A life insurance policy provides beneficiaries a payout (often called a death benefit) after their death. These payouts can help cover funeral costs, debt, mortgage payments, and children’s education expenses.
However, not all life insurance policies are alike. Some are more flexible than others, and your family’s financial needs will change throughout the years. Click www.lifeinsuranceupstate.com to learn more.
Term Life Insurance protects for a specific period and is typically less expensive than other types of life insurance. Generally, if you die during your policy term, the insurer will pay the death benefit to your beneficiary. The policy can sometimes be renewed at the end of your term or converted to permanent coverage, but premiums will generally increase each time you renew or convert. Your age, health, smoking status, and occupation can affect your premium.
Purchasing the right amount of life insurance is important to protect your family from the unexpected and often overwhelming financial burden that can follow the death of a loved one. You can use online calculators to estimate your coverage needs, but the final cost of your policy will depend on a variety of individual factors. To get a quote, you’ll need to provide detailed information about your health and lifestyle.
Some life events can make purchasing a life insurance policy more urgent, such as getting married, having children or buying a home. These circumstances may also influence your desired term length or coverage level, and you can usually obtain quotes at these times to find the best options. The younger you are when you purchase a term life policy, the lower your premiums will be.
There are multiple ways to buy life insurance, including working with an agent, through a broker or directly with the company. Before you decide, you can compare companies and policies by reviewing free quotes. You can also learn about an insurer’s reputation by checking its rating from independent agencies like A.M. Best and Fitch Ratings, although Life Happens cautions against deciding on an insurer based solely on its ratings.
Regardless of the type or duration of your policy, you’ll want to keep it in force to ensure that your beneficiaries receive the death benefits they deserve when you pass away. If you miss payments, the policy may lapse, and your beneficiaries will receive a reduced death benefit. To prevent this, you can set up automatic payments from your bank account or credit card to ensure that you always make your monthly payment. Alternatively, you can borrow against the cash savings in your life insurance policy if necessary.
Whole Life Insurance
Whole Life Insurance is a permanent life insurance policy that provides coverage for your entire lifetime as long as you pay your premiums. Its benefits include a guaranteed death benefit and a cash savings component, or “cash value,” which earns interest on a tax-deferred basis. You can withdraw or borrow from the cash value as needed, though doing so will reduce your death benefit and outstanding loan balance.
While it may seem expensive, this type of policy offers an advantage over term policies in that the death benefit remains unchanged for your entire lifetime, as opposed to only a set period of time (known as the “term”). This means your beneficiaries will receive the full death benefit no matter when you die, as long as you continue to pay your premiums.
In addition to a guaranteed death benefit, whole life insurance typically includes a savings component or “cash value” that grows over the years. You can access the cash value as needed, or when you surrender your policy (though you’ll pay a penalty). This allows you to provide income in retirement or leave behind a legacy to family and friends.
As with any life insurance policy, it’s important to designate one or more beneficiaries. These people will receive the death benefit from the life insurance company when you pass away, and it’s wise to check the designations at least once a year to ensure they reflect your current wishes. It’s also a good idea to have at least one contingent beneficiary, which is like your backup plan in case the primary beneficiary(s) die before you do.
If you’re interested in purchasing a whole life insurance policy, consider getting a consultation with a financial professional. They can ask you questions about your goals and financial situation, then provide guidance that aligns with your needs.
It’s also important to choose an insurer with a high financial strength rating, which indicates its ability to pay claims. You can find this information by checking the insurer’s ratings with an agency such as AM Best. NerdWallet generally recommends selecting a company with a rating of A- or better.
Universal Life Insurance
Similar to whole life insurance, universal life policies give you lifetime coverage in exchange for premium payments. However, universal life also provides a way to accumulate interest-bearing funds and allows you to adjust the amount of premium you pay as your financial situation changes.
In addition to offering flexibility, universal life policies may offer competitive interest rates on accumulated cash value. They do this by allowing the policyholder to withdraw money or take out a policy loan during his or her lifetime. However, these withdrawals and loans will reduce the death benefit of the policy and may cause the policy to lapse if not replenished.
The insurance company typically credits part of each premium payment to the cash value account, but then deducts a cost of insurance charge and expenses from this portion. The remaining cash value account accrues interest at a rate determined by the insurance company. This accumulating cash value may then be used to pay the death benefit, depending on the specific policy.
If you want to avoid the risk that you will be forced to tap into your accumulated cash value, choose a guaranteed universal life (GUL) policy instead of a variable universal life (VUL) policy. GUL policies are more stable and don’t require as much active management of the underlying sub-accounts.
A VUL policy, on the other hand, can be volatile due to the investment choices in the underlying sub-accounts. If the investments lose value, your cash value could tank and your death benefit would be significantly reduced. For these reasons, it’s important to consult with a licensed life insurance agent who has earned the Chartered Life Underwriter (CLU) designation before deciding on a VUL policy.
A third option is an indexed universal life (IUL) policy. These types of policies are similar to other universal life policies but they have the potential to grow in value based on market performance. Unlike other universal life policies, IULs put the policyholder’s cash value into sub-accounts that mirror an index, such as the S&P 500. This is a unique feature that allows IUL policies to have the potential of higher returns than traditional universal life insurance.
Variable Life Insurance
As the name suggests, variable life insurance is a type of permanent life insurance that has a cash value component and allows you to take an active role in investing that money. Unlike term life insurance, which has no cash value component, variable life policies allow you to invest your policy’s cash value in different securities that offer the potential for growth based on market performance. However, this flexibility comes with some risk because, as the market goes up and down, so too will your investment returns.
The death benefit of a variable life insurance policy typically is equal to the policy’s face value plus all premiums paid. However, some policies have other death benefit structures, and a financial professional can provide more details to help determine whether variable life insurance is the right option for your needs.
Like other types of life insurance, the premiums for a variable life insurance policy vary, depending on the individual’s age, lifestyle considerations, health history and family history, the death benefit amount and other factors. In addition, there are various fees and expenses associated with a variable life insurance policy, which can impact your return. Your financial professional can explain the fee structure, and you can request a policy prospectus from your provider with more detailed information.
Generally speaking, policy fees include sales charges that are a percentage of the applied premiums, surrender charges, administration fees and loan interest. In some cases, there may also be additional fees for optional features and transaction fees. These fees can reduce your cash value and, ultimately, the death benefit.
In some cases, the death benefits generated by a life insurance policy can be used to pay the premiums for a new policy or to cover living expenses until you’re able to qualify for Medicare. Alternatively, some people choose to take the money they have invested in their life insurance policies and invest it in other investments, such as stocks and mutual funds. Regardless of how you choose to use the proceeds from your life insurance policy, it’s important to discuss your goals with a financial professional and seek the advice of a tax advisor.