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Of all the insurance types we offer, life insurance may be the simplest to understand. Insurance companies offer only a small variety of insurance types which are described elsewhere on this site. But in any form, even with the most basic plan, if you own life insurance and you die, your beneficiaries get money, often times tax free. There may be instances where the insurance company holds off on paying a claim if they think fraud or a crime is involved in the death, but typically there is no arguing if a policyholder is dead or not. A death certificate is all you need to collect on the claim.
There are life insurance plans available to protect every stage of your adult life. The three stages of an adult life are:
Householding begins with your first apartment or house, and ends when your children become independent upon graduation from high school or college. When you first start your household, even before you have children, there are good reasons to have life insurance. Life insurance may protect co-signors on obligations like an apartment lease, a mortgage, college loans, or other debt. Could your roommates or spouse make the monthly obligations of a house hold (rent, utilities, insurance) if your income ended?
An obvious reason for owning life insurance is during the householding stage is child-rearing, when you are responsible for your children’s food, clothing, shelter, and education. It is common for new parents to start thinking about life insurance at this point in the householding stage. What happens, however, is that the new parents see the need for life insurance only up to the finish of the householding stage of life. This makes the sale of 20-year term insurance very popular, as that roughly coincides with the end of the householding stage of life. This may be short sighted however. Life insurance is an important asset during the mentoring stage as well.
Mentoring begins when your children become independent. Although your kids may not ask you for advice on how to live their lives, they will come to you when they need financial support. Financial support may include allowing them to move back into the household when the economy is bad and jobs are scarce. The child may opt for a graduate degree and need financial assistance there. Children may need loans and co-signors to start their own households. And they will almost certainly need financial support when they have children of their own. Could your survivors live the life you want for them without your financial support?
Legacy refers to your own needs. You may ask yourself “who will remember me?”, or “how will I be remembered?”. If the answers to this question are troubling it may make your last few years of life unsettling. Knowing there is a lump sum of cash waiting in the wings upon your demise, that you control now (during your living days) through the power of a beneficiary change, provides peace of mind and a financial boost to your beneficiaries. Beneficiaries, by the way, may not be people but may include colleges, charitable organizations, or religious institutions.
Types of life insurance include the following:
Term life insurance, like the name suggests, is only good for a certain period of time, usually 10-30 years. A benefit is only paid out if the policy owner should die during the specified term. Term life insurance is the least expensive form of life insurance and the most widely used. Term insurance is an extremely good value for most applicants, because the insurance companies have actuaries who calculate the likelihood of your death at your age and health class. If the likelihood of your death is very low, the price for the term life insurance is low too.
While some term policies can be extended or renewed at the end of the term, the premiums are much more expensive that way. Usually you would only pay the much higher premiums if you were not healthy and could not qualify for a new term policy. Even though you are older at this point, buying a new term life insurance policy will be a better value than extending an expired term policy. Of course if you are not healthy enough to qualify for a new term life insurance policy you must renew the plan if it is offered, or lose coverage.
As the name implies, whole life insurance is coverage for an entire lifetime, not just for a short period of time. Consider there is a 100% chance you will someday die, and realize insurance – whole life is the only product you can buy that will definitely pay a benefit (assuming the policy premiums are paid).
Whole life insurance offers level premiums and life insurance protection for as long as you live. Whole life policies can be paid with a single premium, premiums payable to over age 100, or somewhere in between. Whole life insurance policies also provide accumulation of cash values on a tax-free or tax-deferred basis which can be used when you need it, not just at death for your survivors.
Universal life insurance is designed to provide coverage for your entire life, similar to whole life insurance, but because of its flexible premiums feature these policies may or may not actually last that long.
Premiums are paid into your policy’s account value (after a premium expense charge), where it earns interest and sometimes dividends. Every month, various deductions, such as a charge for insurance protection are taken from the account value. If income in the account (including premiums) exceeds the expenses, your universal life insurance policy stays in force. You have the ability to take loans or make withdrawals from the account value for your personal needs. Note that loans accrue interest and unpaid loans, interest, and withdrawals will reduce the death benefit and cash value. The policy continues as long as the cash value is sufficient to keep the policy alive. Universal life insurance policies are less expensive than whole life policies but do not carry the same guarantees.
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