Life Insurance is literally a matter of life and death, since purchasing Life Insurance is basically planning for after the death. When healthy and well, people from all walks of life prefer not to think that one day they would pass away. However planning for after the death may be as important as planning other significant actions in life.
Have you ever wondered how your loved ones would manage when you are no longer with them? There are plenty of things they may be dependent on you for. While your love and personal assistance are invaluable and cannot be replaced, financial support and an opportunity to pay debts can be an important way to show you care even after your death. Obtaining Life Insurance, you ensure that in the event of your death your family is taken care of.
Life Insurance will be most helpful to your family when they have to pay off credit card debts, mortgages, car loans, estate taxes, checks funding your children's education, etc. If your family's savings are insufficient, Life Insurance can provide support for legal, medical and funeral costs. It can even create an estate for your heirs.
Life Insurance is a policy provided by an insurance company, according to which in exchange for your premium payments, the insurer is obliged to pay a certain sum (a lump sum or portions of smaller sums) to your beneficiary (persons you choose) in the event of your death.
Types of Life Insurance
There are two major types of Life Insurance, each of which can be further broken down into several basic categories: Term Life Insurance and Permanent Life Insurance.
Term Insurance is a temporary Life Insurance policy providing coverage for a specified period. It was designed to provide Life Insurance protection for fixed periods on a limited budget. Being a Term Life Insurance policyholder, you pay an annual premium to cover the risk of death. This type of Life Insurance has no cash value, i.e. no benefits are paid when the policy is expired or the insured person dies after policy expiration. If the insured dies during the specified period of time, his/her beneficiary will receive the value of the policy. Term Insurance is used by those seeking coverage for a specific need, which will have ended by a certain date in the future.
Renewable Term is Term Life Insurance type which can be renewed at the end of the specified term without evidence of insurability. Some renewable policies offer fixed premium rates for a fixed number of years, after that they are renewable at a higher premium rate. These policies are often purchased by young people who take an advantage of an inexpensive policy, however as they get older, their premium rates get more costly.
Level Term guarantees a lump sum paid on the event of death. This sum remains the same for the whole term period. The premiums you pay also tend to be level for a specified period. Level terms divide into annually renewable term, 5-year renewable term, 10-year term, 15-year term, 20-year term, 25-year term, 30-year term and term to a specified age, the most commonly purchased terms being 10, 15, 20, and 30 years.
Increasing/Decreasing Term policy is often purchased by those having financial obligations (e.g. a mortgage or a loan) that tend to decrease over time. In this type of Term Life Insurance, the amount of the death benefit protection decreases over the term period, while premium sums usually remain the same.
Convertible Term allows the policyholder to convert from the Term policy to a Permanent Life Insurance policy without additional evidence of insurability. The premium is based on the insured person's age and health at the moment when the policy was obtained, and the premium remains level for the term period.
Return of Premium Term Insurance (ROP) stands out as a special type of coverage. It combines low premiums for protection during specified terms with a guaranteed refund of the premiums you pay during the level term period, on condition the insured person is still living at the end of the term.
Some people get their Life Insurance through work. Usually Term Life Insurance that provides coverage for a group of employees is purchased by an employer or professional association. The costs of premiums for Group Life Insurance are typically lower than those for Individual Life Insurance policies.
Permanent Insurance policies offer protection throughout your lifetime, and include an option of building cash value. This reserve of cash can be withdrawn or borrowed by the policy owner, often with favorable tax treatment.
There are several types of Permanent Life Insurance available. They differ in flexibility of premium payments, the way the cash value is invested and the death benefit guarantees. The following are major Permanent Life Insurance types:
Whole Life Insurance is a form of Permanent Insurance which covers you for your entire life, does not have to be renewed and does not expire provided you regularly pay premiums. The premiums for this type of policy remain level throughout the life of the insured. The amount of premiums in early years of the policy is considerably higher than in Term Life policies, which result in developing cash values. The cash value increases every year. You can take loans or withdrawals; however it will reduce the death benefit. Whole Life Insurance type is helpful to cover needs that do not tend to diminish with time, like paying taxes.
Universal Life Insurance has an advantage of more flexibility than Whole Life Insurance. It offers flexibility in premium payments and death benefits, as well as an opportunity to change both of them if circumstances change. The policy owner may pay premiums at any time in any amount. No matter whether you prefer to skip payments or to pay in lump sums, premiums must be sufficient to cover the cost of the policy and provide the death benefit.
Universal Life policies distinguish the protection element, the expense element, and the cash value element. You may also withdraw or borrow the cash value at any time. However, loans and withdrawals can reduce the death benefit and alter the performance of the policy.
Variable Life is a form of Life Insurance with a wider selection of investment products, including stock funds. The death benefit and the cash value are not predetermined or guaranteed, but fluctuate according to the investment performance of a separate account fund. The death benefit does not normally fall below a specified minimum. The policyholder pays a level premium for life.
Variable Universal Life Insurance has the premium and death benefit flexibility of Universal Life Insurance and the investment flexibility and risk of Variable Life Insurance. This policy type allows you to invest the cash value of the policy in some investment options and change the death benefit. Note that increases in death benefit may require evidence of your health.
Understanding your Life Insurance Needs
There are certain steps you should take when choosing Life Insurance policy. First off, you should determine your Life Insurance needs. They depend on such factors as your marital status, the number of your dependents, your financial obligations, your career, and basically the aims you pursue. Logically, the more responsibilities you have and the bigger your family grows, the more consideration you should give to Life Insurance purchase.
Life Insurance may be necessary as a part of your estate planning, as an essential means to support your dependents, as a way to pay debts, income taxes, or funeral expenses. How many people depend on you financially and what standard of living would you like to maintain for your survivors? Income replacement is the major reason why many Americans buy Life Insurance package. Long-term needs of your dependents have to be thoroughly considered: mortgage, debt pay offs, income for children, income for the surviving spouse, college education funds and probably some additional emergency fund.
If you are a single person with no dependents, the question of your Life Insurance needs may resolve itself to debts, credit cards or student loans, medical bills, funeral expenses, and supporting elderly parents depending on you for support. Purchasing Life Insurance at a young age is cheaper. If you are a single person with dependents, your Life Insurance consideration can be debts, expenses for your surviving dependents, education costs for surviving children, medical bills and funeral expenses. For couples with no children it is important to consider mortgage and car payments, as well as debts, medical bills and funeral expenses. Couples with children often need child-rearing expenses and their children education costs covered, let alone mortgage payments, debts, medical bills and funeral expenses.
After determining your Life Insurance needs, you should choose the most appropriate policy type for you. Since your needs may change as time passes, your Life Insurance program should also be regularly reassessed. You are recommended to review your policy every time there is a significant event in your life, for instance marriage, divorce, the birth or adoption of a child, a purchase of a house or business, income change, etc.
When it comes to purchasing Life Insurance, the choices are varied. It is important to make a research into insurance market, Life Insurance companies, types of coverage they offer and significant pricing differences. Your choice may be quite difficult as there over 1,500 Life Insurance companies in the United States offering various Life Insurance policies. Setting high standards for the financial solidity of insurance companies is a must when it comes to choosing the right insurance company and policy for you. And last but not least, shop to find the best combination of price and Life Insurance coverage benefits.