Which kind of life insurance would be ideal for you: duration, permanent or employer-sponsored?
Most individuals avoid considering life insurance coverage for as long as you can. However, to produce the question of if you require it somewhat less daunting, place your emotions aside for some time and answer this very simple question: Would anybody suffer financially in the event that you weren’t around to provide for them?
If the answer is yes, then you should consider purchasing some type of life insurance, which would provide your family or other dependents with cash (known as a "passing profit ") if you were to pass away. This could help replace your income, cover funeral costs, pay off debt, or fund college for your kids. There is also no federal income tax on life insurance profits, unlike other types of shares that your loved ones might inherit upon your death.
Simply put: Life insurance is a smart way to ensure that they are well taken care of if something were to happen to you. Read on for information to help you figure out which type of insurance makes the most sense for you.
Term Life Insurance
Term life insurance provides coverage for a specified amount of time, often in increments of five years. Term is ideal if you need coverage for a certain amount of time (e.g., until your child graduates from college or until your mortgage is paid off). There aren’t some bells or whistles if you die during the period, your designated beneficiary will probably gather the death profit. Otherwise, the coverage will end when the term is finished.
Term life insurance is generally the most affordable type of life insurance coverage (out of a class policy provided by an employer – more about this underneath ). The price varies according to factors such as age, health, size and location of passing profit.
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Employer-Sponsored Life Insurance
Many of us carry some basic term life insurance coverage through our employers without even realizing it. (Check with your HR department to understand what’s available to you or your spouse.) The downside: This type of insurance isn’t normally mobile, meaning that if you leave your work, you’ll shed the policy.
Accidental death and dismemberment insurance (also referred to as ADandD) is yet another frequent kind of life threatening life insurance. Though it’s not even a lousy security net to get, it won’t pay out a death profit if you pass away from illness or other non-accidental causes, unlike term insurance. If this is all your employer offers, seek out additional insurance.
The cost depends on your employer. Some workplaces offer a basic profit for free, while others have a monthly or yearly cost. While these policies can be limited, they’re typically the most cost-effective option (if available), after all you’re benefiting from group rates.
Permanent Life Insurance
Permanent life insurance provides coverage for life, as long as the premiums are paid. But it doesn’t just need to pay your family in case of a catastrophe – it may also collect cash value. Some of your premium will proceed to creating cash value, that could subsequently grow tax-deferred from coverage returns, interest or investment sales. In summary: A part of the cash which you cover your insurance coverage are also earning cash. And you’re able to borrow (generally tax free) or draw the money value should you require it. But keep in mind, any withdrawals or loans which aren’t paid back can reduce the death profit, possibly leaving your loved ones with less. (You’ll often have to pay a cancellation charge if you no longer want the policy.)
If you’re thinking about permanent life insurance as a way to build cash reserves, weigh the risks and costs with the potential for growth. Talk to a pro, who will explain the return you can expect to see if you purchase this type of policy. Permanent insurance is more expensive than term, so the potential return on your cash value will need to outweigh this extra cost. If not, you may want to consider purchasing a term policy and investing the difference in your 401(k) or IRA.
Ultimately, to determine whether permanent life insurance is right for you, ask yourself this: Do you see yourself needing life insurance when you are 70, 80 or older? If your kids are self-sufficient and your spouse will be just fine in the middle savings, inheritance and Social Security, then you may not need permanent insurance.
But there are some cases where permanent insurance makes sense even if there’s not an immediate financial need. It’s worth considering if:
- You’re in a very high tax bracket.
- You’ve maxed out all available retirement accounts.
- You want insurance to cover estate taxes when you die.
If you decide that permanent insurance is right for you, there are three major types: whole, variable and universal.
- Whole life insurance (sometimes also called "right life" or "regular life") remains in effect for a person’s whole lifetime as long as they pay all required premiums. With whole life insurance, you’re guaranteed a certain death profit and rate of return on your cash value, which comes from the premiums you’ve paid and the interest they’ve accrued. It’s a good solution for people looking for insurance for life without any surprises.
- Variable life insurance provides a death profit and cash value that rises and falls with the performance of underlying investments. You choose how to invest your premiums and you (not the insurance company) assume the risk. It’s ideal if you are willing to take on some risk to see the cash value grow.
- Universal life insurance is the most flexible permanent life insurance option. It has adjustable premiums, meaning you’ll have the option to pay more or less as long as you’re maintaining the cost of the insurance. This way, you can put more money into it if you want to grow its cash value. You can also adjust how many of your premium goes toward the cash value (versus paying the premiums) and then choose how it’s invested. Finally, you also have the option to pay your premiums with the cash value that has built up. So instead of writing a check to your insurance company every year, you can draw down the cash value to pay the premiums and maintain your policy. The policy is self-sustaining unless the cash value runs out.
The major difference in the middle whole or variable life insurance and universal life insurance is that premiums are no longer fixed. Universal life insurance is a good choice if you want permanent life insurance but also want as many flexibility as possible, after all you decide how many you pay, how the money is invested, and whether you pay the premiums using the cash value of the account or out of pocket.