The Basics of Life Insurance
Introduction
Life insurance can be an important financial decision. While some people view it as a safety net for their loved ones, others see it as a means to provide for their own needs in retirement or as a way to pay off debt.
We all hope that we'll never need life insurance, but unfortunately, that isn't always the case. When you're making decisions about your family's future security, it's important to understand the purpose of life insurance and what a policy can do for you. You can choose from whole life insurance, universal life insurance, term life insurance, and annuities. Here's a quick overview of the different types of life insurance.
Life insurance is a contract between you and an insurance company that provides benefits to your family in the event of your death. It's like having a savings account since it pays a death benefit when you or a family member dies. The benefit you receive is based on the premiums you have paid for the policy. For some insurance, there could be an investment vehicle inside the policy that is in addition to the death benefit.
In recent years, some people have started using life insurance as an investment strategy rather than its intended purpose: protecting their families from financial hardship caused by their untimely deaths.
As with any financial product, there are various types of policies available.
This article covers some key topics regarding life insurance and some helpful ideas you might consider before purchasing a policy. As always, life insurance should be considered in relation to your overall financial plan and strategy. A sound financial plan will simplify the process by figuring out what you need to do in order to make sure your financial future is secure. A sound financial plan helps you clarify your goals, set priorities, and organize your resources so that you can take action on the things that matter most. How life insurance fits into that plan is an important consideration since any financial products are not purchased in a vacuum.
There are a whole host of other insurance products beside life insurance; there are products such as mortgage life insurance, survivorship life insurance, burial and funeral insurance.
This article will focus on the types of life insurance related to investing and financial planning.
Life insurance can alleviate financial stress for your family.
Life insurance is a smart choice because it ultimately ensures that your loved ones have the financial resources to manage the ongoing expense needs and demands—it's about protecting what matters most: the people who love you.
We all have heard stories of those who have died without insurance or were underinsured only to have the family burdened with funeral costs and the continued financial needs. Sadly, many people don't have enough available funds in their checking accounts or savings accounts to pay thousands of dollars in one lump sum on the day they die—and some people don't even have those options, considering that only 55% of all Americans are saving any money at all! Life insurance may provide much-needed peace of mind for your loved ones during this difficult time by covering these costs and allowing them time to mourn your passing without any worries about how they're going to pay for things like flowers or burial plots.
Life insurance is not all the same.
Term Life Insurance
Term life insurance is the most inexpensive way to buy life insurance because you're buying only insurance coverage and not paying for cash value life insurance. Term insurance is a good choice if you want to protect your family financially in the event of death, but don't need a large amount of money.
Term life insurance is ideal for people who want life insurance coverage for a specific debt or situation. For example, some people buy it to cover their working years as income replacement for their family in case they pass away. People buy term life insurance during the years they have a mortgage or other big debt.
But if you have a long-term illness, such as cancer or heart disease, you might not be able to renew your existing policy. And if you have other health conditions, such as diabetes or hypertension, you could find that your premiums increase dramatically, and you may not be able to afford the cost.
Whole Life Insurance
Traditional life insurance is a policy that covers the insured for the rest of his or her life. It is also called permanent life insurance, because the insured is guaranteed to live to a certain age (for example, until age 65. and has no chance of dying sooner.)
Permanent life insurance can be considered an investment product because it allows you to borrow money from your policy for retirement purposes. There are two types of permanent life insurance: whole life and universal life. Whole life insurance, which is available in both fixed and variable form, pays a death benefit equal to the current value of the policy at the time of death. Universal life insurance, which is available in both fixed and variable form, provides a single guaranteed death benefit that remains unchanged throughout the policy's term.
Universal Life Insurance
Universal life insurance is a type of whole life insurance that allows you to control how much you pay for your premiums. Universal life can be a good option for people who want the freedom to lower their premiums, but want to keep their policies until they retire.
Variable Life Insurance
Variable life insurance is a type of whole life insurance that offers a level of flexibility and stability. It allows an individual to build cash value in a tax-deferred account, while providing protection against certain events like disability or death. It's designed to give you a guaranteed income upon death, whether you invest the money or not. Variable life insurance is typically a good choice if you're looking for an income source upon death, but are concerned about the volatility of the stock market.
Annuities
An annuity is a financial product in which your money gets invested and then paid out to you in regular installments over time. This product is very popular with many financial advisors since it typically pays commissions. However, annuities have hidden fees and contract charges that are hard to ascertain. A Certified Financial Planner (CFP®) can help you determine if an annuity makes sense and what are the explicit and implicit costs of owning such a product. One consideration regarding annuities is there can be contract fees that are charged back to you if you move your money out of the annuity.
Understanding Life Insurance company ratings
Investopedia writes: "Insurance company credit ratings are important because many people and businesses depend on insurance companies to pay claims when they suffer an insured loss. Insured risks are usually those that would cause a large financial loss if not insured. However, insurance companies can only pay if they have the money. Like other businesses, insurance companies can become insolvent."
There are four major insurance rating services: AM Best, Moody's Investors Service, Standard & Poor's Financial Services LLC, and A.M. Best Company.
These services provide ratings for insurance companies and financial institutions in order to help investors determine the risk involved with investing in those companies. They also help investors determine which companies have the strength to pay claims on their policies. A company with an "A" rating will generally have fewer problems paying benefits than one with a "D" rating.
Do some comparison shopping before you buy.
Don’t forget to compare policies
You might be tempted to just go with the first life insurance policy you find, but this could be a costly mistake. You could end up paying more for your coverage than necessary or getting less coverage than you need. If you want to make sure that you get the best policy for your needs and budget, then comparison shopping is key.
How to determine a whether a policy is a good value
When it comes time to do some comparison shopping, there are several factors that will help you determine whether or not a company offers good value on its products:
Premium cost—The premium is the amount of money required from the person who will receive the benefits if something happens (the insured). When comparing life insurance policies, consider how much each policy costs per month or year.
What kind of coverage the policy provides--there are a whole host of coverage options that you should be aware of. Your financial planner is equipped to guide you through the various coverage options.
Life insurance can be complicated, but with the right information, you can find the right policy for your needs.
Life insurance can be complicated, but with the right information and the guidance of a financial planner or professional, you can find the right policy for your needs.
Due to the many different types of life insurance policies—term, universal and whole—you will have to determine how the different benefits and coverages fit into your overall financial plan.
You also need to understand how each type of policy works: what it covers, who it covers and for how long. The second thing to keep in mind is that these policies come in different forms—single-payment loans against them (known as "permanent") or a stream of payments over time (known as "temporary"). When comparing policies from different providers, make sure they offer similar features so you know what kind of protection you're getting from each company before deciding which one offers the best deal on life insurance
Conclusion
Life insurance is a valuable tool for your financial security. The more you know about it, the better prepared you can be for the future. However, life insurance must be viewed through the lens of a financial plan. A Certified Financial Planner (CFP®) can be a helpful guide to determine exactly what your life insurance needs are and how it fits into your overall financial goals and strategies.
If you have any questions or need a simple review of how insurance impacts your plan, please give us a call or contact us on our website.
Source images: Photo by John-Mark Smith on Unsplash; Photo by Silas Köhler on Unsplash;