INTRODUCTION TO LIFE INSURANCE
Life insurance is a necessary product that was created to replace your income and to protect personal and business assets, in the case of a premature death. By having a life insurance policy in place, your loved ones can maintain their current lifestyle. Life insurance at its very core is about protecting the living and this post will give you a detail introduction to life insurance.
what is a life insurance policy?
A life insurance policy is an agreement between the insurer (the life insurance company) and the insured (the individual who is covered by the insurance) through which the insurer will pay a lump sum of money upon the death of the insured. The legal document of this agreement is called the policy. It is used to protect your family from any financial hardship, if you were to pass away. The proceeds of the life insurance policy are excluded from federal income tax.
Who Needs Coverage?
- Small business owners
- Single people
Anyone who is dependent on your income and would suffer financially on your passing will need life insurance. People often make the mistake that their employer-provided life insurance will be adequate. This type of life insurance typically equals one year’s worth of salary, which is not enough to continue the lifestyle that your loved ones will need.
Types of Life Insurance
Temporary comes in the form of a term policy and is the most affordable. It only offers a death benefit, no cash value is accrued, and it is designed to last for a specified time, typically 10, 15, 20, 25 or 30 years.
Permanent policies will give you coverage for the rest of your life as long as you continue to pay your premiums. Permanent policies will come with two options, whole life, and universal life. Both permanent policies contain a feature where it builds money toward a cash value for the insured. A whole life policy will have a fixed premium and a guaranteed schedule of the cash value. A universal life policy will allow the insured flexibility in their premium payment, the amount of the death benefit and the cash value is not guaranteed. Permanent policies have a more expensive premium compared to a term life policy due to the cash value element.
The Amount of Coverage
Many variables go into deciding how much coverage an individual will need. You will need to consider how much income you are bringing in, the number of minor dependents and how much debt you are carrying, just to name a few. The typical rule of thumb is 8-10 times your annual income. This simplistic formula will be too much coverage for a single person with no dependents. It may be not enough coverage for a family of triplets still in diapers, and the parents have their focus on sending their prodigies to Ivy League schools.
The Uses of the Cash Proceeds
It’s up to you how to use the cash proceeds. It can be utilized for:
- Income replacement
- Child care
- Credit card debt
- Burial expenses
- College tuition
- Business succession
- Charitable giving
- Paying estate taxes
The beneficiary will be the individual(s) or entity that will receive the death benefit proceeds of your life insurance policy. It can be an individual, multiple persons or your favorite charity.
You will also choose how much of a percentage each beneficiary will receive of the insurance payout. If you have opted for a minor child to be the primary beneficiary, make sure the child has a guardian assigned to them until they are considered an adult.
It’s important to update your beneficiary if there have been any significant life changes such as the ending of a relationship.
There are two types of beneficiaries: revocable which means the beneficiary of the policy can be amended at the discretion of the policyholder. Irrevocable, which means that authorization from the beneficiary is required if there are to be changes made to the names of the beneficiary. Having an irrevocable beneficiary can become problematic if that individual is not placing your best interests first.
Contingency beneficiary is the person or entity that receives the proceeds if the primary beneficiary is unable to receive the assets.
Cost of Insurance
The cost of life insurance varies depending on factors such as the applicant’s age, health, gender, lifestyle habits, and occupation. Your overall health will play a significant factor in how much life insurance you can afford. It is crucial that you are honest and transparent about your health so that you will be able to obtain the right insurance policy for your health condition. If you have a health condition, smoke, have a risky occupation or are severely overweight, you will be paying higher premiums.
Age also plays a factor in the cost. The older you get, the more expensive your premium will be. Insurance companies also round up your age. If you are 43 and 8 months in age, in their eyes you are 44 years old.
The optimum time purchase life insurance is when you are young and in good health since you will be paying the lowest premiums possible. For a twenty-two-year-old female, non-smoker in excellent health, she can have a $500,000 30-year term life policy for only $17 per month.
The Next Step
The best way to leave a financial legacy for your family is through a life insurance policy. It would give you a peace of mind while you are still around and that your family will have the monetary means of continuing their current lifestyle if you were to pass away.
Here at TDL Insurance Group we will be happy to assist you in working through all of the technicalities that are associated with the process of purchasing a life insurance policy. By working with an independent agent, we will work hard for you to find the best policy at the most affordable rate since we have access to over 60 different insurance carriers. Please call 800-876-9016 or email me at Terumi@tdlinsurancegroup.com to obtain a quote.