If you have a family, a mortgage, plan to send your children to college, or have others who depend upon you for support, life insurance can protect them by making up for the loss of your income in the case of your death.
Life insurance is a financial tool that protects against the risk that a person will die prematurely and be unable to fulfill obligations to their loved ones. A life insurance policy guarantees that a designated amount of money will be available, generally income-tax-free, at the very time it is needed most and when loved ones may be exposed to certain financial risks, such as burial expenses, loss of personal or business income and debts.
The first step to learning about life insurance lies in understanding its necessity and importance. Life insurance is essential for a number of different reasons. It is a financial instrument that allows you to protect your family and loved ones once you're gone and also a tool to finance your objectives, from education to retirement, while you are alive.
Life Insurance can be used to:
- Make provisions to take care of your family, guaranteeing that your family will continue to receive income.
- Give your survivors choices about their future - if you own a home, your life insurance might pay off the mortgage so your family can stay in the house rather than being forced to sell it.
- Provide an income to let your family maintain their standard of living and cover everyday expenses such as groceries, bills, rent, the mortgage, etc.
- Take care of your final expenses so your loved ones won't have to worry about these costs.
Life insurance can also be used to:
- Supplement your retirement.
- Help cover the expenses of raising your children.
- Help pay for your children's education.
- Preserve your estate.
- Safeguard your home mortgage
There are two basic types of life insurance coverage:
Permanent life insurance comes in different forms to meet a variety of needs.
- Whole Life Insurance* usually has premiums that remain fixed for the life of the policy. Whole life insurance also builds a savings element, since part of the premium is used to accumulate a guaranteed cash value. Interest or dividends, which are not guaranteed, may also increase the policy cash value and grow on a tax-deferred basis. It's life insurance that you own for your entire lifetime. In essence, whole life is like buying a house versus renting it. The monthly cost is higher than it would be for a term life policy, but with each payment you make; you gain "equity."
- Universal Life Insurance is permanent insurance that accumulates cash value. However, it offers additional features and options as well. For example, you can increase or decrease your policy's face amount to accommodate your changing protection needs. You can also increase or decrease the dollar amount of your premium payments and make additional lump sum payments to your policy.
- Variable Whole Life Insurance is a form of permanent life insurance under which the death benefit and the cash value of the policy fluctuate according to the investment performance of the variable investment options selected by the policy owner.
- Variable Universal Life Insurance is a form of universal life insurance that combines the premium and death benefit flexibility of universal life insurance with the investment flexibility and risk of variable life insurance.
It is important to note that in both variable whole life and variable universal life, the insured party bears the investment risk within the policy.
Term is known as the simplest or purest form of life insurance, typically purchased for short-term financial protection. On products purchased for a specified number of years, the initial premium is guaranteed and level for the selected period of time, i.e. - 10, 15, 20, or 30 years. Premiums often follow the model for permanent life insurance, based on life expectancies, which make them basically unaffordable for renewal after the initial period.
Although not as economically viable as longer term financial protection, there are specific uses for Term insurance, such as to:
- economically provide for large amounts of insurance for a specific time period
- secure loans
- satisfy a divorce or alimony agreement
- insure a short-term business obligation
In contrast, Permanent insurance is purchased to:
- protect income for a extended time horizon
- supplement retirement income
- equalize estates
- assist in payment of estate tax or for other liquidity needs upon a death
At Wealth Dynamics, we will explain the different types of life insurance policies and recommend the type of life insurance that best meets your needs and situation.
*All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.