Life insurance is not just a financial decision, it’s also an emotional decision. Most of us don’t want to think about what will happen in the event of our death, but that doesn’t mean we should ignore it. Life insurance provides a financial safety net that helps safeguard yourself, your loved ones, or your business from loss of life, and the financial impact associated.
At its core, a life insurance policy is a contract between you and your insurance company. In exchange for premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries in the event of your death during the duration, or term, of the contract. Most commonly, life insurance is used to pay off major debts, such as mortgages, loans, or future expenses, such as children’s education. It can also be used to cover taxes and final estate expenses at the end of life.
Life insurance can also be used as a vehicle for wealth creation as a structured pension investment and to transfer wealth to the next generation on a tax free basis.
There are two common types of life insurance you can choose from- term insurance or permanent insurance.
Term insurance is a life insurance policy that provides coverage for a certain period of time or a specified “term” of years. If the insured dies during the time period specified in the policy and the policy is active, or in force, a death benefit will be paid. Term insurance has no cash value. In other words, the only value is the guaranteed death benefit from the policy.
There are various types of term insurance policies available. Many policies offer level premiums for the duration of the policy, such as 10, 20, or 30 years. These are often referred to as “level term” policies. The premiums are fixed and paid for the length of the term. If the policyholder dies prior to the expiration of the policy, the insurance company will pay out the face value of the policy. If the term expires and the individual dies afterward, there would be no coverage or payout.
Permanent insurance is an umbrella term for life insurance policies that do not expire. Unlike term life insurance, which promises payment of a specified death benefit for a specific period of years, permanent life insurance lasts the lifetime of the insured (hence, the name), unless non-payment of premiums causes the policy to lapse. The two primary types of permanent life insurance are whole life and universal life. Whole life insurance offers coverage for the full lifetime of the insured and its savings can grow at a guaranteed rate. Universal life insurance also offers a savings element in addition to a death benefit, but offers different types of premium structures and the investment portion is based on market performance.
Permanent life insurance premiums go both towards maintaining the policy’s death benefit and allowing the policy to build cash value, against which the policy owner can borrow funds or, in some instances, withdraw cash outright to help meet needs such as paying for a child’s college education or covering medical expenses.
The type of coverage needed varies considerably from person to person depending on personal circumstances. Insurance companies determine the premiums based on the individual’s health, age, and life expectancy. Depending on the policy chosen, a medical exam that reviews the person’s health and family medical history will be required. If you are considering purchasing life insurance, or want to learn more about the options available to you, our financial advisors are here to help. We work with medical professionals to assess their individual needs by evaluating their current situation, taking into account their annual income, net worth, debts, along with any other financial obligations, while also considering their long-term financial goals.
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