There are 41 million people in the U.S. who say they need
life insurance but do not have it, according to the 2020
Insurance Barometer Report from industry groups LIMRA
and Life Happens. This can partially be explained by the
tendency of people to overestimate its cost.
Perceptions about affordability and value can deter people
from buying the life insurance they need. More than half of
respondents in the Insurance Barometer Report said a
$250,000 term life insurance policy for a healthy 30-year old
would cost $500 a year or more. But the average cost is
closer to $160 a year. That’s a pretty big discrepancy in
perceived cost versus actual cost.
Here’s a breakdown of what you need to know about life
insurance so you can make an educated decision.
What Is Life Insurance?
Life insurance is a contract between you and an insurance
company. Essentially, in exchange for your premium payments,
the insurance company will pay a lump sum known as a death
benefit to your beneficiaries after your death.
Your beneficiaries can use the money for whatever purpose
they choose. Often this includes paying everyday bills, paying
a mortgage or putting a child through college. Having the safety
net of life insurance can ensure that your family can stay in
their home and pay for the things that you planned for.
There are two primary types of life insurance…term and
permanent life. Permanent life insurance such as whole life
insurance or universal life insurance can provide lifetime
coverage, while term life insurance provides protection for a
certain period.
Main Types of Life Insurance
Term Life Insurance
In addition to being the most affordable type of life insurance,
term life insurance is the most popular type of life insurance sold
(71% of purchasers) according to the Insurance Barometer Report
Term life insurance provides coverage for a certain amount of time
and the premium payments stay the same amount for the duration
of the policy. Typical choices are policy lengths are 10, 15, 20, 25
or 30 years.
If you pass away within the term of your policy, your beneficiaries
can make a claim and receive the death benefit money, tax-free.
Once the term of the policy expires, you may be able to renew the
coverage in increments of one year, known as guaranteed renewability.
But each year of renewal will be at a higher rate.
Permanent life insurance
Permanent life insurance provides lifelong coverage. It’s more
expensive than term life because it… Can last for the duration of
your life. Usually builds cash value.
The cash value component accumulates on a tax-deferred basis over
the life of the policy. It acts as a savings portion of the policy. Typically,
you can borrow against the policy’s cash value or make a withdrawal.
If you decide to end the policy, you can get the cash value minus any
surrender charge.
In some policies the cash value may build slowly over many years, so
don’t count on having access to a lot of cash value right away. Your
policy illustration will show the projected cash value.
There are several varieties of permanent life insurance…
*Whole life insurance offers a fixed death benefit and cash value
component that grows at a guaranteed rate of return. Many whole life
insurance policies pay out dividends that can be used to reduce
premium payments or can add to your cash value.
*Universal life insurance often offers more flexibility than a whole life
insurance policy. You may be able to alter your premium payments and
death benefit, within certain limits. With a universal life insurance policy,
the cash value will build depending on the policy type. For example, an
indexed universal life insurance policy will have cash value tied to an
index such as the S&P 500. A variable universal life policy will typically
have investment subaccounts that you can choose and manage.
*Burial insurance is a small whole life policy with a small death benefit,
often between $5,000 and $25,000. Burial Insurance is designed to cover
only funeral costs and final expenses.
*Survivorship life insurance or “second to die life insurance” insures
two people under one policy, usually a married couple. When both
spouses have passed away, the policy pays out the death benefit to
the beneficiaries. Usually, survivorship life insurance is part of a
larger financial plan to fund a trust or pay federal estate taxes.
- Ashley Kilroy
https://www.forbes.com/advisor/life-insurance/how-it-works/#22527ac27f30
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