A life insurance policy is an agreement between an individual and the insurance company. The agreement states that the insurance company will provide a lump sum payment known as a “death benefit” in case of insured’s (individual’s) death in exchange for premium payments.
Life insurance is typically chosen on the basis of the needs and goals of the insurance holder. While permanent life insurance provides lifetime coverage, a term life insurance provides protection against a set period of time. Different life insurance policies have different benefits; however, most life insurance policies are income tax-free.
Here are three main types of life insurance policies you need to know:
As mentioned above, term life insurance provides financial protection for a limited period of time such as 15 to 20 years. The premium payment amount stays the same for the entire coverage period. After the completion of the coverage period, some insurance companies continue to provide coverage but at a substantially higher premium rate. Term insurance is usually more expensive than permanent life insurance and can be used to replace lost potential income as it provides a “safety net” for the insurance holder’s beneficiaries. It can help them meet their financial goals such as paying off a mortgage, paying for college, and keep the business running. It is important to note here that term life insurance benefits are a one-time payment and are not available as regular payments like paychecks.
It is a type of permanent life insurance designed to provide lifetime coverage. Since policy premium is typically fixed, they usually have higher payments than term life insurance. Whole life insurance has a cash value hence. It can function as savings component and accumulate tax-deferred over time. Financial experts recommend using whole life insurance as an estate planning tool to preserve the wealth you plan to transfer to your beneficiaries.
A type of permanent life insurance, it is defined to provide lifetime coverage. Unlike whole life insurance, universal life insurance is flexible, allowing one to change the premium and payment amount throughout their lifetime. However, due to its lifetime coverage, universal life insurance policies typically have a higher premium than term life insurance. Since it is similar to whole life insurance, it can be used as a real estate planning strategy, which can be used to preserve wealth that can be used to transfer to beneficiaries. The amount from the insurance can also be used long term income as it provides both cash value and death benefit coverage.
Apart from the three types of life insurances mentioned above, here are three other factors that you must consider before buying a life insurance policy:
The purpose of life insurance varies depending on the personal situation such as your annual income, overall health, lifestyle, and the total number of dependents. If your salary is important for supporting your family by paying mortgages, recurring bills, and paying your children’s school fees, life insurance can be a way to ensure financial obligations in case of untimely death.
There is no thumb rule to decide the exact cost of life insurance as every individual has different personal and financial situations. However, many financial experts suggest that it is useful to obtain a policy that will be worth between five to 10 times the annual salary in the event of untimely death. Hence consult a financial planner to determine a suitable life insurance policy that best suits all personal and professional priorities.
It is seen that an employer’s life insurance is the least expensive life coverage. The type of policy offered is typically a term policy, which means the employees are covered as long as they are working with the employer. However, some policies can also be converted to personal life insurance upon termination. The cost of life insurance depends greatly on factors such as the type of policy, annual income, lifestyle, and overall health. It is usually seen that a healthy individual pays a less monthly premium than the ones who smoke or have a history of health conditions. The average cost of life insurance for a 30-year old man would be $300 a year for a $300,000 term life insurance. The cash value of the same cover would approximately cost over $3000.