Life Insurance
The old adage that "nothing is guaranteed in life except death and taxes" is a reminder that Americans should plan ahead to ensure the financial security of their loved ones. The death of a breadwinner results in a substantial emotional and financial hardship for the surviving spouse and/or children. Coping with the grieving process is taxing enough for the average individual, without having to grapple with thorny financial issues. The gift of life insurance protects the ones left behind by providing for their economic well-being. An insurer enters into a contract with a policyholder in which the former agrees to pay a benefit to a designated beneficiary (or beneficiaries) upon the occurrence of an insured event enumerated in the life insurance policy. In exchange, the purchaser accepts to pay a stipulated sum known as a life insurance premium, either in lump sums or periodically. The insured event is based on the life or lives of the individuals named in the policy. Companies allow consumers to insure the following events: 1) death, 2) illness, and 3) accidental death.
Life insurance needs vary according to the applicant's personal circumstances. How much insurance is needed will be determined by such criteria as 1) number of dependents, 2) debts, 3) lifestyle, and 4) supplemental sources of income. As a rule of thumb, consumers should purchase an amount of life insurance that is in the range of five and ten times their yearly salary. The two main types of life insurance policies are term insurance and whole life. Each will be discussed in sequence below:
1. Term Life Insurance
This is often dubbed 'pure' or 'plain vanilla' insurance coverage in that it does not contain an investment component. Beneficiaries do not receive cash value; instead, they are granted death benefits. Term life insurance is purchased for a specific period of time and pays a fixed lump sum to a designated beneficiary if the policyholder dies within the period stated in the policy. Following the preliminary guarantee period, the life insurance premium eventually increases. This kind of insurance is ideal for young, expanding families with significant economic needs but inadequate funds to meet those needs.
2. Whole Life Insurance
These types of life insurance policies, which are more costly than pure term insurance, combine term insurance with an investment fund. Beneficiaries receive cash value and a death benefit. One variation of permanent life insurance coverage is whole life insurance, which offers protection for the policyholder's life, typically up to 100 years of age. Upon the policy owner's demise, whole life pays a specified, fixed amount. One feature of whole life insurance is savings through cash value that grows in a tax-deferred manner. A portion of a policyholder's premium is allocated to savings built-up via investments undertaken by the life insurance provider. The company decides how the cash reserve is invested. The life insurance rate remains constant throughout the policy's term, provided that the policyholder pays the stated amount. The policy remains in effect until the insured's demise, even after he or she has paid all of the premiums. Some life insurance companies offer their customers the chance to earn dividends.
A second type permanent insurance coverage is universal life, which is also a blend of an investment product and term insurance. Universal life, like whole life, has a savings component that builds up tax-deferred value. The insurer invests part of the policyholder's premiums in money market funds, mortgages, and bonds, and the market rate of return on the investments is credited to the latter's policy. Universal life offers two death benefit options- Option A and Option B. With Option A, the death benefit is paid out of the life insurance policy's cash value. Under Option B, which is more expensive, the face amount listed in the contract is paid, in addition to accumulated savings. Universal life insurance offers consumers the flexibility to vary the amount of the premium in accordance with their financial situation and the opportunity to change the death benefit as their needs change. This type of insurance is particularly suitable for families whose income tends to fluctuate.
A third type of permanent life insurance is variable life, which directs part of a policyholder's premium to an account consisting of different investment funds, such as bonds, equity funds and money market funds. Since the value of the cash reserve and death benefit hinges upon the investments' performance, these too may fluctuate. The policyholder is not taxed on the earnings from his or her investments until the policy is surrendered. Furthermore, the policy owner may utilize a portion of the interest earned to cover the cost of the premium, thus lowering the amount to be paid.
The fourth variety of whole life insurance is variable universal life, which is a hybrid of universal life and variable life and provides policyholders flexible premiums, adjustable death benefits, and a choice of investment portfolios. With variable universal life insurance, beneficiaries can expect payment of a minimum death benefit upon the policy owner's death. This insurance provides a buffer against inflation and protects the policy's value from being impacted by cost of living increases, due to the fact that it is dependent upon the success of different securities markets. The insured may also borrow or withdraw cash from the policy during his or her lifetime.
Consumers can easily and quickly compare features and obtain price quotes from hundreds of life insurance providers by visiting an online insurance quotes comparison site. The life insurance rates of term insurance policies are lower than those of whole life policies. Life insurance may be purchased through brokers or agents or in some states, through savings banks. Many companies sell life insurance via mail, the internet, or the telephone, and the commission in such instances is generally waived.
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