Life Insurance
The Basics of Life Insurance
What is Life Insurance?
Life insurance is a contract between the insured and an insurance company and is a way to provide protection against the economic loss caused by the death of the insured.
Why Do I Need Life Insurance?
The main reason for life insurance is to provide income replacement to your beneficiaries if you die. But if you are interested in estate planning, cash accumulation, wealth transfer, and estate tax liquidity, life insurance can help you achieve these goals as well.
Income replacement: For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they no longer have your income to rely on.
Pay outstanding debts and long-term obligations: Consider life insurance so that your loved ones have money to offset burial costs, credit card debts, and medical expenses not covered by health insurance. In addition, life insurance can be used to pay off the mortgage, supplement retirement savings, and help pay college tuition.
Estate planning: The proceeds of a life insurance policy can be structured to pay estate taxes so that your heirs will not have to liquidate other assets.
Charitable contributions: If you have a favorite charity, you can designate that some of the proceeds from your life insurance go to that organization.
Types of Life Insurance
Term Life Insurance
Term Life insurance, as the name implies, is for a specific amount of time - typically 5, 10, 15, 20, or 30 years. It provides a death benefit, has no cash value, and is the lowest cost life insurance product available.
Universal Life
Universal Life is a flexible-premium, adjustable-benefit life insurance contract which accumulates cash value. Flexible premium means that (subject to certain limitations) the policyowner may pay more or less than the premium stated in the contract. Depending on certain factors, premium payments could be skipped in particular years at the policyowner's discretion. The adjustable benefit allows the policyowner to increase or decrease the stated death benefit, subject to certain guidelines.
Whole Life
Whole Life is the most basic type of permanent life insurance. Your premium will purchase a specific death benefit and produce a specific cash value, which are guaranteed for the life of the policy as long as the premiums are paid. Whole Life premiums are usually higher than term premiums, but are guaranteed not to increase.