What Is Life Insurance?
Life Insurance is a contract with an insurance company that guarantees your beneficiaries a specified sum of money upon your death. It is funded by premium payments. Life insurance provides peace of mind for your loved ones and can help pay for expenses like funeral costs, debts, college tuition, and other income replacement. There are many different types of life insurance policies, with varying premiums and coverage amounts. Some also include a cash value component that allows you to access a portion of the death benefit during your lifetime. There are also optional riders that allow you to customize your policy and add additional protection.
When considering which type of life insurance to buy, think about your needs and your budget. Term life insurance is typically less expensive, but it only pays out a death benefit if you die within the policy term. A permanent policy with a fixed premium and a guaranteed death benefit may cost more, but it will give you lifelong security.
Some factors that affect the cost of life insurance are your age, health and family medical history, lifestyle choices (like smoking), and dangerous occupations or hobbies. Your level of risk is assessed through a medical exam and other related tests. Depending on the results of these, your risk-based premium could increase significantly.
There are two main types of permanent life insurance: participating whole life and non-participating whole life. Participating whole life policies pay dividends, which are based on the company’s favorable experience with investment earnings, expense savings, and mortality savings. These may be paid in cash, used to reduce the premiums, accumulated as interest, or used to purchase additional insurance. Non-participating whole life policies provide a guaranteed level of premiums and face amount for the entire duration of the policy, though the premium rate can change in later years based on the company’s current estimate of investment earnings, expense charges, and mortality costs.
Both types of life insurance can be used to cover final expenses, debts, and other bills or income replacement. In addition, life insurance can be used to set aside funds for specific purposes such as providing for a child’s education or paying for the care of a special-needs adult.
Most people buy life insurance to protect their families against financial hardship in the event of their death. However, you can also use it to fund a trust that a fiduciary will manage for the benefit of your special-needs adult children. Life insurance can be an effective tool for addressing other estate planning goals, as well, such as minimizing taxes. For this reason, it is important to work with an experienced and knowledgeable life insurance agent when choosing a policy. This will ensure that you select the best product to meet your needs and objectives.