A majority of individuals insure homes, vehicles, phones, and other property they own. It benefits them because if anything were to happen, they would be rightfully compensated by their insurance providers. There is another type of insurance that people do not benefit from directly. An individual takes it to protect the people they love if they are no longer alive to look after them. It is known as life insurance, and people take it as a means of protection against financial loss that would come about because of the premature death of the policy holder. The person whose name appears as a beneficiary receives all the proceeds giving them a financial safety net that helps them to cope financially in an otherwise difficult moment. Read on to uncover more details about this type of insurance.
When is the Right Time to Get Insurance
Experts’ advice that a person should get life insurance when they are younger because it helps to protect insurability. Younger people are ideal candidates because they attract lower premiums. They also have numerous options to choose from. Waiting until a person is much older may imply that they will be asked to pay hefty premiums and in the worst case scenario be denied coverage since some companies may feel like they are too risky to insure. Ideal age would be when a person turns thirty where they take insurance that spans around 15-20 years with a convertible structure. It would mean that they can make the policy permanent without the additional hassle of proving that they are in excellent health during the latter years.
How Life Insurance Works
The insurance is a contract between an insurance provider and an individual with an insurable interest. The company promises to transfer financial risk of premature insurer’s death for a particular premium amount. Three main components of the insurance are discussed below.
- Death Benefit- it is the total amount of cash that the beneficiaries receive when the insurer dies. Despite the fact that the insured determines the final payout, he/she must also decide whether it will be an insurable interest or whether the insured individual can qualify for the coverage by its underwriting requirements.
- Premium Payments- the insurance company, uses actuarially based statistics to come up with a figure that a person needs to pay to cover mortality expenses. Factors that affect this include personal & family medical history, age, and lifestyle which are the primary risk determinants. If the insurer pays the premiums as agreed, the company is at liberty to pay out the death benefit. When dealing with term policies, premium costs include the costs of insurance. In regards to permanent policies, the premium amount also includes the insurance cost plus the money that was deposited to a cash value account.
- Cash Value Account- it only applies to people who have permanent life insurance. It comes with a cash value component that serves two purposes. One it is a saving account that enables the insured to accumulate capital which he/she can utilize as a living benefit when the insured is still living. Second, the insurer can use it to mitigate risk. As the cash value goes higher, the amount the insurer is at risk for the death benefit becomes less something that helps insurance companies to charge level, fixed premiums.
Perks of Life Insurance
The type of insurance comes with its set of benefits that people cannot get from other financial instruments such as:
- It offers infusion for money that helps mourners to deal with the adverse economic consequences of the death of the insured.
- A majority of policies are very flexible in regards to adjusting the needs of the policy holder. It is possible to decrease death benefits anytime, and one can opt to increase, skip, or reduce premiums quickly.
- A beneficiary may opt to change the life insurance policy with another annuity or life policy without having to worry about paying for current taxation.
- Beneficiaries enjoy favorable tax treatments unlike other financial instruments because the death benefits are income tax-free. Other aspects that they also enjoy are:
- Some death benefits are estate-tax free if the owner of the policy had property in their name.
- Cash values grow tax deferred when the insured is still alive
- Cash value withdrawals are subject to FIFO (first in first out) basis which implies that money value withdrawals are up to the total premiums that were paid and they do not attract tax.
- Policy loans are also income tax-free
Types of Life Insurance
Although insurance providers have various plans they offer people seeking life insurance, there are two main types of insurance i.e.
- Term- it is the simplest form of life insurance. It only pays if death occurs during the terms policy which is usually one to thirty years. The option does not have any other benefit provisions.
- Whole Life/ Permanent- this option pays whenever a person dies even when they live for a decade. There are different variations within this option allowing a person to choose the one they feel will work best for them.
A great vehicle to fund future financial goals, life insurance scores well over other investment options in some aspects. It is tax efficient, flexible, offers numerous options, provides excellent liquidity, and the benefits can go on and on. To benefit from such insurance, it is important to do due diligence to find out all the options available. Take time to compare the pros and cons so that you can pick a policy that will work best for your interests.