Know Everything About Life Insurance 101: The Ultimate Guide

Know Everything About Life Insurance
Know Everything About Life Insurance 101: The Ultimate Guide

If you’re in the process of buying a life insurance policy for the first time, you may be feeling a little bit lost. It can be a lot to take in and it might seem like a lot of information to digest, but once you understand the basics, everything will make sense. 

Life insurance is a confusing topic, even for people who work with it for a living. It can be hard to know where to start, and the language can be confusing. But don’t worry! I have you covered. I'm a Financial Advisor who specializes in life insurance. 

I’m also a master's degree candidate in Financial Planning, and I’ve been working in the industry for a number of years. I thought I’d share my knowledge with you and give you the ultimate guide to life insurance.

Life insurance is an important and essential financial tool that is often overlooked, especially by individuals nearing retirement age. Many people are more than willing to spend thousands of dollars on a new car, home improvements, or even a luxury vacation, but when it comes to protecting their families, they balk at the idea of spending their hard-earned money on life insurance. 

This article is an overview of life insurance and an introduction to the different types of life insurance policies available. The aim of this article is to help you make an informed decision about what type of life insurance policy is best for you and your family.

This article will guide you through the life insurance process, from understanding what insurance is all about to choosing the right policy for you.

What is life insurance?

What is life insurance?
What is life insurance?

Life insurance is a policy that enables you to pay for the financial, medical and funeral expenses of your loved ones in the case of your demise. It allows you to obtain a financial security blanket for your loved ones, should the worst happen to you. 

Life insurance is a financial tool that is often overlooked and unappreciated by the middle class. One key aspect to consider is that most people simply pay premiums. How long will that be until you collect the maximum benefit? For life insurance, the term depends on the policy. 

For long term insurance, the term is usually 20 years from the start of the policy and the cash value increases by a fixed percentage each year. For term life insurance, the term starts the moment the policyholder starts to receive payments. 

After the term ends, the policy matures and payments stop. Once you reach the point of collecting, you could then start to receive an income each month. The cash value (the amount that would have been in the policy at death) continues to increase.

Why does life insurance matter? 

The purpose of life insurance is to pay for your dependents' financial responsibilities in the case of your demise. The fact of the matter is, without life insurance, you could leave your children and family with a hefty burden to manage upon your demise. 

Why do I need life insurance? 

It’s a basic question many adults, especially the baby boomers, will ask themselves at some point. But the more you think about it, the more you realize that this is something that has to be addressed sooner rather than later. 

The simple answer is to provide your family with the peace of mind they need in case of your untimely death. Why pay for the policy now? There are many reasons why it may make sense to get life insurance today. 

But in this blog, we will focus primarily on one, which is that you should set aside funds now so that you can be in a position to receive a cash payout when you need it.

There are three main reasons you need life insurance – 

three main reasons for life insurance
There are three main reasons you need life insurance

1. Insurable interest 

When it comes to long-term care, life insurance is the No. 1 protector for your assets. But in order to be in a position to protect assets and obtain the peace of mind that a long-term care policy can provide, you must be able to pay for the coverage. 

Traditionally, in order to qualify for a long-term care policy, a person would need to be 65 and, depending on the policy, at least have assets of $2 million to $3 million. But today, due to the current low interest rates, a private long-term care policy may be more affordable than ever. 

The good news is that in many instances, the premiums for a policy today can be far less than the monthly payment needed to meet your long-term needs. Interest rates will not remain this low forever, though.

2. Funding your children's education 

Savings programs that parents use for tuition and textbooks may also cover expenses for their children's future education. Many college savings plans require that you deposit funds in the account at least six months prior to your child's expected first day of school. 

For private schools, a few months is a better time frame for these programs to cover the cost of your child's first year. How to find the best 529 plan for your child's educational needs. What is more, if your child attends an in-state public school, 529 college savings plan funds will typically be taxable as a taxable distribution. 

However, if your child's private school is in a state that taxes 529 plans in the same manner as investment income, funds in the account would be subject to federal tax instead.

3. Funding your retirement 

More than one-third of Americans do not have enough cash in their savings to support them through their golden years, according to a recent survey by Fidelity Investments. Fidelity estimates that people who say they don’t have enough savings for retirement are living on approximately $40,000 a year. 

That’s certainly not enough money to retire comfortably, especially as many Americans are living much longer than ever before. “Traditional pensions are history and, consequently, most people, especially the middle class, 

have to fund their retirement on their own,” says Brian Scott, senior vice president of Whole-Life Protection and Health with TruLife, a national leader in individual term life insurance.

Types of life insurance

Types of life insurance

If you’re looking to purchase a policy, the first thing you need to do is understand what types of policies are available. These are broken into two main groups: whole life and variable life. Whole life policies are a very simple concept. 

