An Intro to Life Insurance
The Risk of Dying
From its’ earliest version, life insurance was created to replace some portion of future income of the deceased. It’s one way to reduce the financial risk of dying too soon. Life Insurance has three main purposes: to pay for burial expenses and final bills to close out your estate, to replace the income you would have provided to a dependent (relative or business partner), or to gift to a favored charity or institution.
There are two basic types of Life Insurance policies, a Whole Life Policy and a Term Policy.
Whole Life Insurance
The cost of a Whole Life policy is calculated based on your life expectancy – age, health and family illness history. The younger you are the lower the cost and the annual rate never changes.
Over the years as you continue to make premium payments your policy will accumulate equity. This is the living benefit of a Whole Life policy. As the owner, you can borrow against your equity at a lower interest rate, regardless of your credit rating. Any outstanding balance will reduce the death benefit paid upon your death.
Another benefit of getting a Whole Life policy when you are young is to lock in your good health. Some illnesses may prevent you from being able to afford or qualify for a policy at some future date. Consider it as a cornerstone of your estate plan.
Term Life Insurance
A Term Life policy is calculated on a specific time frame of coverage, such as 5, 10 or 20 years. The shorter terms are less expensive, since the insurance company is taking on a much lower risk. These policies can help cover specific debts, such as a mortgage, car payments or college expenses upon your death. At the end of the term, you can let the policy go or renew it based on your current age and health.
Mix it Up
There are a multitude of other types of Life Insurance policies – which are some type of combination between these two. If you want to research further, be sure to compare and verify information from a variety of sources. Know before you buy.
You can own more than one policy, a smaller Whole Life to be with you long term and Term Policies to cover those higher ticket items as needed. It’s very important to consider the long term strength and stability of the insurance company you choose to work with. You want to make sure they will be there when you are gone.
Review your beneficiary designations on a regular basis. You can name multiple people as benefactors and for different percentages. You can also designate a charity or school as a beneficiary. Be sure to take advantage of any life insurance offered through your employer or credit union, as these tend to have lower costs and can provide additional coverage along with your long term plans.
Have you considered or included Life Insurance as part of your financial strategy?