September is Life Insurance Awareness Month (LIAM), and it’s time to take stock of what you have and what you need. Do you have insurance, and if you do, is it enough?
What is Life Insurance?
An insurance policy is a contract that transfers risk from one party to the other. In the case of a life insurance policy, if your life is lost, your beneficiary receives the value for which your life was insured. Let’s face it, no amount of money can replace you after you’re gone, but a life insurance policy can at least ease the burden of the financial responsibilities you leave behind.
Life insurance is an important part of your overall financial strategy and, while death is not a pleasant event to have to plan for, it’s a necessity. Without it, your family’s financial health could be at risk, and honestly, who could rest in peace knowing they left this world without having planned better?
There are different types of life insurance, each designed to achieve different goals or to potentially support the different seasons of your life. For example, if you have a mortgage, a spouse and two young children, your untimely death could, among other things, financially devastate them. In that case, your death benefit should be substantially higher in value than if you were retired, your children were married, and you owned your home. Insurance can be used to meet many needs, including the replacement of lost potential future income, as part of an estate planning strategy to help preserve wealth, or for long-term income replacement when the need extends beyond your working years.
There are two major types of life insurance, term and permanent.
Term life insurance, often referred to as “Death Benefit Only” life insurance, is among the most basic types of insurance and is generally the least expensive option. It provides protection for a pre-defined period of time, or term, typically 5, 10, 15, 20, 25, and up to a maximum of 30 years. The premium is a fixed payment amount and remains unchanged for the duration of the policy’s term. If the insured dies during the specified period, the full death benefit will be paid, in one lump sum, to the named beneficiary. In the event that the term expires and the policyholder is still alive, there is no death benefit and no cash surrender value. There is typically an option to renew the policy, but it will usually be at a higher rate.
Permanent life insurance is designed to provide lifetime coverage, rather than protection for a defined period of time. One of the unique benefits of permanent life insurance is the savings component, which accumulates, tax-deferred, over the term of the policy. It builds cash value, which means you are able to borrow against your insurance or even cash it in if you decide you no longer need the insurance.
Whole life insurance is the most basic type of permanent life insurance. This option is more expensive than term insurance since it comes with specific guarantees. It has a guaranteed death benefit and a guarantee of cash at a future date. Premium amounts are fixed throughout the life of the policy.
Universal Life Insurance is another type of permanent insurance that is designed to provide lifetime coverage. Once you lock in your coverage, however, you still have the flexibility to raise or lower your premium payments or your coverage level based on your changing needs or goals. It’s best described as a flexible premium adjustable life policy. As a policyholder, you can pay the minimum premium, which covers the cost of insurance, but you also have the option of contributing extra money that accumulates in an interest bearing cash fund and can be used to offset future premium payments.
Other types of universal life insurance products include indexed universal life and variable universal life, which invest the additional accumulated cash in either underlying financial securities or an index that’s tied to the stock market.
Choosing an insurance product that fits your needs is a critical step in protecting your family from an unexpected financial tragedy. Speak to a qualified insurance professional, so that together, you can find both the coverage and the level of flexibility that delivers a greater sense of security. Enjoy today and worry less about tomorrow.