When it comes to becoming financially prepared, getting life insurance is one of the smartest decisions you’ll ever make for your family. Even if you’re healthy and physically fit, death is inevitable, and investing in a life insurance policy is a great way to protect your family’s finances.
With life insurance, your beneficiaries are entitled to the full amount of insurance coverage or death benefit from the time you pass away. Aside from that, a life insurance policy provides a great way to pay off debt and replace income, and can serve as a savings cushion for your beneficiaries if you die prematurely.
In this post, you’ll learn how life insurance can protect your family financially, serving as your guide to making a sound decision when choosing the best investment for you.
Life Insurance Is Investing In Your Future Life’s Reality
Death is life’s reality. It is inevitable and true amongst all people because nobody is immortal. So, getting life insurance is an excellent and direct way to invest in your family’s future. The premium or amount you’ll pay each month would depend on your age, the degree of risk you pose, the type of policy, and the amount of insurance coverage you want.
Think about getting life insurance as early as possible because once you enter the senior life, life insurance can be too late. Postponing this beautiful investment can lead to higher premiums, less benefits, and higher risks.
How much you’ll pay for a policy depends on how much coverage you prefer, the type of policy you’ll get, and how much risk you pose. Life insurance provides policyholders a sense of security that they’ll never leave their dependents financially burdened.
Here are the two main types of life insurance you can choose from:
- Term Life Insurance: This type of life insurance provides a predetermined amount of death benefit, which covers you for a certain number of years. The fixed yearly premiums are based on your gender, health, and life expectancy.
- Permanent Life Insurance: It is a better option for those who want to invest in a lifetime or guaranteed life insurance coverage. It means that as long as you are alive, and even as you live more than a hundred years, you and your family will be covered. The major advantage of a permanent life insurance policy is that it combines the death benefit with an investment or savings account.
Life Insurance Has Significant Monetary Value
Every life insurance has three main components, which include the death benefit, premium, and cash value. While permanent life insurance is not the best option for most people due to the expensive premiums, it accumulates some cash value because of its investment or savings component. It means paying more for a definitely rewarding payout in the future.
The good thing about the cash account of a permanent policy is that you can borrow a portion of it. Just imagine yourself benefiting financially from your life insurance investment while you’re still alive. Besides, it is something you truly deserve. By being able to borrow money using your permanent life insurance, you could use it to finance a business or pursue your retirement dream. But, of course, you have to understand that borrowing can diminish the value of your policy.
Here are the three main components of life insurance policies that every policyholder should know:
- Death Benefit: It’s the face value or the amount of money that the insurance company will give to the beneficiaries when the policyholder or the insured dies. For instance, the insured can be a parent who wants to safeguard their children’s college education and financial future. One thing you have to remember when choosing a life insurance plan is to take into consideration the future needs of your beneficiaries. On the other hand, the insurance company determines the insurable interest, and whether or not the proposed insured is qualified for the coverage according to the underwriting requirements of the company. It is usually based on a person’s age, health, and involvement in hazardous activities.
- Premium: It is a component of life insurance that the policyholder pays. The insurance company or insurer must pay the agreed or specified death benefit when the policyholder dies as long as the premiums are being paid. Your premium is determined by how likely the insurance company will have to pay the death benefit according to your life expectancy. Of course, a part of the monthly, quarterly, or annual premium the policyholder pays goes toward the operating expenses of the insurance company. Expect higher premiums on life insurance policies with a greater value of death benefit, as well as if you have higher health and safety risks, and permanent life insurance policies that include investment and accumulated cash value.
- Cash Value: For a permanent life insurance policy, the cash value serves as a savings account (to get a loan, get additional insurance, or pay premiums) and a living benefit. You can take out a loan against the cash value of your insurance policy and pay the interest on the loan principal. As a policyholder, you can use your life insurance’s savings as long as you live in which the cash accumulates based on a deferred tax. In some insurance policies, restrictions are imposed on withdrawals based on how the money is intended to be used. For permanent life insurance, the cash value remains a living benefit that stays with the insurance company until the policyholder dies. All outstanding loans obtained from the cash value will be deducted to the death benefit.
Life Insurance Is A Solid Source Of Financial Support
One of the greatest fears of parents is leaving their children financially unsupported when they pass away. That’s why life insurance makes for a great financial support for your family, giving you peace of mind, knowing that they don’t need to worry about paying your debts and funeral expenses, and that they’ll continuously have a source of money while they are still studying.
So, who should avail of life insurance? Check out some of these examples of individuals who need to get life insurance:
- Parents with children who have special needs: If you have a minor or an adult child with special needs, you know that lifelong care is required. Life insurance gives you peace of mind, knowing that your child’s needs will still be met even if you’ve already passed away. The death benefit can fund the special needs of your child. You’ll have to choose a trustee or a fiduciary who will take good care of your child and with whom you can entrust the death benefit.
