Life Insurance

"There is nothing certain in a man's life but that he must lose it." The bereavement process is burdensome enough for those left behind without being further encumbered by financial stresses and worries. Among the unforeseen, final costs arising after death are medical expenses, legal expenses, burial costs, and funeral expenses which may potentially deplete resources of the survivors and jeopardize their pecuniary security.

In addition to these expenses, survivors must pay off the regular monthly bills such as loans, insurance, and mortgage payments. By taking out a life insurance policy, a breadwinner can protect the financial well-being of dependents such as their spouse, children, and even parents, thus avoiding them a potential financial hardship in the event of his or her demise. If the policyholder dies prematurely, life insurance will offer loved ones the security of an income replacement and enable them to maintain their lifestyle and live comfortably.

Life insurance policies pay out a death benefit to a beneficiary upon the death of the insured or when the latter attains a certain age. The proceeds paid out to the beneficiaries are generally income tax-exempt. The two main categories of life insurance are 1) permanent life insurance and 2) term life insurance.

Permanent life insurance offers lifetime protection to beneficiaries. Consumers shopping for a life insurance policy should consider applying for permanent life insurance if they are seeking protection for a lengthy period of time. This type of insurance is optimal for long-range objectives such as

The life insurance premiums on permanent life policies are payable for life and are usually level. Policyholders can also obtain a living benefit from permanent life insurance. A portion of the premium is allocated to a cash reserve, which grows tax-deferred and may produce dividends. Guaranteed cash values provide financial relief in emergencies and address temporary needs such as education expenses. The insured may borrow against the cash reserve at any point during their lifetime, provided they pay the premiums set forth in the policy.

There are several types of permanent life insurance:

1. Whole Life Insurance

Whole life insurance combines an investment fund with lifetime coverage. The insured purchases a policy that pays a fixed sum on his or her death. Premiums are usually payable for life and remain fixed throughout the life of the policy. Annual premiums are cheaper when the insured purchases the whole life policy at a young age. Part of the life insurance premium is allocated to building cash value from the provider's investments.

Variations of whole life are a hybrid of term insurance and an investment product. Universal life, which combines a money market investment with term insurance, allows policyholders to decrease or increase the premium payment within the policy limits and the amount of insurance. The insured may also choose between an increasing or level death benefit. The total premiums paid and the life insurance provider's performance determines the account's cash value.

Other permanent policies are variable universal life and variable life, which consist of investment funds that are linked to a bond or stock mutual fund investment. Policyholders may skip or adjust premium payments or make supplemental premium payments. They may also decrease or increase their coverage. Some of the benefits offered by variable universal insurance are:

 

• Tax deferral on growth in the account value
• Distribution of premiums among an array of investment options
• Financial security for beneficiaries in the event of the insured's premature death
• Tax-free nature of the death benefit paid to beneficiaries
• Transfer of cash value to other investment options without being subject to income taxation on gains

2. Term Life Insurance

Pure insurance or term life insurance policies provide temporary insurance coverage. A death benefit is provided for a specific duration or term. This type of insurance is well-suited for short-term needs such as payment of education expenses, payment of home mortgage, and payment of an auto loan. Term life insurance does not have an investment component. Experts recommend that consumers purchase a death benefit that is 10 times greater than their salary. The insured pays a small monthly premium for time-limited coverage, which may span 1, 5, 10, 20, or 30 years. Term life policies offer adjustable premiums and are renewable at an increased life insurance rate.

Policyholders are allowed to convert a term insurance policy into a permanent life insurance policy. The lowest term life insurance rates are classified as preferred or select and are reserved for individuals with excellent health and no family history of illness. The other categories are 1) standard life insurance rates, which are assigned to applicants with minor health issues such as elevated cholesterol levels or obesity and 2) substandard life insurance rates, which are assigned to those who have a risky occupation, consume tobacco products, or have important health problems.

Since providers sometimes differ in how they estimate the risk of a client's condition, consumers who shop around may save as much as 50 percent on their life insurance premium. They may also benefit from a lower life insurance premium by paying their premium all at once. Prospective policyholders may avail themselves of free instant insurance quotes and numerous bargains that are available online. When searching for the right provider on the web, consumers should focus on the term desired, low prices, and a high rating. Insurers are rated on their claims-paying ability by a number of agencies, such as A.M. Best and Standard & Poor's.

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