Life Insurance Basics


Life insurance is a contract between the policy holder and the insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract and other events such as terminal illness or critical illness may also trigger payment. In return, the policy holder agrees to pay a stipulated amount (at regular intervals or in lump sums). Life insurance will go to the designated beneficiary income tax free.

The value for the policy owner is the ‘peace of mind’ in knowing that the death of the insured person will not result in financial hardship.

There are 2 different types of life insurance.

1. Term Insurance.

2. Permanent Insurance

Term life insurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. The most common are 10year, 20year, and 30year term policies. Term insurance is the least expensive way to purchase a large amount of life insurance coverage with the rate of premiums staying the same and never increasing throughout the term. After the term expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or obtain further coverage with different payments and/or conditions. If the insured dies during the term, the death benefit will be paid to the beneficiary income tax free. Buy enough term coverage to fill your needs. Life insurance is no place to skimp, especially with rates at historic lows, there is no excuse no to have enough life insurance to protect your family. Match the term of the policy to your needs. You want the policy to last as long as it takes for your dependents to leave home and graduate from school, or for your retirement income to kick in.

Permanent insurance provides lifelong protection, and the ability to accumulate cash value on a tax-deferred basis. Unlike term insurance, a permanent insurance policy will remain in force for as long as you continue to pay your premiums. There are many different types of permanent insurance: whole life, universal life, variable life. These policies can be use to help fund your retirement with tax free income. If you have a permanent policy you do not have to die to get your money. Why would someone need coverage for an extended period of time? Because contrary to what a lot of people think, the need for life insurance often persists long after the kids have graduated college or the mortgage has been paid off. If you died the day after your youngest child graduated from college, your spouse would still be faced with daily living expenses. And what if your spouse outlives you by 10, 20 or even 30 years, which is certainly possible today. Would your financial plan, without life insurance, enable your spouse to maintain the lifestyle you worked so hard to achieve? If you can afford permanent insurance premiums, it is the smart way to buy life insurance, because it will give your family the protection if you were to pass away. If you do not pass away permanent insurance will fund your retirement tax fee, you will receive more money that you paid for the policy.