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Understanding Life Insurance

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Life insurance is a way to offer your loved ones extra security and provide yourself with peace of mind. Unforeseen accidents can befall us at any time, and life insurance provides an extra layer of security to help bridge the gap in the case of tragedy. It’s an important facet of building protection against your loved one’s loss of income in the event of your passing.

Life insurance can help assist your family with legal proceedings, medical costs, and funeral arrangements. In addition, it protects your family against a sudden loss of income. It is an important way to establish income protection for those who depend on you. Let’s take a deeper dive into the different types of life insurance and the situation in which you need it most.

Who needs life insurance?

Are you questioning whether life insurance applies to you? You are likely a good candidate for life insurance if you have a large estate, are the sole family breadwinner, or have many dependents or debts. A great way to answer this question more thoroughly is to begin by considering those individuals who depend on you on a day-to-day basis and whether you have a major financial impact on their life.

  • Would you be leaving behind unpaid debts?
  • Do you have a living will?
  • How many children do you have and are they self-sufficient?
  • Do you have parents or extended family members who rely on you for support?
  • What would it cost to replace you financially?
  • What is the current standard of living for your dependents, and how much would it cost to maintain that?
  • Do your children still need to cover college expenses?
  • Do you have a mortgage or a business?

What are the different types of life insurance?

There are two basic types of life insurance: term and permanent.

  • Term offers coverage for a specific time period, and does not accumulate cash value. It offers a static cash benefit for a premium, for a predetermined amount of time. This term can be any length of time from one year, to thirty five or more. The premium for this type of insurance and the death benefit stay the same throughout the term.
  • Permanent life insurance does not expire, as long as the owner continues to pay premiums. This type of life insurance accumulates a cash value, and is more expensive to purchase as you age. You can also cash out this money or borrow against it. Permanent life insurance comes in four standard arrangements:
    • Whole life coverage: This coverage provides guaranteed death benefits with predictable premiums. But the cost of this type of coverage is inflexible and the rate of return may be lower than simply investing that money in a savings account.
    • Universal life coverage: This type of coverage has flexible premiums and death benefits, allowing the insured to change their death benefit to cover their needs over the course of their life.
    • Limited pay coverage: This type of coverage has a limited period of time under which premiums are paid. This allows the policyholder to pay for a policy in its entirety and retain their guaranteed death benefit.
    • Endowments: Endowment policies provide a benefit amount at a certain age, whether the insured is alive or has already passed away.

Accidental death insurance can also be purchased, often as a rider on a standard life insurance policy. This type of policy covers the insured if they die as a result of an accident. Accidental death insurance policies are often less costly than standard insurance policies because of their limited coverage.

Life insurance is an important means by which to protect your loved ones in the event of your death. It can help ease the burden of making posthumous funeral plans, paying bills, and preparing your loved ones for the future in your absence.

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