Yes, its true that most would rather get a tooth pulled than make life insurance decisions. While not at the top of our "fun" list, making critical decisions about life insurance is foundational to a secure financial future for yourself and those you love.
So here are the quick facts to hopefully simplify the process.
Life insurance pays a certain amount of money to the insured persons beneficiaries when the policy owner or insured person dies. While many people, especially younger people don't want to think about death and dying, its important that everyone is covered especially if others depend on your for their financial stability (parents, caregivers, spouses, key income earners).
The basic structure of most life insurance policies is relatively straight-forward: the policy owner or payor pays a premium every month; when insured person dies, the insurance company issues payment for the policy amount to the spouse, children, or other beneficiary named in the policy. Now of course, there are more involved policies with extra benefits in case of disability, long term care needs and much more but this is a standard explanation.
For example, the life insurance policy might have riders, or additional clauses, that pay off in the event of a terminal or critical illness or a permanent disability due to physical or mental causes. Also, there are different varieties of policies, including term life insurance, whole life coverage, universal coverage, and limited-pay policies. Understanding the difference between the different types of coverage and picking the appropriate one for your situation can be difficult, and professional advice may be necessary to ensure the correct policy is in place.
Term Life Insurance is Temporary and covers the insured for a certain number of years, after which the coverage typically expires. Because the policy does not build any cash value, and because it is typically based on a low likelihood of death for the covered person, term insurance premiums are usually relatively low. However, the length of the term, the amount of coverage (and whether it stays the same or decreases over time), and the premium amount (again, fixed or adjustable over time), will all affect the premium amount. The lower premium is a primary advantage of term life insurance; a drawback is that, at the end of the term, the still-living insured receives no benefit from the coverage. There are term policies with options for return of premium that will return a portion of what's been paid over the years to the owner at the end of the term.
Whole Life Insurance is permanent life insurance, which means the policy holder can withdraw money paid in or borrow against the cash value. Whole life has the advantage of a fixed annual premium and guaranteed death benefits. Premiums are much higher than term life policies at first, but over the life of the policy the two policy types roughly even out in terms of total cost. While whole life insurance does build value over time, it may not be as strong as other savings options in terms of the rate of returns. Also, dividends are not guaranteed with whole life.
Universal life insurance is similar to whole life, but it offers more flexibility in premiums and may offer stronger returns over time. It also has a cash account and accrues interest. Largely based on interest rates its important to understand this policy, its benefits and limitations.
The variety of policies available is intimidating enough to many people. With dozens of optional riders available, and variations even within individual rider classes, competent professional help is definitely recommended when selecting life insurance. It should be noted that the life insurance policies offered by many employers, while an attractive benefit, are typically not adequate to meet the needs of the insureds family in the event of an untimely death. In addition, life insurance through an employer typically belongs to the employer and is rented by the employee only for their term of employment. When they leave the company they are no longer covered and receive no compensation for the coverage.
How much life insurance is appropriate? The total amount of life insurance carried should be enough to pay off any mortgages, car payments, credit card debt, and any other major outstanding debt, leaving the survivors in a solid financial situation. Its an exchange of a small premium for the security and protection of a large payout when needed most.
While knowing these differences helps, I would suggest you find yourself an insurance agent such as those we have at Remedy Insurance & Retirement Agency. Its important that you feel comfortable and discuss which insurance plan is right for you. We are an Independent Insurance Agency contracted with several companies to give you options and peace of mind.
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