Goals of Life insurance
The goal of life insurance is to provide a measure of financial security for your family after you die. So, before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your dependents or survivors.
For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments and college?
It is prudent to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business.
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Types of Life Insurance
Term Life Insurance
A term policy is like renting life insurance for a set amount of time. It's more affordable than permanent insurance but will expire at some point.
Term Insurance Basics
You purchase this insurance for a set amount of time, or a "term," often in 5, 10, 20, or 30 year increments. It's usually at a set price, which means you pay the same amount of money for the policy ever year until the term is up. If you should die during the term, the beneficiaries of your policy will receive the value of the policy. If you don't die during the term, there's no payout. (The good news is you're still alive!)
For the most part, Term policies are less expensive than Permanent or Whole Life Insurance. The premiums are generally fixed and don't change over the course of the policy. However, the premium can vary from person to person, and depends on a number of factors, including your age, health, and lifestyle. For example: An older person who smokes will generally pay higher premiums than an older person who doesn't.
In many cases, Term insurance is not available for people over the age of 65. However, in certain cases and with certain policies, it can be converted to a Whole Life policy without “evidence of insurability” (a medical exam). This would allow you to retain coverage even if your term policy were to expire. However, even when a Term policy can be converted to a Permanent one, there may be a cut-off age when it can no longer be converted. If you're interested in converting an existing Term policy, it's best to speak with a professional Life Insurance agent about your situation.
Universal Life Insurance
What if you could get the flexibility of adjustable premiums and face value, and an opportunity to increase cash value; would you go for it? What if you could get this without the inherent downside risk of investing in the equities market? It's your lucky day: All of this is possible with an indexed universal life insurance policy. These policies aren't for everyone, so read on to find out if this combination of flexibility and investment growth is a good fit for you.
Universal Life Insurance Basics
Universal life insurance (UL) comes in a lot of different flavors, from fixed rate models to the variable ones, where you select various equity accounts to invest in. Indexed universal life (IUL) allows the owner to allocate cash value amounts to either a fixed account or an equity index account. Policies offer a variety of well-known indexes such as the S&P 500 or the Nasdaq 100. IUL policies are more volatile than fixed ULs, but less risky than variable universal life policies because no money is actually invested in equity positions.
IUL policies offer tax-deferred cash accumulation for retirement while maintaining a death benefit. People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use IULs as key-person insurance for business owners, premium financing plans or estate-planning vehicles. IULs are considered advanced life insurance products in that they can be difficult to adequately explain and understand. They are generally reserved for sophisticated buyers.
Permanent / Whole Life Insurance
Permanent Life Insurance (also known as Whole Life Insurance) lasts for your entire life and never expires. In addition, Permanent policies usually have an investment element, allowing you to invest and/or borrow money from the policy.
Permanent Insurance Basics
Like Term Insurance, Permanent Insurance will pay your family or other beneficiaries a certain amount of money if you should die (known as a “death benefit”). In addition to a death benefit, Permanent Insurance policies usually have a cash value (think of it like a savings account) that increases over time on a tax-deferred basis, which you can invest and borrow against. Loans taken out against the cash value of the policy are on a tax-free basis, but usually accumulate interest and reduce the death benefit.
Cashing Out A Permanent Policy
Permanent policies usually offer the ability to cash it in for the value amount, which grows over time. This can provide you with a chunk of cash when you need it, though you will no longer own the insurance.
Permanent Policy Premiums
The premiums you pay are usually on an annual basis and stay the same for the duration of the insurance without any increases. While the premiums for Permanent policies are higher than premiums for Term policies, the fact that Permanent policies include savings and investment options may make this option more appealing.