Life insurance comes in many shapes and sizes. For many individuals, understanding how life insurance works can be difficult and confusing. How do you choose the right life insurance policy for your situation? How you select appropriate options? You may even ask yourself if you need life insurance in the first place.
The bottom line is that if you support others—financially or through your efforts—you should consider the protection an appropriate life insurance policy offers. Replacing income, covering funeral expenses, and paying for recurring things like a mortgage can burden your loved ones, which can be especially challenging when they are dealing with the emotional aftermath of your loss. The main draw for most people with life insurance is a death benefit to address the issues mentioned.
However, many individuals aren’t aware that the benefits of a life insurance policy can go far beyond a death benefit. With a permanent life insurance policy, for instance, your contract accumulates a cash value that can be accessed through withdrawals or policy loans. Adding a long-term care or chronic illness rider, you can receive benefit payouts from your insurance contract should you face a debilitating condition. And a life insurance policy has several tax benefits attractive to many consumers such as tax-free growth, tax-free exchanges, and generally no income tax for beneficiaries.
Life insurance can also be a tool for business owners. Commonly, life insurance is used in a key person arrangement, whereby a company purchases life insurance coverage on key personnel with the company designated as a beneficiary. In this structure, if an employee crucial to the life of the business dies, is injured, or retirees, the company as a whole is able to recover some of the financial damage this represents. Disability insurance can provide coverage on a personal level, but business owners may also want to consider business overhead expense insurance to protect their business interests in the event of their disability.
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Life Insurance Types
Life insurance products are constantly evolving, with new innovations introduced into the marketplace constantly. While there is a great amount of variation amongst insurance carriers and contract types, life insurance typically falls under two main categories: term life and permanent.
Term Life Insurance
As the name suggests, Term Life Insurance provides coverage for a specified timeframe (term). This is usually in ten-year increments. Should an insured die within a covered period, the insurance company issues a death benefit to beneficiaries. If, however, the insured survives the term, coverage terminates, although there may be an option to renew for another term or convert to another policy type.
For individuals wanting a death benefit—and nothing else—a term life insurance policy may be an appropriate choice. Since a term life policy does not build cash value or retain value outside the coverage period, it is often less expensive than permanent policies.
Permanent Life Insurance
Permanent life insurance policies give lifetime protection, as long as premiums and contract charges are met, per the condition of the policy. This broad category life insurance policy type offers flexibility and builds tax-deferred cash value.
There are three main types of Permanent Life insurance:
Whole Life Insurance provides coverage for your entire life, with a guaranteed rate of growth for the cash value component.
In addition to offering lifetime coverage, universal life insurance policies allow for flexible premium payments (as long as enough is paid to keep the contract in force) and the option for a level or increasing death benefit.
Fixed Universal Life
A fixed universal life insurance policy is very similar to a universal life policy, with the difference that the cash value is tied to either current interest rates or fixed to stock market index, such as the Standard & Poors.
There is certainly more variation within these life insurance subcategories. What life insurance policy will best for you depends on your unique situation, goals, and needs. Call 919-797-4505 or email firstname.lastname@example.org to explore your life insurance options.