Life Insurance

 

 

Who Should Buy Life Insurance?

Life insurance provides financial support to surviving dependents or other beneficiaries after the death of an insured. Here are some examples of people who may need life insurance:

 

 

 

 

  • Parents with minor children – If a parent dies, the loss of his or her income or caregiving skills could create a financial hardship. Life insurance can make sure the kids will have the financial resources they need until they can support themselves.
  • Parents with special-needs adult children – For children who require lifelong care and will never be self-sufficient, life insurance can make sure their needs will be met after their parents pass away. The death benefit can be used to fund a special needs trust that a fiduciary will manage for the adult child’s benefit.
  • Adults who own property together – Married or not, if the death of one adult would mean that the other could no longer afford loan payments, upkeep, and taxes on the property, life insurance may be a good idea. An example would be an engaged couple who took out a joint mortgage to buy their first house.
  • Elderly parents who want to leave money to adult children who provide their care – Many adult children sacrifice by taking time off work to care for an elderly parent who needs help. This help may also include direct financial support. Life insurance can help reimburse the adult child’s costs when the parent passes away.
  • Young adults whose parents incurred private student loan debt or cosigned a loan for them – Young adults without dependents rarely need life insurance, but if a parent will be on the hook for a child’s debt after his or her death, the child may want to carry enough life insurance to pay off that debt.
  • Young adults who want to lock in low rates – The younger and healthier you are, the lower your insurance premiums. A 20-something adult might buy a policy even without having dependents if there is an expectation to have them in the future.
  • Wealthy families who expect to owe estate taxes – Life insurance can provide funds to cover the taxes and keep the full value of the estate intact.
  • Families who can’t afford afford burial and funeral expenses – A small life insurance policy can provide funds to honor a loved one’s passing.
  • Businesses with key employees – If the death of a key employee, such as a CEO, would create a severe financial hardship for a firm, that firm may have an insurable interest that will allow it to purchase a life insurance policy on that employee.
  • Married pensioners – Instead of choosing between a pension payout that offers a spousal benefit and one that doesn’t, pensioners can choose to accept their full pension and use some of the money to buy life insurance to benefit their spouse. This strategy is called pension maximization.

 

Types of Life Insurance

Many different types of life insurance are available to meet all sorts of needs and preferences.

 
  • Term Life – Term life insurance lasts a certain number of years, then ends. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years.
  • Level Term – The premiums are the same every year.
  • Increasing Term – The premiums are lower when you're younger and increase as you get older. This is also called “yearly renewable term.”
  • Permanent – This stays in force for the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. It’s typically more expensive than term.
  • Single Premium – In this case the policyholder pays the entire premium up front instead of making monthly, quarterly, or annual payments.
  • Whole Life – Whole life insurance is a type of permanent life insurance that accumulates cash value.
  • Universal Life – A type of permanent life insurance with a cash value component that earns interest, universal life insurance has premiums that are comparable to term life insurance. Unlike term and whole life, the premiums and death benefit can be adjusted over time.
  • Guaranteed Universal – This is a type of universal life insurance that does not build cash value and typically has lower premiums than whole life.
  • Variable Universal – With variable universal life insurance, the policyholder is allowed to invest the policy’s cash value.
  • Indexed Universal – This is a type of universal life insurance that lets the policyholder earn a fixed or equity-indexed rate of return on the cash value component.
  • Burial or Final Expense – This is a type of permanent life insurance that has a small death benefit. Despite the names, beneficiaries can use the death benefit as they wish.
  • Guaranteed Issue – A type of permanent life insurance available to people with medical issues that would otherwise make them uninsurable, guaranteed issue life insurance will not pay a death benefit during the first two years the policy is in force (unless the death is accidental) due to the high risk of insuring the person. However, the insurer will return the policy premiums plus interest to the beneficiaries if the insured dies during that period.