Life insurance is a critical component of your financial management plan. Not only does life insurance allow you to leave your family with a non-taxable sum after your death, but it is a way to cover personal loans, mortgages, and other expenses, such as funeral costs.
Facing your mortality may be uncomfortable, but life insurance can help provide security for your loved ones left behind. Putting a policy in place can give you peace of mind for their future and your final expenses.
Additionally, life insurance replaces your employer’s insurance when you retire, which makes it possible for you and your family to maintain your lifestyle.
You have a unique financial situation, and you need a life insurance policy that fits your budget and meets your financial requirements. In this article, we will look at the importance of life insurance, as well as the different products available. Keep reading to learn more.
Why Life Insurance?
You may be apprehensive about buying life insurance. Not only does a new policy represent another monthly expense, but it forces you to take an in-depth look at your financial situation—much like personal taxes do.
Going through the process of selecting a life insurance policy is also an acknowledgment of your mortality and the possibility that things can go wrong.
Financial Security
When things do go wrong, a life insurance policy will see your family through. By going through the process of acquiring life insurance now, you ensure that your loved ones are financially secure and that they have a way to cover their expenses when you no longer can.
However, if you don’t have life insurance in place, your family may struggle to replace your lost income. In addition to not being able to cover household expenses, they may have no way to cover burial costs or estate taxes.
The investment options that your provider ties to your life insurance policy can also help to diversify risk within your portfolio. If you are in a partnership with someone else, life insurance will help to protect your company if your partner passes away.
Peace of Mind
Life is filled to the brim with uncertainty. You may lose your job, suffer an injury that affects your ability to work or pass away. All of these cases carry severe financial implications.
Life insurance brings comfort that you or your family can cover expenses after an unfortunate event.
Complete Policy Customization
Another reason you need life insurance is that your provider can tailor your policy to your unique financial situation and requirements. Many features of your insurance policy can be customized, including:
- The number of beneficiaries
- Total coverage
- Policy terms
- The investment of cash value
- Your payment schedules
- The death benefit and accelerated death benefits
- The cost of premiums
- Spouse or child riders
By personalizing your policy, you ensure that you and your beneficiaries derive optimal value from your plan and that it meets all your financial requirements.
Build-in Cash Value
Every life insurance policy features a cash value component, which is a tax-deferred savings account. With every deposit, your cash value increases, and the longer you live, the higher your cash-value accumulations will be.
The cash value component of your policy may be subject to various terms. Some insurers require that you use it while you are alive. In this case, the remaining balance will go to the insurance company when you pass away.
In other cases, you may be allowed to withdraw from the cash value accumulation without it affecting your death benefit.
Life Insurance Is Affordable
Cost is one of the most common objectives that people have when it comes to life insurance. However, life insurance policies are relatively affordable, thanks to policy personalization. Additionally, you younger and healthier you are, the lower your life insurance policy costs will be.
What Kind Of Life Insurance Do I Need?
There are many different life insurance products available, and they differ significantly in terms of premiums, death benefits, and cash value policies. Choosing one that is right for you can be a challenge.
Below, we take an in-depth look at the different types of life insurance policies to help you make an informed decision.
Term Life Insurance
Term life insurance is a relatively straightforward policy and is also one of the most affordable options. This type of life insurance can cost as little as $1 per day for a 30-year, $500,000 policy.
Term life insurance covers you for a set period before it expires. If you pass away during this period, the insurer will pay a death benefit to your policy beneficiary. Term life insurance pays a guaranteed amount upon your death. Your beneficiary can receive the death benefit as a lump sum, monthly payment, or annuity.
Healthy people in their 20s and 30s typically prefer this type of life insurance because of its affordability and simplicity. When the 10-, 20-, or 30-year term expires, you can renew your policy, or you can switch to one of the permanent plans that the insurer has available, for example, whole life insurance.
Whole Life Insurance
Whole life insurance differs from term life insurance in that it is a permanent life insurance policy that does not expire. In addition to a death benefit, whole life insurance policies also include cash value that accrues interest at a set rate. The cash value component of the plan makes a guaranteed rate of return possible, and it will grow over time as you pay your monthly premiums.
Because this type of life insurance includes both cash savings and investment components, it is the most popular form of permanent life insurance. For as long as you pay your premiums, your family will be eligible to receive the death benefit. Additionally, you can withdraw from the policy or take out a loan.
Whole life insurance policies cost significantly more than term policies due to the additional cash value component and fees that include surrender fees, interests, and taxes. If you have a relatively complex financial situation and need cash value to cover expenses, such as endowments, a whole life insurance policy may be ideal.
