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Guide to Life Insurance
Guide to Life Insurance
Buying a life insurance policy is one of the ways to take ownership of your financial future. A life insurance policy is a policy where the insurance company promises to pay a certain amount of money to a beneficiary in exchange for a premium upon the policyholder's death. A life insurance policy is a legally binding contract.
How life insurance works
Life insurance has a death benefit and a premium. The premium is the amount of money a policyholder pays the policy's insurance to be in force. Premiums are mostly dependent on the life expectancy of the insured. On the other hand, death benefits are the amount of money the beneficiary receives from the insurance company upon the insured's death.
Types of life insurance
There are different types of life insurance that a person can purchase. Term life insurance and whole insurance are the most common. The difference between term life insurance vs. whole life insurance is as follows.
Term life insurance
A term life insurance is purchased for a certain number of years before expiry. Death benefits are paid to your beneficiary if you die before the term is up. It's one of the most straightforward and accessible life insurance policy. The policy can last up to 30 years with a premium amount of 30 to $40 a month.
Pros of term life insurance include:
- The low premiums can make the policy affordable.
- The policy is convertible to whole life insurance.
- Beneficiaries will receive a lump sum of money upon payout.
Cons of term life insurance include:
- After every renewal, the premiums increase.
- It can be difficult to qualify if you have a chronic health issue.
Whole life insurance
Whole life insurance is a policy and does not have an expiration date. The coverage has a death benefit and cash value, which is interest received at a fixed rate upon the premium payment. Whole life insurance is the most expensive policy that can cost up to 15 times the term policy.
Pros of whole life insurance include:
- The policy builds cash value.
- Fixed premium.
- It is permanent coverage, and anyone can easily qualify for the contract.
Cons of whole life insurance include:
- The beneficiaries receive small death benefits.
- The policy is expensive.
Universal life insurance
Universal life insurance is almost the same as the whole life policy because the premiums are shared between death benefits and cash value. The only difference is that the universal life insurance death benefits and installments can change without getting a new policy.
Pros of universal life insurance include:
- The policies are more flexible than whole life insurance.
- You can yield high returns because the cash value grows at variable interest rates.
- There are more opportunities to increase your cash value policy.
Cons of universal life insurance include:
- The cash value can be lower due to the variable rates.
- For our policy to remain active, it should have a positive cash value.
Variable life insurance
A variable life insurance policy is the same as the whole life, only that the cash values are different. The cash value in the system is an investment where the money goes to other mutual funds to get better returns.
Pros of variable life insurance include:
- The fee payment is lower than the whole life policy.
- The growth of cash value is tax-deferred.
- You can get higher returns than whole life insurance when the market is right.
Cons of variable life insurance include:
- You can lose money during investment because the rates are dependent on the market.
- The premiums are prone to change.
What should you think about before buying life insurance?
The most important financial decision you can make is to purchase life insurance. Before getting one, consider the following factors:
Determine length of coverage
You can either choose a lifetime life insurance or one that lasts for a certain period. For a specific period, select the term life insurance, but if you want an insurance that will last as long as you live, the whole insurance is the one to consider.
Consult with a professional
It would help if you had guidance in the process of purchasing life insurance. There are available independent life insurance agents you can get help from in making the decision. A trusted advisor will have the best of your interest.
Figure out what you can afford
Consider an affordable policy so that when you need to cut on a budget, you will still pay for it. Many people stop paying life insurance when severe and might find it expensive when they embark.
Are there taxes involved when receiving payments?
When a beneficiary receives life insurance benefits, those benefits are not part of taxable income. But some situations may lead the beneficiary to be taxed. For example, the beneficiary has to pay tax when the policyholder upon death does not allow immediate payment of the benefits for a certain period. When the benefits are paid to an estate, they are also taxed.
Is it possible to change my insurance policy?
Yes. Insurance companies give room for a policyholder to change his life insurance coverage. For example, if you need to change the percentage of what the beneficiary gets or change from life to term insurance, you are eligible for changes.