Life insurance is one of the best strategies to guard against the financial repercussions of a key wage earner’s early demise. However, it might be challenging to select from the several life insurance policy kinds that are offered. Here are a few key categories explained to assist you in finding a life insurance policy that is suitable for you.
Remember that factors like age, health, and the type and amount of insurance acquired all affect how much insurance is available and how much it will cost. It would be wise to confirm if you are insurable prior to adopting a strategy incorporating insurance.
Long-term care insurance
The most fundamental and frequently least expensive type of life insurance is term. Policies can be bought for a predetermined amount of time. The insurance provider will pay your beneficiaries the face value of your policy if you pass away within the time frame specified in your policy.
Typically, policies can be purchased for periods of one to thirty years. Without submitting evidence of insurability, annual renewable term insurance can typically be renewed each year; however, the cost may rise with each renewal. If you can only afford a cheap choice or need life insurance for a brief period of time (such up until your kids graduate from college), term insurance can be helpful.
Life insurance that is permanent
Permanent life insurance is the other significant type. You pay a premium as long as you live, and upon your passing, your beneficiaries will receive a benefit. A “cash value” savings component is frequently included with permanent life insurance. Permanent life insurance comes in three primary flavors: entire, universal, and variable.
Whole life protection. The premium for this kind of permanent life insurance remains constant for the course of the policy. Even if the premiums initially appear to be higher than the mortality risk, they can build up monetary value and are included in the company’s overall investment portfolio. If necessary, you might be able to borrow money from the policy’s cash value or surrender it for its face value.
Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, increase the chance that the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. Additional out-of-pocket payments may be needed if actual dividends or investment returns decrease, if you withdraw policy values, if you take out a loan, or if current charges increase.
Universal life insurance. Universal life coverage goes one step further. You have the same type of coverage and cash value as you would with whole life, but with greater flexibility. Once money has accumulated in your cash-value account, you may be able to vary the frequency, as well as the amount, of your premiums. In fact, it may be possible to structure the policy so that the invested cash value eventually covers your premium costs completely. Of course, it’s important to remember that altering your premiums may decrease the value of the death benefit.
fluctuating life insurance. The death benefit from variable life insurance is the same as that from traditional permanent life insurance policies, but you have more influence over the investments made with your cash value. Your cash value can be invested in equities, bonds, or money market funds. Your policy’s value could increase more fast, but there is also more danger. Your cash value and the death benefit could go down if your investments underperform. However, some insurance plans include a warranty that your death benefit won’t decrease below a specific amount. This sort of insurance has fixed premiums that are not affected by the size of your cash-value account.
Another variety of variable life insurance is variable universal life. It combines the benefits of variable and universal life insurance, allowing you to customize your premiums and death benefit as well as your investment possibilities.
There are costs involved with buying life insurance, as there are with most financial decisions. Contract restrictions, costs, and charges are typically included in life insurance plans. These can include mortality and expense charges, account fees, underlying investment management fees, administrative fees, and fees for optional services.
In the early years of the contract, if the contract owner surrenders the policy, there are usually surrender fees levied. Any guarantees are subject to the issuing company’s capacity to pay claims and maintain its financial stability. Life insurance is not a deposit of, nor is it guaranteed or sponsored by, any bank or savings association, nor is it guaranteed or backed by the FDIC or any other government agency.
Withdrawals of earnings are taxed as ordinary income and may be subject to surrender charges plus a 10% federal tax penalty if made prior to age 59½. Withdrawals reduce contract benefits and values. For variable life insurance and variable universal life, the investment return and principal value of an investment option are not guaranteed and fluctuate with changes in market conditions; thus, the principal may be worth more or less than the original amount invested when the policy is surrendered.