Navigating through life insurance can be a tricky process. Do you need it? What kind of policy should you choose? How much should your coverage be? These are some questions that all of us face at some point in life.
But before you get here, it is necessary to understand the basics about life insurance so you can make an educated decision:
What is Life Insurance?
When you get Life insurance, you enter into a contract with your insurance provider where in exchange for monthly premium payments, they pay a lump sum known as a death benefit to your beneficiaries after your death.
This can be used to pay everyday bills, pay off a mortgage, or pay for education. Having this safety net can ensure your family members don’t have to worry about money and can carry on paying for the things you had planned.
There are two primary types of life insurance:
Term Life Insurance
Term life insurance is one of the most popular and affordable types of life insurance. It provides insurance coverage for a certain amount of time and the premium payments remain the same throughout. You can typically choose between 10, 15, 20, 25, or 30 years. If the policyholder passes away within the term of the insurance policy, the beneficiaries can claim the death benefit money, tax-free. If the policy term expires, you opt-in for guaranteed renewability by renewing your coverage in increments of one year. But you should know that with each renewal, you get charged a higher rate.
Permanent Life Insurance
Like the name suggests, permanent life insurance provides lifelong coverage. It is usually more expensive than term insurance because it lasts for your entire life and builds in cash value.
This cash value accumulates on a tax-deferred basis throughout the duration of the policy and acts as a savings portion of the policy. You can choose to borrow against the cash value or make withdrawals if you need to.
Here are three types of permanent life insurance plans:
Whole life insurance: offers a fixed death benefit & cash value component that grows at a fixed and guaranteed rate.
Universal life insurance is more flexible than a whole life insurance policy and allows you to alter your death benefit and premium payments within certain limits.
Burial insurance: is designed to cover final expenses and funeral costs. It usually offers a small death benefit, ranging between $5,000 and $25,000.