- Parents with young or minor children: Losing a parent is a real tragedy for any child, and leaving nothing for them or just debts is a total financial disaster. Financial hardship is never a good legacy to leave a child, so make sure that you have life insurance coverage to keep them financially secure, at least until they graduate college or can already support themselves.
- Elderly Parents: Yes, seniors can still avail of life insurance. But, as early as possible, if you want to leave money to your adult children who take care of you and sacrifice their time off work just to cater to your needs, then, you should get life insurance. It’s a type of direct financial support that reimburses your adult child’s expenses when you die.
- Joint Property Owners: If the death of one adult would mean that loan payments won’t be afforded, including taxes and upkeep, getting life insurance is a smart move. For instance, an engaged couple decided to take a joint mortgage and bought their first house. The sudden death of any one of them may result in loss of ability to pay the mortgage, so the death benefit comes in to supply the deceased person’s share of the mortgage to avoid losing the property.
- Young Adult: If you’re a young adult and don’t have dependents, but have parents who cosigned a loan for you or have accumulated private student loan debt, life insurance still proves to be a good investment. Also, if you have debt and you might risk your parent’s finances paying for it after your death, you should make sure to get enough life insurance coverage to pay it off..
- Lock in low life insurance rate: As already mentioned, the healthier and younger you are, the lower you’ll pay for insurance premiums. Even if you’re single and don’t have dependents, you need to consider getting life insurance if you’re anticipating having your own family in the future.
- Individuals who belong to wealthy families: More often than not, wealthy families owe estate taxes, so carrying life insurance can provide additional funds to cover these taxes, thus keeping the full value of the estate.
- Families who cannot afford funeral or burial expenses: The last thing you’d want your family to worry about is the expenses of funeral or burial services. Because of the economic and health crisis the world is facing today, many families cannot afford funeral or burial expenses. Even if you’re a low- or middle-income earner, it pays even to get a small life insurance policy to provide funds for these types of expenses.
- Married pensioners: You don’t have to choose between a spousal benefit and a pension payout. This is because you can choose to accept your full pension and, then, use some of the money to avail life insurance to benefit your spouse. This is referred to as “pension maximization”.
- Business owners with key employees: If you’re a business owner, purchasing a life insurance policy for your key employee, like your store manager or production supervisor, is a good idea. The death benefit could be used to avoid severe financial hardship for the employee’s family, your business, and your family.
Protect Your Family Financially With Cash-Value Life Insurance
Cash value insurance refers to permanent life insurance as it provides coverage for the life of the policyholder. Due to its cash value component, cash value insurance has higher premiums as compared to term insurance. But, why is that? Premium payment for this permanent life insurance is expensive and fixed, in which a part is allocated for both the insurance cost and the cash value account.
The major benefit of cash value insurance is that it earns interest, and it comes with deferred taxes on the accumulated earnings. Of course, as expected, the cash value of permanent life insurance increases over time.
Here are some key takeaways for cash value insurance:
- Expiration of cash value or living benefit: The examples of cash value life insurance are variable life, universal life, and whole life insurance. Cash value insurance policies don’t expire after a certain number of years, unlike term insurance that expires on the fifth, 10th, 15th, 20th, or 30th year period. Policyholders can always borrow against the cash value of their permanent life insurance policy.
- Living benefit for withdrawals and loan purposes: Because the cash value offsets the liability of the insurer as your cash value increases, there’s a decreased risk for the insurance company. It means that the beneficiaries will get the full death benefit, and the accumulated cash value already belongs to the insurer. It means that the cash value is only a living benefit for the policyholder. So, a policyholder can withdraw it anytime during their life, as agreed upon on the terms of the policy.
- Cash value repayment: Some insurance companies would require the loan interest repayment, and, if left unpaid, it will be deducted from the cash value. If you have sufficient cash value, you can use it to your benefit and stop paying premiums out of your pocket. It’s because you have a cash value account that can cover the premium payments.
Note: Most arrangements for cash value life insurance allow loans. Similar to other types of loan, the insurance company will charge interest on the principal, which will lower the death benefit in the event of the policyholder’s death before the full loan repayment.
Getting life insurance is undoubtedly the best financial decision you can ever make for your family. Your spouse, children, or your beneficiaries will receive a certain amount of money or death benefit from the insurer or insurance company when you pass away.
Also, taking advantage of permanent life insurance can provide you with cash value or living benefits that you can use as a loan, to pay for your premiums, and withdraw whenever needed. Having these benefits helps you provide financial support for your family, avoiding financial hardships.