy your beneficiaries get paid - that's all there is to it.
2. It is inexpensive. You aren't paying anything extra to fund a savings account or cover investment fees. And because the market is so competitive for term insurance, companies have a huge incentive to keep prices low.
3. It's easy to shop for. With relatively little effort you can comparison shop and assure yourself of a good deal.
4. You pay only for what you need when you need it. You typically need life insurance coverage for a specific period of time (until the kids are out of college, for instance).
Benefits of a Permanent Life Insurance Policy
1. Flexibility. A permanent plan can give you access to some or all of the premiums that you have been paying for in a way favorable to your taxes.
2. It is with you until you die. This type of policy coverage is guaranteed for your life with no out of the blue payment increases. A term policy will expire at a certain date, and a renewed policy could have much higher premiums.
3. Inheritance. Maybe the best reason for a permanent policy is to make sure your estate and investments do not get eaten up by the government. A permanent policy can provide peace of mind that your family and loved ones will be taken care of for the future.
Remember, the decision to buy a permanent or a term life insurance policy will depend on your situation, your age, your financial well-being, and other factors. If you are a young family with some investments to protect but not financially stable a term life policy might be a good idea to protect those investments and your family. However, if you are financially stable with considerable investments, it may be a better decision in the long run to purchase a permanent plan.
The National Association of Insurance Commissioners (NAIC) presents Insure U - Get Smart About Insurance. This site provides consumer insurance information for those considering or buying insurance.