- January 22, 2016
- Posted by: Liam Dai
- Category: Uncategorized
Life is ever anything but predictable. There are few guarantees that, if something would happen to yourself, your loved ones would be able to carry on. This is where life insurance comes in.
Basically, a life insurance policy is a contract with an insurance company. By providing premium payments, the insurer pays out a lump-sum payment (known as a death benefit) to the beneficiaries should the insured person pass away. Life insurance also acts as a supplemental source of income for your loved ones in the future.
Benefits of a Life Insurance Policy
Some benefits for having a life insurance policy in place are:
- Your spouse (or partner) can help pay off your remaining mortgage
- Helping your children pay for their college/university education
- Your businesses can survive without your presence
- You can create equity, a source of potentially tax-free loans and withdrawals for whatever needs arise
Of course, a complete list of benefits is only limited to your most important life goals and ingenuity. This is why we recommend speaking to our qualified agents to determine your financial future.
Types of Life Insurance Policies
Life insurance is generally chosen based on the needs and goals of the owner of the policy:
- Term-life Insurance: provides coverage for a set period of time, requiring periodic renewals.
- Permanent Insurance: provides lifetime coverage. Examples of this include whole life and universal life insurance.
Let’s take a look at these a little more in-depth.
Term Life Insurance
The aim of choosing a term life insurance policy is to provide financial protection for a specific duration of time. Typically, this can be ten or twenty years.
Traditional term insurance ensures that the premium payment amount stays the same throughout the coverage period you select. After that period elapses, some insurers may offer policies for continued coverage, usually at higher premium payment rates. However, term life insurance is usually less costly than permanent life insurance.
Why should you choose it? During your working years, term life insurance may help replace some of your lost potential income from taxation. It also provides a safety net for your beneficiaries, ensuring that your plans and theirs aren’t significantly interrupted by your absence.
Whole Life Insurance
If you’re looking for lifetime coverage, whole life insurance may be your best choice. Whole life insurance is designed to provide coverage of a lifetime, so it generally has higher premiums than term life insurance.
Why should you choose it? The policy’s premiums tend to be fixed AND have a cash value, functioning as a way to defer tax payment and steer your wealth toward typical estate planning schemes for your beneficiaries.
Universal Life Insurance
Much like whole life insurance, universal life insurance provides lifetime coverage. However, universal life insurance policies tend to be flexible, allowing you to raise or lower your premiums and/or coverage amounts throughout your lifetime. Because of the length of coverage, universal life insurance tends to have a higher cost of premiums than term life insurance.
Why should you choose it? The most common usage of a universal life insurance policy is as a part of a flexible estate planning tool. Also, it functions as a long-term income replacement, extending beyond the years that you’re actively part of the workforce. Some policies focus on providing death benefit coverages as well as building cash value; others focus on providing coverage for guaranteed death benefits.
How Much Does It Cost?
Insurers use rate classes (or risk-related categories) to figure out your premium payments. However these categories don’t affect the amount or length of coverage. While every insurer has a different set of criteria they use to determine these classes, some common examples are:
- Tobacco use
- Family medical history
- Lifestyle (ex. skydiving instructor vs. librarian)
- Overall health
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Choosing what type of life insurance is a difficult decision that not everyone can make alone. That’s why we encourage you to speak to an insurance agent at RiskBlock to ensure that you secure your family’s future when you’re gone.