Understanding Life Insurance – Life Insurance Awareness Month
We all set different goals for ourselves in life. One goal that remains consistent with all of us is the goal to leave our families taken care of and protected. Life insurance isn’t a fun thing to think about, and it may seem like an unnecessary expense. But if you have people who depend on you for financial support, then life insurance is really about protecting them in case something happens to you.
During the month of September, we celebrate Life Insurance Awareness Month to help remind everyone the importance of having the right life insurance policy for you and your loved ones.
Life insurance can be confusing, so here’s a rundown of the basics.
Types of Life Insurance
Term: A life insurance policy that provides a stated benefit upon the holder’s death, provided that the death occurs within a certain specified time period. This is the simplest and generally the cheapest form. You buy coverage for a specific period of time. It can usually be renewed, but premiums will increase based on age and health factors. There is no cash value, like in a permanent life insurance policy, which represents the policy owner’s interest in the policy.
All other types of life insurance are permanent, but there are several varieties. They all include a savings element that builds cash value, in addition to the death benefit. Once that cash value accumulates, it is accessible to the policyholder tax-free. The following are some of the common types of permanent life insurance.
Whole Life: You purchase this policy to cover your entire life, as long as you keep paying premiums. Premiums remain constant throughout the policy, and the company invests a portion of your premium that becomes the cash value. These are more expensive than term policies in the early years, but they even out because the premium does not increase.
Universal Life: This policy is similar to whole life, in that it can cover you for your entire life, or can be designed to provide the protection you need. It is more flexible in terms of changing premiums and face value throughout the policy. Disadvantages include higher fees and the possibility of increasing premiums.
Variable Life: A variable life policy was the most risky policy in the past in that the returns are tied to the performance of the stock market. However, newer variable policies can have a guaranteed death benefit that is not subject to the fluctuations of the market. You have control over the investment decisions for the cash value portion, but the cash value is dependent on assuming certain stock market performance.
How Much to Buy?
It’s hard to know how much life insurance to buy. Many people decide based on an income replacement calculation, between 5 and 10 times the amount of your current income.
Think about your personal circumstances: Are you the sole income provider in your household? Are there other expenses, such as college tuition, that may arise in the future? Don’t forget to include potential medical and funeral costs. Above everything, you want to be sure your family does not get stuck with bills, debts or expenses that they cannot afford. Depending on your needs, you may want to consider buying supplemental coverage.
Why Purchase Now?
Buying life insurance may seem unmanageable right now, but it could be a smart decision. Unlike many other benefits, life insurance is actually more affordable right now than in the recent past. Plus, during this tough economic period, ensuring that your family will be financially secure in the future is more important than ever.