Life insurance is a contract between an insurance policyholder and an insurer that provides a monetary benefit to named beneficiaries upon the death of the insured.
The purpose of life insurance is to provide financial security and protection to family members and other dependents in the event of untimely death.
There are several types of life insurance policies:
- Term life insurance covers 10–30 years. If the policyholder dies during coverage, it provides a death benefit. Cheap term insurance doesn’t build monetary value.
- Whole life insurance provides lifelong coverage and cash value for borrowing or withdrawal. Fixed premiums exceed term insurance.
- Universal life insurance has adjustable premiums and death benefits. Cash value and death benefit premiums are split.
- Variable life insurance allows cash-value investments. Investment performance determines death benefit and cash value.
Life insurance works by policyholders paying regular premiums to the insurer. Upon death, the insurer pays out a lump-sum death benefit to the beneficiaries. Premiums and death benefits are determined by factors like age, health, and the type of policy purchased.
Benefits of Life Insurance
There are several advantages to having life insurance:
- Financial protection for loved ones – The death benefit from life insurance can replace lost income to support dependents. It prevents family members from falling into financial hardship.
- Ability to leave an inheritance – Life insurance allows policyholders to designate beneficiaries to inherit a sum of money. This can supplement retirement savings earmarked for heirs.
- Tax benefits – Employer-paid premiums and benefits received are generally tax-free. Policies can be set up to minimize estate taxes when passed to heirs.
- Cash value accumulation – Permanent life insurance policies build cash value that grows tax-deferred. This can be borrowed against or withdrawn for various needs.
Who Needs Life Insurance?
There are certain scenarios where life insurance is strongly recommended:
- Breadwinners – Families depending on one income need life insurance to replace that income if the breadwinner dies. The higher the income, the larger the needed benefit.
- Stay-at-home parents – Life insurance on stay-at-home parents accounts for losses like childcare costs and lost household services. It offers income for surviving family members.
- Business owners – Life insurance for business owners covers loss of revenue, ownership transition, and liquidity needs in the event of their death. It protects the business.
- Single individuals – Single adults with no dependents may need smaller policies to cover final expenses or debts that loved ones would inherit.
How to Choose the Right Life Insurance Plan
Choosing adequate and affordable life insurance involves some preparation:
- Assess your needs – Consider income replacement, debt coverage, and cash needs for dependents. Young families need higher protection to replace income over decades.
- Consider your budget – The amount of life insurance you can afford will depend on factors like age, smoking status, and health. Get quotes for different policy types and terms within your budget.
- Compare quotes and policies – Insurers offer varying premiums and policy features. Compare quotes for the best value based on price, ratings, exclusions, and ease of claims.
Consult with a financial advisor – An advisor can help determine the right policy and coverage amount based on your financial situation and goals. Their guidance is invaluable.