Do you have it or don’t you? Do you need it or don’t you? Unfortunately, when it comes to life insurance, many people who need it — don’t have it. One of the principal reasons is lack of understanding. They think life insurance is expensive and complicated, they don’t know the facts about it, so they simply don’t bother with it.
But it doesn’t have to be that way. The following facts are key to understanding life insurance:
- The primary purpose of life insurance is to help replace the income of one or more wage earners in a family so that, in the event of their death, the rest of the family can continue living the same or similar lifestyle without being financially devastated. In families with non wage earners, the financial impact of replacing the non wage earner’s services (child care, maintenance of the home, etc.) should also be considered.
- Life insurance payouts are income tax-free1 to the beneficiaries so they can also be used an important part of a family’s retirement planning. If structured correctly in an estate plan, it may be a way to pass wealth from one generation to the next, minimizing estate taxes.
There are several types of life insurance on the market today. The cost and features of these policies can vary tremendously depending on the options selected and the company that provides the insurance.
The two main types of insurance are term and permanent:
Term Life Insurance
Term Life insurance covers you for a set period of time, pays benefits in the event of your death during this period, but term policies do not build up a cash value. That means if you die after the term ends, your beneficiaries do not collect on the policy.
Term Life is typically the least expensive option for obtaining pure life insurance protection for a specific period of time. The payout is income tax-free1 to beneficiaries, and, depending on your age, amount of coverage, and other factors, payments can be as low as a $10 or $20 per month. Usually, term policies give you the option of converting the policy to a permanent policy quite easily and without complicated medical exams and the like. Some people get term life insurance to supplement their permanent insurance until their expected retirement age, when they will receive retirement benefits that could help support their family if they should die.
Permanent Life Insurance
Permanent life insurance provides coverage for the entirety of the insured’s life as long as the policy is in force. As you pay in, it typically builds in cash value. You can then access this cash value to take out a loan for emergencies, fund a major purchase, or finance college education for your children. The death benefit amount is offset by any outstanding policy loans at the time of death.
Permanent Life Insurance Policies generally offer fixed premiums over the entire course of your life and, unlike term policies, the premiums generally do not go up after a certain amount of time. The death benefit is income tax-free1 and the accumulated cash value is tax-deferred. However, due to the cash value feature of the policy, the cost of permanent insurance is usually more than term insurance.
How Much Coverage Do You Need?
The best way to determine the amount of coverage you need is to consider, in the event of your death, what your loved ones will need in order to pay off the mortgage, handle other living expenses that you currently take care of, or cover future expenses such as college cost, that you would have taken care of.
How to Find the Best Policy Options
Today, one of the best ways to find a term policy that meets your needs is to use an online quote service. Visit multiple companies — it’s not a lot of work, and it will let you see if they are really offering you the best rates.
With a little bit of digging, you will have your family covered at a rate you can afford.