For a set price, you can withdraw cash from the policy anytime until you die. Whole life policies are the most common and most purchased. However, these products have very high costs, and the payout is very low if you live a long life. 

They are best for those who intend on using the policy for only a short time. Pre-retirees For many people who are about to retire, or are already retired, insurance is not a top priority. A fixed income or a lump sum investment is more appealing to them.

Term life insurance

The term life insurance is usually the cheapest and least complicated to purchase. This insurance allows you to purchase one whole life policy for a set amount of time – generally 12-15 years. The policy will provide you with a lump sum of cash if you die. 

It is always better to purchase term life insurance as opposed to whole life. A person who chooses to purchase a whole life policy will need to take out a loan for a considerable amount of money, over the course of the policy. 

And will most likely pay an annual premium. This can make the whole life policy cost much higher than it would be if one chose term life. Can I purchase term life insurance on my own?

Whole life insurance

The cheapest term life insurance available is a whole life policy. These policies provide ongoing income (called a cash value) for the buyer throughout their life and are often purchased in tandem with other financial products, such as an IRA. 

Many whole life insurance policies now feature tax advantages and a fixed return, which reduce the need for the policy holder to make a withdrawal each year. A unique life insurance policy However, there are several factors that can make a whole life insurance policy more expensive than other life insurance products. 

These factors include the cost of the company administering the policy, the additional costs related to additional benefits or features, and the required minimum distribution(RMD) from a whole life policy.

Universal life insurance

In addition to whole life and term insurance, which provide permanent coverage to meet your needs, there are also universal life policies. Such policies are typically sold to young families or retirees who don’t need a lot of income right away. 

This type of insurance is a form of term life insurance, but the key difference is that the premiums don’t have to be paid for life. This is an attractive option to many retirees, especially since they receive a stream of cash payments in retirement while the insurance company provides benefits. 

A fixed annuity Many retirees want to make the most of their retirement years, so they will purchase a deferred fixed annuity to guarantee that they receive regular payments.

Indexed universal life insurance

This type of life insurance is a type of permanent life insurance that pays a guaranteed cash value with guaranteed interest. Insurance companies write universal life policies for individuals and families, as well as institutions, based on customer needs, affordability and coverage limits. 

These policies can be written to suit your family’s lifestyle needs and expense level. These policies have no surrender charge and no policy fee. Premiums are variable and depend on how the insurance company determines premiums. 

Advertisement Premiums vary with age, gender, family history, and the coverage chosen. Policies with a term longer than 40 years generally increase premiums. The premiums also vary with the additional features that have been added to the policy.

Variable universal life insurance

A policy is not without its flaws. It is not 100% perfect and because it is a life insurance product, there are generally more claims made by policyholders than by the insurance companies. 

The best thing you can do is to invest money into a balanced life insurance plan, with an ultimate aim of having enough money to provide your dependents with some money when you die. 

This is because your dependents need money to survive on and should you die, this fund is what they would use. How do you go about investing? The best investment account for you is probably a taxable account, which has no investment costs.

Which type of life insurance should I get? 

The right insurance product is not one-size-fits-all. There are different ways to go about purchasing it and it all depends on your needs. You could decide to buy life insurance via your employer or by buying a whole life policy. 

The decision depends on your comfort level and the type of coverage you want. However, buying life insurance from your employer, on the other hand, offers benefits such as tax benefits, employee discounts and preferential health care benefits. 

Don't forget to shop around for the best value. And remember that you don’t have to be a loyal subscriber for your current life insurance provider to get better rates with another insurer.

How to choose a life insurance policy

The first step is to establish how you intend to use your life insurance. In this case, your life insurance policy should be an investment vehicle, not a source of income. While you may hope for a secure retirement, a secure retirement requires money to be saved for retirement. 

Therefore, be wary of the low cost sales pitch for a monthly premium policy that pays out on death. For your policy to be a powerful retirement plan, the payments to your beneficiaries should be matched with an equally powerful rate of return, preferably in the form of inflation-protected bonds or a direct cash payout. 

Do not forget about the mortality tax on investment income in retirement if you chose to build the payout on death. Key factors to consider when choosing a life insurance policy.

How can I afford life insurance? 

Before you think about whether life insurance is right for you, first consider the other financial goals that you have. Maybe you're not quite ready for retirement, and you're saving up for a trip to Africa or Europe. 

Perhaps you don't have children yet and you want to buy an asset that can help to offset the cost of future college tuition. When considering the cost of life insurance, some first-time buyers find that they simply can't afford it. 

However, that doesn't mean you should let life insurance slide. Before you consider paying for it, make a budget and stick to it. If you know you can afford to pay your current bills with the savings you'll gain, you'll be able to set aside funds that will be enough to cover your life insurance premiums.

Conclusion

No one likes to think about their death, but it is in everyone’s best interest to have some sort of plan in place. The more prepared you are, the less panicked you will feel and the less work you have to do when the time comes.

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