Life Insurance is a contract between an insurer and the insured employing a policy with specific provisions, where the insurer agrees to pay a certain amount of money (benefit) in exchange for a premium upon the death of an insured person. Other events such as critical illness or terminal illness, can also trigger payment depending on the terms of the contract. Life insurance helps protect the financial security of your loved ones by giving them a tax-free payment in the event you pass on. The type and amount of coverage you choose should be based on your needs and circumstances.
Types of Life Insurance
Term Life Insurance
This is a simple and affordable life insurance that provides a fixed amount of insurance for a certain duration. In case you die, the policy pays your beneficiaries a tax-free benefit. The term life insurance provides a temporary protection which you can customize to meet your changing needs.
Permanent Life insurance
This insurance is also called the whole life insurance. It covers your entire life, with some types building cash value over time. The costs of a permanent insurance are often guaranteed not to increase from the time the buyer first buys the policy.
Participating Life insurance
This is a type of permanent life insurance that has the ability to receive dividends. Additionally, your coverage and premiums are guaranteed for life. You are free to use your dividends as you wish, however, they are not guaranteed.
Universal Life Insurance
This is a flexible type of permanent life insurance that combines both savings and protection. It lets you choose a guaranteed death benefit that will be paid to your beneficiaries upon your death. Any payments made above the cost of insurance earn interest on a tax of your choice.
With all the technicalities and rules involved in purchasing life insurance, it can be tricky to figure out. Luckily for you, we have debunked some of the most common myths associated with life insurance to help you make more informed decisions.
Four Common Myths About Life Insurance
1. The life insurance provided by your employer is all you need.
Although life insurance through your employer is great, most of these plans offer accidental death or short-term policies which offer low limits. Also, these policies are not portable. Meaning, if you change jobs or get fired, you might be left without the coverage. For you to remain insured, you will need to register for a new policy that will be based on your age and general health status.
It is highly recommended that you secure your own personal life insurance that is totally different from what is being provided by your employer.
2. You do not need life insurance if you are young or single
Even if you still do not have dependents, you still have funeral costs that your loved ones will be expected to cater for when you die. Also, chances are you will start a family in the future and will still need to offer financial support for them.
3. Once all my children reached adulthood, I do not need life insurance
Life insurance will help you through many stages of life and not just when raising your children. For instance, when your children are adults, this insurance can help cater for your costs, any debt you may possibly have left behind or any state estate taxes your heirs may face.
What are the pros and cons of life insurance?
While life insurance offers some advantages that are cannot be achieved through any other financial instruments, it also has its disadvantages.
• This policy enjoys favorable tax treatment. For instance;
• Income tax-free policy loans
• Death benefits do not incur tax to the beneficiary
• The life insurance may be substituted for a different life insurance policy without earning current taxation
• It provides an infusion of cash for dealing with adverse financial consequences of the insured’s death
• Most life insurance policies are exceptionally flexible with regards to adjusting them to your changing needs
• You may need to forego certain current expenditures to pay your policy premiums
• You may not recover all the premiums paid in case the policy is terminated before the term is over
• The life insurance acquisition process can be hard and annoying
Three Life Insurance Secrets You Should Know
While life insurance is a valuable financial tool that can provide financial help to your loved ones when you are not around, it is also crucial that you remember that it is a huge and highly profitable business. Hence, it is vital that you take care not to be taken advantage of by Insurance companies that are out to take as much of your hard earned money as possible. Here are 3 life insurance secrets you should know.
1. Cash value is not as valuable as you are made to believe
One of the selling points of insurance is the cash value they accrue over time. However, you should know that the money does not come from anywhere nor are insurance companies in the business of giving away money. This money is funded by the extra cash you pay each month. With interest rates being at near record lows, you might be better off buying affordable life term policy and investing the difference in mutual funds or IRA.
2. Whole life insurance is a bad investment
Although insurance agents focus on selling you permanent life insurance, it is a bad investment. The returns on whole life insurance are historically low when compared to other investment products. This is because their premiums are high resulting in limited benefits. Also, so much of your investment goes into paying for the investment fees and coverage leaving you with the relatively little left for investment within the plan.
3. Buy Term and Invest is a better strategy
This is one slogan by insurance companies that is true. First, since Term us much more affordable, you can buy a lot more to meet your needs. Its investment performance of mutual funds – especially index funds, dramatically outperforms any insurance related investment plan.
Life insurance is an important investment as it will provide your family financial protection after you are gone. However, it is crucial that you analyze your financial situation as well as the standard of living of your dependents before purchasing this insurance. Also, it is advisable that you reevaluate your life insurance needs yearly, or after important life events like the birth a child, adoption, marriage, divorce or purchasing a house among other major purchases.