Choosing the Right Life Insurance Policy
Life Insurance is a type of contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the insured’s death. There are many reasons why someone might need life insurance, such as to cover end-of-life expenses, pay off a mortgage, replace lost income or provide funding for children’s education. Choosing the right policy is a personal decision that can be simplified by working with a financial professional.
The first step in selecting a policy is to calculate the amount of coverage you need. There are a number of tools online that can help you do this. Once you know the amount of coverage you need, you can move forward with comparing types of policies and benefits.
Typically, the most common type of life insurance is term life insurance. This type of policy offers a fixed death benefit and premium that is guaranteed for a specific period of time, such as 10, 20, or 30 years. At the end of the term, the option is available to convert the term policy into a permanent life insurance plan, usually at an increased cost.
Another type of life insurance is whole life insurance. This type of policy offers enduring protection and wealth building opportunities. In addition to a death benefit, whole life policies accumulate cash value that can be used to reduce the premium or for other purposes. Some mutual insurers offer annual dividends to their policyholders, which can increase the cash value of the policy or supplement retirement income.
A key consideration when selecting a policy is the type of beneficiaries and how to allocate the death benefit. Beneficiaries can be individuals or entities. The beneficiary can receive the death benefit in a lump sum or it can be distributed by percentage to multiple people and/or entities (for example, 30% could go to each of three children and 10% could go to charity). Beneficiaries can also be changed at any time.
If a beneficiary is an entity, such as a trust or corporation, the insurance company may require additional information to verify identity and eligibility for the benefit payment. In some cases, the death benefit may be subject to income or estate taxes.
It is important to review your life insurance needs on a regular basis. As your family’s needs change, so should your life insurance policy. A financial professional can help you assess your situation and determine if there are any gaps in coverage that need to be addressed.