Life is full of uncertainty. Insurance can help you turn your fear of the uncertainty into “I don’t know what will happen in my life but I know myself and loved ones will be protected.” Over the next several weeks, we will describe the various types of insurance. Insurance can be confusing, so we are here to teach you about it or reinforce what you already know.
Did you know that September is Life Insurance Awareness Month? Life insurance is an important type of insurance that can be used in a variety of ways.
Usages for Life Insurance
The most well-known usage of life insurance is to protect your loved ones when you pass away by providing them with income replacement The death benefit is tax-free to the beneficiary. The death benefit could also pay for loans and other debts that the deceased had, rather than using other assets to pay for the debt.
A life insurance policy can also accumulate a cash value that the policyholder can use during their lifetime. The cash value can be used to pay the premiums of the policy, withdrawn as a loan against the policy, or simply when the policyholder needs cash.
If you own a business with one or more person, life insurance can be used to protect your business. Each owner or the business can purchase life insurance policies on the owners. When the owner dies, the remaining business owners can use the death benefit to transfer the business interest to themselves.
There are three types of life insurance: whole/permanent, universal life, and term. Life insurance is a contractual agreement. The death benefit will go to one or more designated beneficiary and will avoid probate and taxes.
Whole/Permanent Life Insurance
This type of insurance can be purchased at any time in your life and will stay in force for your whole life, as long as the premiums are paid. When you die, the value of the policy will go to one or more designated beneficiary.
Whole life policies accumulate cash that can be used on just about anything. Part of the premium payments accumulate into a cash value portion of the policy and grow with interest over your lifetime. This feature allows policyholders to use their life insurance as a savings vehicle or a source of a loan. It is important to note that this cash will go back to the insurer when you die. Policyholders may want to spend the cash while they are living or ask the insurance company if they can add it to the death benefit.
- The different features offered: a cash value, savings component, ability to take out a loan against cash value, dividend potential
- The insured will have a guaranteed death benefit as long as premiums are paid
- Premiums can be expensive
- A lifetime of insurance coverage might not be needed
- Cash value could deteriorate if premiums are not paid
An Example Where Whole Life insurance is Appropriate
If you are young and looking to purchase life insurance, you may want to purchase a whole life policy because insurance is generally less expensive the younger you buy it. Secondly, term policies terminate at a specified time period. If you purchase a 20-year term policy when you are 20 years old, the policy will lapse when you are 40, meaning no benefits will be received. Purchasing a whole life policy will extend your coverage until you die. You can purchase a policy with a low face value (resulting in lower premiums) and supplement your policy with term insurance when you are older. You can change the beneficiaries based on the relationships you have with people throughout your life.
Universal Life Insurance
Universal life insurance offers flexibility of a death benefit, premium payments, and investment opportunities to policyholders. The cash value can be used to pay for premiums of the policy. The policy will not lapse if a policyholder misses a premium payment, the premium will be taken from the cash value. There are different types of universal life insurance. Indexed universal life allows for the cash value of the policy to be tied to a financial index. Variable universal life allows for the cash value to be invested in separate investments accounts, chosen by the policyholder, based on their preferences and risk tolerance.
Term insurance covers individuals for a designated period (10, 20, 30 years, etc.) After the designated period, the policy will lapse or may be convertible to a whole life policy. Term insurance is commonly purchased to provide high death benefits for periods of financial vulnerability. This could be due to a mortgage balance, student loans, or income replacement that family members may need in the event of a premature death.
- Can be less expensive than a whole life policy
- Some term policies can be renewed or converted to a permanent life policy without evidence of insurability
- Can be beneficial to younger people to apply when they are young and healthy to get an inexpensive premium rate and then convert to a whole life policy
- A policy may lapse before the death of the policyholder, meaning no benefit will be distributed
- There are no savings components, loan options, and limited to no cash value
- Premiums can increase greatly if you renew the policy when you are older
An Example Where Term Life insurance is Appropriate
If a family has young children and one of the parents dies prematurely, the survivors may experience financial hardship. Term insurance would pay for final expenses, living expenses, and will provide income to the family. It is especially important to have insurance if there is only one employed spouse. If the income earning spouse dies prematurely with young children and an unemployed spouse, the surviving spouse may have a hard time making ends meet financially and emotionally. Term insurance protects a family during a period of extreme risk. It may not be necessary to provide income to the family if the children are grown and receive their own incomes.
What type of insurance is best for you?
There are a lot of factors to think about when purchasing insurance. That is a reason why we are here. We can determine how much insurance you need, what type, and find a policy to align with your and your family’s needs. We will evaluate the different components of your financial situation and your family life.
Life Insurance Quote
Our website offers a free and instant life insurance quote. Simply enter a few details about yourself and your life insurance desires and we will give you a quote!
It can be difficult to find an insurance agent that is in favor of your best interest. Two of our advisors at Tenpath Financial Group, Craig Breitsprecher and Andrew Komarow are CFP® Professionals that are committed t acting in your best interest. They have experience working with many different insurance companies as independent agents and are dedicated to find a policy that works for you.
Visit our website http://www.tenpathfinancial.com to obtain your free quote or contact us today at (860) 606-0977 or (860) 815-9041.