Universal Life Insurance
Like whole life insurance policies, universal life insurance is permanent, and the premiums you pay maintain a death benefit, as well as a cash value. The difference between these policy types is that universal life insurance allows you to change the death benefit amounts and premiums without having to switch to a different policy.
You have to pay a minimum premium to maintain your policy. However, if you have sufficient funds in your cash value, you can use the accrued interest of the cash value to pay the rest of your premiums, which reduces your life insurance costs.
With this type of policy, you can also adjust the death benefit within the policy limits, but such an adjustment may be subject to additional fees.
A universal life insurance policy is ideal for people who have dynamic financial situations and prefer flexibility. However, this type of life insurance is complex, and it involves additional costs that don’t apply to more straightforward plans.
Variable Life Insurance
A variable life insurance policy is similar to a whole life insurance policy, as both include a cash value component. The difference between these two policy types lies with the cash value application. The cash value of a whole life savings policy is a savings account with a guaranteed minimum rate.
The cash value of a variable life insurance policy functions similarly to an investment account. The premium portion that goes toward the cash value is paid into sub-accounts that are similar to mutual funds. Depending on the market trends, the fund in your cash value can either increase or decrease.
In terms of investment, a variable life insurance policy is a better option than whole life insurance, especially since it allows for tax-deferred growth. However, the sub-accounts that are available through your plan may be limited. You can use this option as an instrument to access mutual funds on the open market.
Variable Universal Life Insurance
Variable universal life insurance features aspects of both universal and variable life insurance. With this type of policy, you can adjust the amount of your death benefit and premiums, and you can use the accrued interest from your cash value to pay your premiums.
However, instead of using your cash value as a savings account with a guaranteed minimum rate, your cash value is an investment instrument. As a result, the cash value growth does not depend on your cash value premium portions, but the current market conditions.
At first glance, this option is the ideal investment opportunity, and it allows for ample flexibility. However, variable universal policies are complex, and their fees are relatively high. You can achieve the same goals with a simple term life insurance policy and a mutual fund.
Simplified Issue Life Insurance
With other life insurance policies, you have to undergo a paramedical exam so the insurer can conduct a risk analysis and determine your premium rate. With a simplified issue life insurance, however, you don’t have to go through the medical exam. Instead, you have to complete a health questionnaire, which contains questions about your lifestyle habits and medical history.
The advantage of this type of policy is that the underwriting process takes less time than that of other policy types. If you are in a hurry—for example, if you have to leave the country soon—this type of life insurance policy may be ideal.
The drawback of simplified issues life insurance is that these policies are more expensive. Because insurers don’t have insight into your health, they mitigate their risk with higher premiums.
Guaranteed Issue Life Insurance
Guaranteed issue life insurance policies are similar to simplified issue life insurance. The underwriting process doesn’t include a paramedical exam. Additionally, you also don’t have to complete a medical questionnaire. The only information the insurer needs is your name, age, sex, and the state where you reside.
This type of life insurance is ideal if you are older or if you have health issues that make it challenging to get sufficient coverage. However, as is the case with simplified life insurance, insurers don’t have your risk profile. As a result, you can expect your premiums to be higher than those of other policy types.
Final Expense Insurance
Final expense insurance covers all costs related to your death, including your funeral, cremation, or mortuary fees. Like most other insurance types, final expense life insurance consists of a cash value that grows as you pay your monthly premiums. These policies are also relatively straightforward, and their coverage is for small amounts.
This option is ideal if you don’t have sufficient life insurance to cover funeral costs—for example, if your term life insurance expired. Older people who don’t have savings to pay for their funeral may also prefer this type of policy if they don’t want their families to pay their funeral expenses.
The drawback of final expense insurance is that premiums are generally high, considering the low coverage amounts.
Group Life Insurance
Group life insurance is typically term or whole life insurance that employers offer as an employee benefit. As an employer, this type of insurance can be valuable, especially if you don’t have to pay a monthly premium or take a medical exam to qualify.
However, the life insurance that companies offer their employees are typically only the equivalent of one- or two-year’s salaries and may not provide your family with sufficient protection. If you retire or pass away, your family will need long-term coverage. You may also require additional coverage for funeral costs and taxes.
If possible, find a way to incorporate the group coverage you receive with an additional life insurance policy.
How We Can Help
Finding the right insurance policy for your needs can be difficult, especially if you are not sure about the coverage you need. CB Acker Associates is a leading life insurance agency in San Mateo, CA, and we can help you find the most suitable policy for your goals.
Contact us today to schedule an initial consultation and to start the process of finding the best possible life insurance.