Life Insurance 101: Types, Benefits, and How to Choose the Right Policy
Life insurance is a crucial component of financial planning, which offers a safety net for loved ones in the event of the policyholder’s death. It is designed to provide protection and financial assistance to dependents. Make an informed choice that best suits your financial needs and goals.
Diving Into Life Insurance
There are two basic types of life insurance, Term insurance and Permanent insurance, which mature upon the policyholder’s death. While benefits different between the two, they are both aimed at providing protection and assistance to your dependents.
Term Life Insurance
With Term life insurance, premiums are fixed for a set amount of time, usually between 10 and 30 years, in which protection is offered. In the case of death, term insurance is designed to keep premiums level during the term.
Term life insurance usually provides the most coverage per dollar. It is ideal for individuals who have costs that will decrease over time, such as a mortgage, or child care. Premiums will remain stable until the fixed time expires. When the term has ended, you can renew the policy for increasing premiums or convert your term insurance to permanent life insurance.
Permanent Life Insurance
Permanent life insurance is just that - permanent. In addition to providing benefits to your family in the case of your death, permanent life insurance can gain cash value to be used during your lifetime.
Premiums for permanent life insurance tend to be higher than term life insurance yet the amount is set for life. Although more complex, permanent life insurance can offer benefits to your lifelong dependents or assist you in leaving a financial legacy to your heirs.
Breaking Down the Benefits
Life insurance provides essential assistance to your family. It offers beneficiaries help with income replacement, final expenses (such as funeral and burial costs), debt coverage, and future financial security.
Both permanent and term life insurance have distinct benefits which can play a crucial role in protecting your family. Below are examples of the benefits covered by the respective life insurance policies.
Term Life Insurance Benefits
The affordability can be ideal for young families.
Practical example: A young parent can buy a 20-year term life insurance policy to cover the years until the children are financially independent. Paying lower premiums compared to a permanent policy, term life insurance is more manageable for this parent.
Income replacement ensures security for dependants.
Practical example: If a policyholder dies unexpectedly, the death benefits help the family cover daily living expenses, mortgage payments, and future educational costs for children.
Permanent Life Insurance Benefits
In addition to income replacement and security, permanent life insurance can offer higher financial resources and stability during the policyholders’ lifetime.
The accumulation of cash value that accrues over time can be borrowed against or withdrawn.
Practical example: An individual takes out a permanent life insurance policy at 30. At 50, he borrows against the cash value to help pay for his child's college tuition, using the policy to serve as a financial resource during his lifetime.
Fixed premiums for life offers a stable and predictable policy.
Practical example: An individual buys permanent life insurance at 40. Her premiums are fixed, making it easier for her to budget and ensuring she can maintain coverage. Despite inflation, this policyholder’s monthly premiums will be the same when she is 80 years old.
Making the Right Decision
While life insurance is important, finding the right policy for your unique needs is just as crucial. To make an informed choice, Informed Choice recommends the following steps:
Determine your financial obligations, such as mortgage, education expenses, and daily living costs.
Decide on the type of life insurance policy, based on your financial goals, budget, and coverage needs.
Evaluate the affordability of premiums and ensure they fit within your budget.
Helping safeguard your loved ones’ financial stability and your legacy requires knowing your unique financial situation. Careful consideration of your financial responsibilities and goals requires honesty with your current financial situation.
Conclusion
By carefully considering your life insurance options, you can provide your family with the protection and support they need, ensuring their financial stability even in your absence.
If you need guidance in choosing your life insurance policy, or just have questions about how a facet of life insurance works, contact Informed Choice.
Do you have more questions? Visit Informed Choices’ Frequently Asked Questions, or book an appointment today with an expert.
