What Is Life Insurance?
Life insurance is protection against financial loss resulting from your death. Life insurance can be used to cover the costs that arise after your death – funeral costs, taxes, probate costs, childcare or your mortgage and other household expenses.
Who Needs Life Insurance?
Everyone should use good insurance planning to prepare for more than just replacing a lost income. Life insurance can provide for future needs of your family or business.
- Funeral – Provide the funds needed for a proper funeral and burial expenses.
- Estate Taxes – Preserve the value of your estate by using life insurance funds to cover federal estate and state inheritance taxes.
- Mortgage Protection – Pay off the balance of a mortgage or provide an income stream to pay monthly mortgage or rent payments.
- Income Replacement – Provide a supplemental income stream to ensure that your surviving family members are able to maintain the same standard of living.
- Debt – Cover personal loans, credit cards, student loans and other debts.
- Future Education – Ensure that the education costs of your children are covered.
- Charitable Donations and Gifts – Fund a donation to a charity or a gift to a family member.
- Key-Employee Protection – Protect against the financial loss to your company from the unexpected death of a key employee.
- Business Continuation – Fund a buy/sell agreement plan to arrange for the orderly transfer of your business at your death, disability or retirement by using life insurance policies with either death benefits or cash values.
- Executive Benefits – Build an attractive benefits package for selected employees by paying premiums for life insurance.
- Salary Continuation/Deferred Compensation – Provide supplementary income to selected key employees and their families in the event of the death, disability or retirement of the key employee.
Whatever your need for life insurance, that need can change over time. At any age, you should consider your individual circumstances and the standard of living you wish to maintain for your dependents.
How Much Life Insurance Do I Need?
To determine how much life insurance you need, start by gathering all your personal financial information and estimating your burial costs and what your family or business will need after you are gone.
What Types of Life Insurance Policies Are Available?
Individual life insurance coverage generally falls into one of two categories, permanent or term.
Permanent Life Insurance
Permanent life insurance, which includes whole life and universal life, is an appropriate way to meet long-term needs. Over time, it may be the least expensive form of life insurance since premiums are fixed and the policy accumulates cash value on a tax-deferred basis.
Whole life insurance provides continuous protection, generally up to age 100, as long as premiums are paid when due. Whole life is designed to have a level premium for the duration of the policy and provides a guaranteed death benefit. Whole life builds cash value that can be used during the insured’s lifetime to help meet “living” needs such as college expenses, buying a home, emergency funds or retirement funds. Premiums must generally be paid as long as the policy is in force.
Universal life insurance is similar to whole life insurance because it provides continuous protection and cash value build up. It also provides the advantage of premium and death-benefit flexibility that allows the policy to keep pace with changing life circumstances. You can select a level or increasing death benefit. Universal life differs from whole life in that its cash value earns a current interest rate that is sensitive to current economic conditions. In addition, premiums paid are credited to the policy surrender value from which the cost of insurance is deducted monthly. As long as the policy has sufficient cash value to cover the monthly cost of insurance, the policy will remain in force even if you miss a premium payment.
Consider permanent life insurance when you:
- have a long-term need
- like flexibility on death benefits and premium payments
- want a policy that accumulates a tax-deferred cash value
Term Life Insurance
Term life insurance protects you for a specified period of time – ranging from one to 30 years – and pays a death benefit only if you die during that specified term of the policy. That’s why it’s commonly referred to as “temporary” life insurance.
Over the short run, term insurance generally provides the greatest amount of protection for the least amount of premium. It can be a cost-effective choice if you face growing responsibilities on a limited budget, if you expect your financial responsibilities to decrease after a limited period or if you simply want to free your funds for other uses.
One of the drawbacks of traditional term life insurance is that you pay premiums for a financial benefit that may never be used. An exception to this rule is a return of premium term policy. With these nontraditional policies, the initial premiums are higher than that of traditional term policies. However, the premium payments you pay during the guaranteed term period are returned to you, which may or may not include rider or substandard premiums.
Consider term life insurance when you:
- have a temporary need
- need a large amount of insurance protection but have a limited budget
- have a specific business need such as key-employee, executive benefits or business continuation
Coverage and product availability varies by state. Underwriting requirements apply. This is not a policy.
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