Understanding life insurance Note: This general overview of life insurance may or may not reflect the benefits and features offered with specific life insurance products. Life insurance offers basic financial protection for your family. Because families and their circumstances are different, there are many types of insurance options available. The role of life insurance is to provide a lump sum of money (the "death benefit") in the event of your death, which can help: Cover your debts, including your mortgage Provide an income for your family Provide a nest egg for your family or a favorite charity Help provide money for your children’s postsecondary education Provide money to pay for burial or other final expenses. Your priorities and needs may not be the same as those of your neighbors. That’s why there are different types of life insurance to help meet a variety of needs. Term life insurance – Modest initial cost Term life insurance provides coverage at a comparatively modest initial cost. It pays a death benefit if you pass away prior to the date the term coverage expires. Although term insurance does not build up cash value, with the relatively lower initial cost it can be useful if you only need insurance for a limited period of time, such as while you have a mortgage. Term insurance premiums typically stay the same during the initial term period, for example, 20 years. After the initial period, you may be able to renew your coverage, but generally at a higher premium and the premium typically increases every year. However, for many term products if your insurance needs change, you have an option to convert your term coverage to permanent coverage such as whole life insurance, at a higher cost, based on the age when you convert. Whole life insurance – Build cash value Whole life insurance offers good value, because it may help you build cash value that you may be able to borrow against if you need to. The premium for whole life is typically guaranteed for the life of the contract. And whole life insurance is just that: insurance for your whole life as long as the premiums are paid on time. Another advantage of whole life insurance is that it might be a “participating policy.” Participating policies may be eligible for dividends. Depending on the dividends options in your insurance contract, these dividends may be taken in cash, applied to reduce your premium, taken in additional insurance or left to increase the cash values. Dividends are not guaranteed. Universal life insurance – Stay flexible Universal life insurance provides you with greater flexibility and the potential for accumulating cash value. Universal life has two parts: a life insurance part and a cash accumulation part. The premium you pay is first applied to the costs for the insurance. If the premium paid is higher than the costs for the insurance, the excess is applied as cash value and earns interest over time, typically on a tax-deferred basis, until withdrawn as cash or applied to help pay the costs of the insurance. Universal life typically has a guaranteed minimum interest rate that the insurer will apply to the cash value. Unlike whole life policies, universal life insurance uses current interest rates determined by the insurer, which may be above the guaranteed minimum interest rate. This means that if current interest rates go above the minimum guaranteed rate, you may accumulate more cash value that you can withdraw or use to help pay the costs for the insurance.
Posted on: Thu, 19 Sep 2013 22:44:03 +0000
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