Life Insurance for Dummies

Life insurance is essentially a contract that exists between the owner of an insurance policy and the company that issues it. The terms of the contract outline the payments the policyholder will make to the insurance company. These payments, whether they are made monthly, quarterly or annually, are called the premium. In exchange for the premium, the life insurance company that issued the policy agrees that a cash disbursement will be made to the person or person named by the insured should he or she die while the insurance policy in is force. This payment is called the death benefit and the person who receives it is the beneficiary.

» Get Top Life Insurance Quotes Now

Why Buy Life Insurance?

People with dependents who count on them for financial support should always consider having a life insurance policy in force. Life insurance was created to protect surviving family members from financial hardship in the event of the primary earner’s death. Now, more often than not, a family requires two salaries to cover day-to-day living expenses and to ensure sufficient retirement savings.

Some of the more common reasons for purchasing a life insurance policy are to:

  • Make sure all final expenses, including those for the funeral and burial services, are paid for
  • Make sure that a surviving partner has sufficient cash to pay-off the mortgage and other debts
  • Make sure that a child’s private school or college tuition is covered
  • Make sure that a spouse and dependent children will not experience a decrease in current living standards

Life insurance policies can also be purchased for estate and tax planning purposes. Since the death benefit paid out to the beneficiary is usually paid tax-free under most circumstances, it can be used to pay inheritance tax, real estate tax, capital gains tax or any other tax owed by the beneficiary if assets in excess of the allowable limit remain in the estate.

Life insurance policies can also be a good financial planning tool for the small business owner who needs to ensure that his or her share of the company can be sold or passed to a child or grandchild. The death benefit that is big enough to pay for the sale of the company is often used to ensure an orderly closing of the business.

The Different Types of Life Insurance

Those looking to purchase a life insurance policy can choose between two types: Term insurance and permanent insurance. Term life insurance is in effect for a specific amount of time, as long as the policyholder pays the premium on time and on schedule. The number of years he or she is insured is called the term. A term policy can be as short as one year or as long as 30 years. However, most life insurance companies will not issue a term policy after age 75. If the policyholder dies within the term, the insurance company issues the death benefit to the beneficiary or beneficiary. If the policyholder does not die during the term, the coverage and the insurance contract end.

Term life insurance is usually the most affordable form of life insurance. It is most often the preferred policy type for young couples and young families. A family with young children usually has several financial obligations with which to contend along with few assets. Therefore, the main goal of the term policy is to cover final expenses. The dollars saved on an expensive permanent life policy can be invested in other areas, used for unexpected expenses or saved.

Permanent life insurance is permanent. It remains in force for as long as the policyholder pays the premiums. Permanent life insurance also incorporates a “cash building” component. With term life insurance, the insurance company uses the entire premium to cover the cost of providing the insurance. With permanent insurance, however, some of the premium covers the cost of the insurance and some is placed in a cash-building account. The earnings on the cash account grow tax-deferred.

Whole life and universal life are just two of the types of permanent life policies. The difference between the two is the way in which the premium is invested by the insurance company. The owner of a whole life policy can choose among several different investment strategies that involve a dividend and the amount of the premium. The owner of a universal policy, however, can choose among several fixed, indexed or variable mutual fund-like investments. Some life insurance companies will guarantee the return while others will not.

How to Purchase Life Insurance

The Internet is a great source of information when it comes to researching life insurance policies. Those in need of insurance should start by assessing their specific needs. Does he or she provide sole financial support for a spouse? Are there dependent children? Then, figure out the amount of the death benefit that will be needed to cover the expenses the family will incur. One family may choose to cover funeral and burial expenses, while another may choose to cover final expenses, mortgage payments and a child’s college education. Finally, calculate the dollar amount that can be safely paid each month on the premium. The size of the premium will be in part determined by the size of the death benefit.

Which Life Insurance Policy is the Best?

It is often helpful to understand that term life insurance provides protection for a limited number of years. Permanent life insurance, however, protects both family and assets permanently. Young families just starting with term life may consider converting the policy to permanent insurance as their assets grow. Most insurance companies will allow this conversion to take place in order to make sure their clients needs are met at all stages of their lives. The best type of insurance policy, therefore, is the one that covers the items the family needs it to and also fits into the family budget.

To find the best life insurance products request a free, comprehensive quote comparision. Secure your future today, Get Started Now.