What is Life Insurance?
Life Insurance is insurance for you and your family's peace of mind. 'Life insurance' is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount (at regular intervals or in lump sums).
Life insurance is a policy that people buy from a life insurance company, which can be the basis of protection and financial stability after one's death. Its function is to help beneficiaries financially after the owner of the policy dies.
It can also be a form of savings in the long run if you purchase a plan, which offers the option of contributing regularly. Additionally, a little known function of life insurance is that it can be tied in with a person's pension plan. A person can make contributions to a pension that is funded by a life insurance company. These are considered private pension arrangements.
Advantage of Life Insurance
- Provide security for your family
- Protect your home mortgage
- Take care of your estate planning needs
- Look at other retirement savings / income vehicles
Types of Life Insurance
Term Life Insurance
Term life insurance is called "term" because it provides coverage for a specific period or term (most often 1, 5, 10, 15 or 20 years).
Term insurance is the most straightforward type of life insurance and the easiest to understand. Sometimes it is called "pure" insurance, since the policy has no financial investment value and most of your premium goes to pay for coverage, with only a small amount used to pay the insurance company's costs. If you are looking for the maximum amount of coverage for your dollar, term life insurance will give you the most "bang for your buck".
Here's an overview of the different types of term policies available for different needs:
- Annual renewable term insurance
- Renewable term insurance
- Level premium term insurance
- Decreasing term insurance
- Convertible term insurance
Whole Life Insurance
As the name implies, whole life insurance covers the policyholder for his or her whole life. There is no fixed end date for the policy, as there is with term life insurance. When the policy holder dies, the face value of the policy, known as a death benefit, is paid to the person or persons named in the life insurance policy (the beneficiary or beneficiaries).
The cost of a whole life insurance policy is spread out across many years, so the premium remains the same. This ensures that older people on a fixed income will not have to cope with rising premiums.
Unlike term life insurance, whole life insurance accrues cash value over time. If you cancel the policy after a certain amount of time has passed, the insurance company will surrender the cash value to you. The cash value is scheduled to equal the face value when the policyholder reaches the age of 100. If you live that long, the insurance company will likely pay the face value to you in a lump sum.
Universal Life Insurance
Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for greater growth of cash values. There are several types of universal life insurance policies which include "interest sensitive" (also known as "traditional fixed universal life insurance"), variable universal life (VUL), guaranteed death benefit, and equity indexed universal life insurance.
Like whole life insurance, universal life insurance is a permanent policy. It protects the policyholder until death – however long that may be. Also like whole life insurance, universal life insurance accrues cash value over time.
Unlike whole life insurance, universal life insurance breaks the death benefit and cash value accumulation into separate components. This allows the policy holder to make changes in the policy. For example, if the policyholder wants to increase the death benefit, he or she puts more of the premium money into the insurance account and less into the cash value account. The reverse is also true. The policyholder can decrease the death benefit and increase the cash value contribution. To reduce premiums, the policyholder can pay only the insurance portion.
Children's Life Insurance
Children’s life insurance is a tool many families use to give their children a financial foundation that they can draw upon when they are older.
The lowest cost life insurance you can buy is the one you qualify for right now: Rates rise with age. It comes as no surprise, then, that rates for a child – as young as two weeks old – is the least expensive insurance you can buy. The low rates make whole life insurance affordable for almost everyone. Because whole life premiums are locked in at the beginning, they will never increase with the child’s age – regardless of whatever health issues may arise.
The primary reason for buying any kind of life insurance is to insure against untimely death. This is not something parents or grandparents wish to think about. Nevertheless, consideration must be given to the survivors, including a child’s siblings. Funeral and burial expenses and unpaid medical bills can affect the finances of an entire family at a time when grief and stress are already at an extreme level. Life insurance is a way of protecting everyone.
Senior Life Insurance
Most seniors already have life insurance of some kind, but the death benefit often is too small to take care of funeral expenses and medical bills. In most states, a life insurance death benefit is exempt from creditors. It is also exempt from inheritance taxes. This makes it an excellent vehicle to transfer wealth to survivors.
Seniors often assume that they will not qualify for life insurance, but many states have laws requiring insurance companies to provide coverage to seniors. Since the senior population is growing fast, many insurance companies have found it profitable to offer life insurance to seniors.
Mortgage Protection Life Insurance - A Home Saver
Mortgage protection life insurance can be a lifesaver—not for the mortgage protection life insurance policyholder, of course, but for the mortgage protection life insurance policyholder’s family. Mortgage protection life insurance eliminates the risk of your family losing its home in the event that you die before your home mortgage is paid off.
Financial health during a terminal illness
Mortgage protection life insurance can also protect your home in the event that you are diagnosed with a terminal illness. Mortgage protection life insurance policies can be written to include a terminal illness benefit. The terminal illness benefit will pay off the mortgage while the mortgage protection life insurance policyholder is still alive.
A mortgage protection life insurance terminal illness benefit also relieves stress on the terminally ill person’s family at a time when they have a great deal on their mind. Caring for a terminally ill family member and preparing for a future without him or her is one of the most stressful situations a family can face and doing so while struggling to save the family home can be overwhelming.
A financial control
Some people question that wisdom of mortgage protection life insurance because it limits a family’s options after the death of the mortgage protection life insurance policyholder. It is true that options are limited, but this is a major benefit of mortgage protection life insurance. A mortgage protection life insurance policy serves as a kind of financial control.
A standard life insurance benefit could be used to pay off a mortgage, but it also could be used for other purposes. Beneficiaries might choose to invest the death benefit, believing the return on the investment would be greater than the interest paid on home loan. The return on the types of investments that would outperform, say, a 5-7 percent mortgage interest rate cannot be guaranteed. In addition, grieving family members often do not make the best investment decisions. Add to the mix the fact that unscrupulous financial advisors may attempt to take advantage of grieving family members, and you have a recipe for financial disaster. The family may lose the life insurance death benefit and have nothing left to repay the mortgage.
Since the mortgage protection life insurance is tied to the principle of the mortgage—rather than the value of the home—it is not affected by falling housing prices. The value of mortgage protection life insurance is recession-proof.