What is a Life Insurance Policy

A life insurance policy is a contract that exists between the insured person and an insurance company. The insured pays the insurance company for coverage. In exchange, the insurance company guarantees a payment to a beneficiary upon the insured’s death. Anyone who has dependents should have a life insurance policy. Life insurance was developed to protect those left behind from financial hardship in the event of the death of the family’s primary earner. As more and more families now require two incomes in order to meet their monthly financial obligations, life insurance is crucial for both spouses.

» Get the Best Life Insurance Quotes Now

Financial Categories

For people in one of the following categories a life insurance policy can mean the difference between financial stability and financial hardship:

Spouse: Even if neither spouse has children, together they may have expenses such as mortgage or credit card payments, student loans or other debt obligations that would be owed by the surviving spouse. If the couple does have children, they may want to make sure that the death benefit is high enough to cover tuition and other school expenses.

Single Parent: A single parent especially needs to make sure that his or her children will have financial resources available.

Caregiver: As people live longer, some adults are now caring for their parents and children at the same time. A life insurance policy naming a parent or adult sibling as the beneficiary will help to make sure that his or her standard of living will not be affected by the death of the primary caregiver.

Parents may also consider taking out a life insurance policy on a child. Juvenile life insurance is very inexpensive. A standard policy would cover funeral and burial expenses that may create a financial burden on a young family.

What is a Term Life Insurance Policy?

Term life insurance is easy to understand and cost effective. A term policy is temporary. It is in force for a limited amount of time, which is defined as the term. A term can be as one year, five years or as many as 30 years, depending on the length of term needed and chosen. The amount of the premium is based on the age, sex and health of the applicant. It is also based on the length of the term and dollar value of the death benefit. Depending on the insurance company, premium payments can usually be made monthly, quarterly or annually.

Term life insurance policies are usually best suited for young families without a lot of extra cash. Term policies are usually purchased in amounts ranging from $2,500 to $2,000,000. Depending on the life insurance company, a young, healthy family can find an affordable policy to provide enough cash to cover day-to-day expenses, final expenses and possibly the payment of a mortgage.

A term life policy can also be appropriate for a senior citizen in his or her sixties. For example, a senior who wants to provide money for the college education of a grandchild, or one who wants to leave the family enough cash to cover inheritance taxes might choose a term policy.

Those who survive the term may feel that the money spent on the premiums was not a good choice. A return-of-premium term policy will return premiums to the policyholder at the end of the term. The premiums are higher for an ROP policy, but having the money returned may make the increased cost easier to tolerate.

Finally, because term insurance is expensive to renew as the policyholder ages, he or she may wish to convert the term policy to a permanent policy while the term policy is still in force. Almost all insurance companies today allow term policyholders to convert a term policy in order to provide permanent coverage for life.

What is a Permanent Life Insurance Policy?

Unlike a term life insurance policy, a permanent life insurance policy ends when the policy owner surrenders the policy for the cash value or when the death benefit is paid to the beneficiary. Permanent insurance policies are sold in several variations. The most common permanent policy is whole life. Permanent life policies have an investment account that builds cash value throughout the life of the insured. The insurance company invests some of the premium, which is either paid in installments or as one single premium, in financial accounts as directed by the policy owner.

A permanent life insurance policy is part insurance product and part investment product. Because of the investment portion, permanent life policies are also used as retirement savings vehicles. Growth is tax-deferred and generous federal and state tax laws combine to create yet another way for investors to accrue retirement savings. Some investors might prefer to invest in an immediate annuity instead, as it provides several similar advantages and has immediate 100% equity.

Permanent life insurance is suited for people who are older and better able to make the financial commitment required. Investors in permanent policies need to realize that permanent insurance requires a financial commitment that term insurance does not. If the premiums on a term policy are not paid, the insurance coverage ends. With permanent insurance, however, the investor may lose a significant portion of his or her built up cash value if premiums are not paid. Further, the surrender fee, which is the amount the insurance company will charge to cancel the policy, can be high.

What is a Life Insurance Policy for Estate Planning?

A life insurance policy for estate planning purposes is extremely useful for those with a large estate or a small business. Written properly, with a person named as the beneficiary and not the estate or business, the death benefit is paid directly to the beneficiary. He or she can then use the proceeds to pay estate or inheritance taxes. A business owner can purchase a policy and name his or her partner as beneficiary. This can ensure that any final business debts will be paid or allow the surviving partner to buy out the deceased partner’s shares.

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