You purchase either permanent or term life insurance. Permanent life insurance will cover you for your whole life with premiums calculated to cover the cost of insurance until a very advanced age, typically 100. If you live past the advanced age the policy is calculated for, you will no longer need to pay premiums, and in some cases, may receive your death benefit as a birthday present! If you pay premiums for your whole life, then this is called whole life or straight life insurance.
Even though the premiums are calculated to provide you insurance over a long life, you may have a policy that can be paid off in a shorter times. Common pay off periods are ten or twenty years. In order to receive the full tax benefits of insurance, as in a tax free death benefit, the payoff period must be longer than seven years. If the payoff period is shorter, the policy is called a Modified Endowment Contract (MEC).
An example of a MEC is single payment whole life. These types of life insurance are still popular products, especially seniors who want to transfer wealth to their heirs. For instance, a twenty thousand dollar contribution may provide an immediate death benefit of thirty-five thousand dollars. In addition, these types of policies usually pay interest on the cash value, and they may even be indexed to equities like the stock market. Since they have an immediate cash value, money will grow right away. The longer the insured person lives, the greater the value of the policy. The death benefit will be taxable under current federal law, but the growth is tax deferred, and they provide an immediate death benefit.
Another type of permanent insurance is called Universal Life. Universal life insurance separates the cost of insurance from the cash value, and many products are indexed to security indexes like the S&P 500, allowing for greater returns. Most policies guarantee that the return will never be negative, and some provide a no-lapse guarantee. This means that as long as you pay an agreed upon minimum payment, the insurance company will not lapse your policy because the returns are not large enough to cover the cost of insurance.
On the upside, gains in the value of your insurance policy can increase your death benefit, increase the cash value, and generally provide you with ways to access the money in your policy while you a alive. As you may have guessed, Universal Life Insurance provides life insurance, as well as an investment or savings vehicle. You may assume more risk with Universal Life than with Whole Life, but can be rewarded with greater returns.
Of course the last type of insurance is term insurance. This is usually considered pure insurance because you are generally only paying the cost of insurance without ever receiving any cash value. That is why term life insurance has the lowest premium cost. The insurance company only accepts the risk of insuring your life for a specified period of time. They are betting you will live for a period of ten, twenty, or thirty years. You are purchasing term life insurance to make sure that your family or business will survive just in case you do not.
Of course, the life insurance world is not this simple. You can add a term rider to universal life insurance to provide extra protection during those years when you need more coverage, You may also add return of premium riders to term policies so you will get premiums refunded when the policy ends. Before you purchase a long term contract like life insurance, you should always consult with professionals and do your own homework.
M Katz has helped many families and businesses choose life insurance protection. The key is to analyze an individual's needs, educate the consumer, and then allow them to select a policy that will serve their needs. M Katz believes that insurance shopping works out best when it is a consumer directed process!
Read more things to think about before you buy life insurance.
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