Life insurance is an investment vehicle that provides your family with financial security and peace of mind once you are deceased and no longer around to take care of them. In addition, if you are a business owner, life insurance can provide your business with the resources necessary to sustain continuity or to recover from financial losses in the event of your untimely death.
The most common types of life insurance are term life and whole life. Term life is typically more affordable and provides your family with a payout if you die during a specific time period or term. It can provide insurance for terms of five, 10 or 20 years. If you outlive the policy, you and your loved ones will not benefit from your investment. The policy merely expires at the end of the term with no payout.
Whole life insurance provides coverage for your entire life, not just for a period of time. As a result, whole life policies tend to be much more expensive than term life policies. But note that the higher premiums build up a cash value so that you can use the accumulated value to help pay for the policy down the road or borrow against should you need to. Depending on the policy, you may pay premiums for your entire life, or for a set number of years. Some individuals start with term life policies and later convert them to whole life policies as they age and their needs change.
Different types of life insurance are appropriate for different stages of life. If you are single, you may want to have a plan that will cover your funeral arrangements and any secured debts you may have. You can designate a family member as your beneficiary to handle those payments upon your demise.
For young families, whole life policies could make sense because you are building cash value and protecting your loved ones’ financial security at the same time. And the policy stays with you throughout your life.
A whole life insurance policy in your child’s name can be a good idea if you want your children to be able to tap into the cash value to fund their education, make a down payment on a first home or manage a financial emergency or major expense. If the unthinkable happens and your child dies, you can use the death benefit to cover funeral and related expenses.
For older adults with no children at home, a guaranteed issue life insurance policy may be the right choice. This type of policy does not require a medical exam, but the premiums may be higher. They tend to be a last resort, but the death benefit can be helpful to cover your funeral and related expenses upon your demise.
Annuities are life insurance products that allow you to tailor the death benefit to projected needs. A Variable life ties the death benefit the performance of certain investment assets. Universal life allows for flexible payments and adjustable death benefits. Variable universal life, which is a combination the two. Each type has its own pros and cons which should be considered as you conduct your research. Be aware that often the management fees and commissions connected with annuities are high and the pricing structure opaque.
No matter what type of policy you are considering, it’s important to choose a life insurance company that is financially solid and has a good rating. You can check out different companies on A.M. Best’s website and read their Financial Strength Rating Guide.
The most important goal to have in mind when you are looking for life insurance is to make sure you and your loved ones have a plan that provides for your financial security. We are happy to discuss different options and help you determine which type of life insurance best suits your life stage and personal finances. Contact one of our tax advisors to schedule a call or appointment.