Do You Need a Life Insurance Policy for the Family?
The Policy, the Best Plan, Beneficiaries, Premiums, Tax Benefit
Is Someone Counting on You to Protect Them?
Life insurance provides for the people you care about
A life insurance policy
buys peace of mind.
, when you're not there to take care of them.
If they depend on you for support, chances are you need life insurance.
A life insurance policy provides cash for your family after your death. This cash, known as the death benefit, replaces your income and can help your family with daily living expenses, mortgage payments, funeral expenses and the cost of college. Here you'll discover the inside story of a life insurance policy, when your family might need it and the best insurance plan.
Do You Need to Buy a Life Insurance Policy for the Family?
Do you and your family need to buy a life insurance policy
? You need some life insurance if you provide for your family. Perhaps you’re a single parent who wants to provide for your children. It could be that you are a stay-at-home parent and caregiver. Maybe you are planning for a secure retirement. No matter the circumstances, when you buy a life insurance policy, you provide security for your loved ones. Life insurance is also a valuable tool for retirement and estate planning.
A life insurance policy covers many needs. A life insurance policy can help pay the bills, continue a family business, finance a children’s education and protect your spouse’s retirement, when you are not there to help with these burdens.
How a Life Insurance Policy Protects Your Family
When you buy a life insurance policy, you specify the beneficiary
who will receive the payment in the event of your death. Often the beneficiary is your spouse or family member. The beneficiary can receive the proceeds from the life insurance policy as a lump sum or as an annuity with regular payments.
When you buy life insurance, be sure to keep the beneficiary on the policy up to date
. No matter what you say in your will, the insurance proceeds will be paid to the directly beneficiary whose name is on the policy. You have the right to change the beneficiary of your life insurance policy from time to time.
How Much Does a Life Insurance Policy Cost
When you buy a life insurance policy, the cost is the annual premium
. The cost depends on how old you are, whether you are male or female and whether or not you smoke, because these factors affect longevity. The insurance company also considers your health and family health history to determine your cost. This process is called “rating.” Sometimes a medical examination is required. For example, for a 45-year-old male nonsmoker, a million-dollar, 30-year term life insurance policy could cost $2,600 a year. A $500,0000 term life insurance policy would cost $1,300 a year.
The insurance company uses all the premiums to create a pool of money from which it can pay claims and finance its operations. Insurance companies invest the bulk of the funds to pay future claims. By pooling the risk of a large group of customers, insurance companies can accurately predict their future claims. Insurance companies are required by law to maintain large reserves to guarantee they can meet their future obligations to their customers.
Do You Need Term or Permanent Life Insurance
Which type of life insurance policy do you need for your family?
There are two general types of life insurance policies, called TERM insurance
and PERMANENT insurance
. TERM life insurance covers you for a specified period of 5, 10 or more years
, which is the “term”. The policy only pays if you die within the term or covered period. The policy has no cash surrender value while you are alive. Premiums for TERM life insurance are lower than for other types of life insurance. Most people need TERM life insurance, and don't need PERMANENT life insurance.
TERM life insurance meets the needs of young families for financial security if the income earner dies. The premiums are much lower for young people. When children are grown, you do not need much life insurance, and there are usually other financial assets to provide security for the beneficiary in the event of your death. If you want to have life insurance coverage throughout your lifetime, the total premiums on TERM life insurance will be about equal to the permiums on permanent life insurance.
The only disadvantage to TERM life insurance is that you may not be able to replace the TERM insurance contract when it expires, if you have become uninsurable in the meantime. To avoid this problem, choose TERM life insurance with a renewal guarantee.
The Tax Benefits of a Life Insurance Policy
A life insurance policy offers several income tax benefits for your family
. When life insurance payments are made to the beneficiary, they are exempt from federal and state income tax and exempt from estate income tax. The life insurance policy also bypasses probate court, so that payments are available to your family quickly. Never specify your estate as the beneficiary of the insurance policy. If you do, the payment could be subject to federal and state estate and inheritance tax. For these reasons, it is important to name a person as your beneficiary, rather than have the life insurance payments made to your estate.
The life insurance premiums you pay are not deductible on your income tax return.
When Life Insurance Doesn't Pay Off
A life insurance policy is a legal contract. There are various terms and riders in an insurance contract. The annual premium is the price you pay for life insurance. The face value of the life insurance policy is the amount your beneficiary will receive. Before you buy life insurance, ask if the face amount will remain constant or decline. Find out if the premium remains level over time or changes.
The terms of the life insurance contract describe the limitations of the insured events. The policy may have specific exclusions, when the company will not pay off. Death as a result of war, riot or civil commotion may be excluded from the policy. A fraudulent claim invalidates the policy. Most policies will not pay anything for death by suicide during the first two years of coverage. Some life insurance policies will not cover anyone who dies during risky activities, like parachuting, flying an airplane, professional sports, or involvement in a military war.
A common add-on, or rider on the life insurance policy, is the accidental death rider, which pays twice the amount of the policy face value if death results from accidental causes. Another common rider is the premium waiver rider, which waives future premiums if the insured becomes disabled.
What Is a Permanent Life Insurance Policy?
The second type of life insurance policy is PERMANENT, rather than TERM
. PERMANENT life insurance covers you for your entire life, as long as you pay the premiums. The insurance company cannot cancel your PERMANENT life insurance, unless your application is fraudulent. PERMANENT life insurance builds cash value over time for you. If necessary you can borrow the cash value, but you must repay it with interest. You can receive some of the cash value if you discontinue the policy. However, the cash value and the rate of return on PERMANENT life insurance policies are relatively small, and do not compare well with other investment options. The annual permium on whole life insurance is double, triple or quadruple the premium of renewable term life insurance. For these reasons, independent financial advisors suggest that most people need renewable TERM life insurance.
There are three kinds of PERMANENT life insurance products offered to you
- Whole Life
- Limited Pay Life
- Universal Life
Whole Life Insurance
Whole life insurance policies
are the simplest plan for permanent life insurance. They stay in effect your whole life, as long as you pay the premium, and they build a small, but predictable, cash value based on the policy schedule.
Limited-Pay Life Insurance
Another type of PERMANENT life insurance you can buy is Limited-Pay life insurance
. With this policy, you pay higher premiums for a shorter period of time. Then the policy is paid up, and no more premiums are required. The insurance policy covers you the rest of your life. You can choose to make payments for 10 years, 20 years or until you reach age 65.
Universal Life Insurance
Universal life policies are a newer idea in PERMANENT life insurance
. They pay a fixed rate of interest on the cash value of the policy. The interest can be used to help pay the premiums. When you buy a Universal Life Insurance policy, the premium you pay changes from time to time, depending on the interest your policy earns. If interest rates are high, then the dividends help reduce premiums. If interest rates are low, then you will have to pay a higher premium to keep the policy in force. The universal life policy addresses the perceived disadvantages of whole life. Premiums are flexible, but they not known in advance. The internal rate of return is usually higher because it moves with the financial markets. The disadvantage lies in the uncertainty of the cash value and the premiums you pay.
Glossary of terms
to discuss with your insurance agent. | Life insurance policy | Life insurance premiums | Tax Benefits | Death Benefit | Limited-pay | Family life insurance | Term life insurance | Permanent life insurance | Whole life insurance | Permanent life insurance | Universal life insurance | Life insurance rating | Medical examination | Cash surrender value | Beneficiary | Policy proceeds | Life insurance lump sum | Life insurance annuity
I hope life brings you much success.
I wish you a very happy day.
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