Life Insurance is protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured.
The goal of life insurance is to provide a measure of financial security for your family after you die. So, before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments, and college?
Because of those moving parts, it is prudent to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business.
Types of Life Insurance:
Whole-life policies, a type of permanent insurance, combine life coverage with an investment fund. Here, you’re buying a policy that pays a stated, fixed amount on your death, and part of your premium goes toward building cash value from investments made by the insurance company.
Cash value builds tax-deferred each year that you keep the policy, and you can borrow against the cash accumulation fund without being taxed. The amount you pay usually doesn’t change throughout the life of the policy.
Universal life is a type of permanent insurance policy that combines term insurance with a money market-type investment that pays a market rate of return. To get a higher return, these policies generally don’t guarantee a certain rate.
Variable life and variable universal life are permanent policies with an investment fund tied to a stock or bond mutual-fund investment. Returns are not guaranteed.
The other type of coverage is term insurance, which has no investment component. You’re buying life coverage that lasts for a set period of time provided you pay the monthly premium. The annual-renewable term is purchased year-by-year, although you don’t have to re-qualify by showing evidence of good health each year.
When you’re young, premiums for annual-renewable term insurance are inexpensive – as low as a few hundred dollars per year for $250,000 worth of coverage.
As you get older, premiums steadily increase. Level-premium term has somewhat higher – but fixed – premiums for longer periods, anywhere from five to 30 years.