Common types of life insurance: what you need to know
About half of Americans had life insurance in 2021, according to a report of the LIMRA group of industry associations. If you’re not one of them, you might be wondering if you should find out. But what is life insurance and who benefits from it?
In exchange for regular payments made over time to an insurance company or through an employer, the people you designate as beneficiaries receive an agreed sum on your death through your life insurance policy. life.
Experts recommend that most people purchase life insurance as part of prudent overall financial planning. Life insurance helps protect spouses, children, family members and others who depend on your income. It can also be part of an inheritance or a philanthropic gift.
“Most people don’t expect to die unexpectedly. And it’s usually an inexpensive way to ensure your loved ones are taken care of,” says Jarrod Sandra, owner of Chisholm Wealth Management in Crowley, in Texas, and a Certified Financial Planner (CFP). . According to Sandra, life insurance is one of the main things he sees as part of an overall plan for clients.
Who should buy life insurance?
Just as health insurance is an important part of health care and auto insurance is necessary to drive a car, life insurance can be a vital part of your financial situation. “Married couples, anyone with dependents and business owners” should seriously consider buying life insurance, said Martin A. Scott, CFP and founder of Lasting Wealth Principles in Freehold, New Jersey, specializing in advising people in their thirties and forties. .
How can I get life insurance?
You can purchase life insurance either individually or through a group. Insurance companies offer policies to individuals. Employers and groups, such as professional associations, also offer group policies as part of a benefits package. Insurance companies are regulated by the states. The National Association of Insurance Commissioners has a directory of approved agents and companies. Many states also provide detailed descriptions of the ins and outs of life insurance on their websites.
You can also buy fonts online. It is safe to shop. Most experts recommend consulting a financial advisor with a paying CFP who is also a fiduciary. Kevin Lao, CFP and founder of Imagine Financial Security in Jacksonville and St. Augustine, Fla., advises customers to also speak with a licensed life insurer (CLU).
“I recommend talking with a financial planner and an insurance broker together,” Lao says. “That way the recommendations are coordinated and there are multiple sets of eyes on it.”
If you are looking for life insurance there are several options to choose from according to your needs and your personal situation.
How much life insurance do I need?
Consider carefully how much. You don’t want to pay a monthly premium that’s too high for your current financial situation or too low for the payout you think your beneficiaries might need after you leave. Then consider dependents like children, marital status and your current debts, experts say. Consider what they need and for how long, taking into account your loss of income. You may also want to leave someone an inheritance for future expenses.
Usually, beneficiaries receive tax-free life insurance payments. Lao recommends using an insurance calculator to determine your needs and generally advises people to consider coverage valued at at least 10 times your gross income. It all depends on your situation.
What are the different types of life insurance?
There are two main types of life insurance, available in various forms:
Permanent: This covers the lifetime (premiums may cost more). Term: This covers a set period of years until the policy expires.
Here are the popular versions of permanent and term life insurance:
Whole: Whole life insurance is a common type of cash value policy and often the simplest type of permanent insurance. Premiums are generally paid throughout life. If you take out a policy at an earlier age, say in your twenties, you pay a lower premium than later in life because you’re putting money into the policy for longer. The cash value of the policy increases based on a fixed rate set by the company.
Effective for life (as long as you pay on time and don’t cash in the policy) Some policies pay an annual dividend (although usually not guaranteed) You can increase cash value and be able to borrow against the policy (bounties are locked in for life)
Usually more expensive than term life insurance Premiums can increase with age, so experts advise starting early If you need longer coverage later in life, it can be expensive
Term: Term life insurance covers a set number of years. This can come in handy at certain times in your life, like when you’re raising a family. But you have to renew term life insurance policies and premiums often increase.
Cheaper than allYou pay for what you needGood for a specific period of time (if you’re raising a family, for example)
Only covers a set number of years in the policyEach time you renew, premiums usually increaseIf you become ill or contract a high-risk medical condition, you may not be able to renew
Universal: Universal life is a type of cash value policy with flexible premiums that can change over time. It deals separately with the three main parts of the policy: the premium, the death benefit and the cash value.
More flexibility Death benefits can be fixed or increase over time Can change premium and benefit value Policy can be prepaid
If you pay less than premium, benefits may expireEasy to lose sight of and not rely on cash valueIf value reaches zero, policy may expireMay include “mortality” and expenses that increase with age age
Other types of life insurance
Variable: The benefit and cash value may vary, as the name suggests. Insurance companies invest your contributions in things like stocks, bonds, and other investments, much like a mutual fund. As the policyholder, you bear this risk. If the investments prosper, you get a higher return. If they fall, your premium may rise, reducing the value of your policy. Supplemental: Here’s what it looks like: coverage on top of your primary policy. This may include coverage for your spouse, children, or accidental death coverage. Spouse: This usually expensive option covers two or more people, with payment coming on the death of the first person. Insurers view joint policies as riskier because a larger benefit payout is likely faster and larger overall.
Ultimately, your decision may depend primarily on who relies on you financially and other circumstances, said Curtis J. Crossland, CFP and managing member at Suttle Crossland Wealth Advisors in Scottsdale, Arizona.
“Are you starting a family or do you want to protect or provide for a loved one? Income replacement issues, debt issues, issues with uncovered future expenses, etc. All of this play in the right circumstance,” Crossland said. “If you’re single or single for life, dying with a lot of debt or not building a full retirement account won’t have the same impact on others.”