A Breakdown Of The Basics Of Life Insurance
The industry education organization Life Happens declared September as “Life Insurance Awareness Month” in 2004. The “Life Insurance Awareness” month aims to inform the public about the importance of life insurance and how it may serve as a solid financial foundation for a family.
Reasons People Buy Life Insurance
Life insurance should have a goal or justification, just like purchasing any other financial item. Among the explanations people have for getting life insurance are:
• To ensure the named beneficiaries’ financial security.
• To make provisions for estate liquidity, the heirs’ equitable distribution of inherited assets, and wealth transfer.
• Providing money to pay off a specific debt, like a mortgage.
• Comply with the demands of the divorcing spouse, and
• To invest, such as a life insurance policy with a single premium.
Individual Life Insurance Policy Types
There are two prominent types of life insurance policies: (1) individual or group-sponsored; and (2) term or permanent (cash value). Both are discussed here.
Individual vs. Group-Sponsored Life Insurance Policies
- Individual life insurance policy
A person can apply for an individual life insurance policy that provides such policies. The person must most likely qualify for insurance since, among other things, the insurance company will scrutinize the person’s medical records, and the person almost certainly needs to undergo a medical exam.
- Group-sponsored life insurance policy
Permanent employees of an employer are entitled to join a life insurance plan at the time of hire, and the employer sponsors the plan. The Federal Employees Group Life Insurance (FEGLI) program of the federal government is an example of a group-sponsored life insurance plan.
A group-sponsored life insurance plan has the benefit of being a “guaranteed issue,” which means that anyone applying for coverage is not required to provide proof of insurability.
All potential employees, regardless of age, gender, or smoking status, are welcome to apply. There are no medical exams or records of specific patients checked.
Comparison between Term Life Insurance and Permanent Life Insurance with Cash Value
- Term life insurance
Term life insurance provides complete defense (in the form of a death benefit) against monetary loss brought on by a decedent’s passing during a predetermined period. When a person needs life insurance for a relatively short time – less than 30 years – term life insurance is typically the most suitable option and the best investment. In summary, term life insurance provides the highest level of protection at the lowest cost (premiums). It is not intended to cover a long-term requirement for life insurance.
- Permanent life insurance with a cash value
The term “permanent” (also known as “cash value”) refers to life insurance that does not expire as long as the payments are paid, and the policy owner does not switch from one cash value life insurance policy to another. Whole life, variable life, and universal life are the three main categories of permanent life insurance plans and are discussed below.
1. Whole life insurance: A whole life insurance policy offers death benefit protection for a fixed premium for only the duration of the insured’s life. Another name for the whole life insurance policy is a “straight line” policy. A portion of the premium is invested at a fixed rate of return, which allows the policy to save money.
2. Universal life insurance: A cash value fund that grows tax-free as long as the insurance is in force is combined with term life insurance to provide death benefit protection with universal life insurance.
In the case of a universal life insurance policy, the insurance provider subtracts certain costs and the first month’s premium payment from the death benefit.
The remainder of the premium is invested in a cash value fund, which is often a high-yielding government securities fund and receives interest at the market rate. The cost of an additional month’s death benefit plus expenditures is taken from the cash value fund each subsequent month.
3. Variable life insurance: Variable life insurance combines the benefits of tax-free deferred savings with the growing potential of stocks (stocks). Like standard life insurance, variable life insurance products provide fixed premiums and a guaranteed death payout.
Contrary to other life insurance policies with cash value, like whole life, the cash value of an insurance policy is not guaranteed and will fluctuate according to the performance of the investment portfolio that the policyholder has chosen.
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My name is Kevin Wirth and I have worked in the financial services industry for many years and I specialize in life insurance and retirement planning for individuals and small business owners, with a specialty in working with Federal Employees. I am also AHIP certified to work with individuals on their Medicare planning. You can contact me by e-mail or phone. I look forward to the opportunity of working with you on these most relevant areas of financial planning.