Life insurance pays a settlement to designated beneficiaries when the insured person dies. Life insurance companies set rates based on the age and health of the insured, the type of insurance and the amount of the promised settlement.
When you shop for life insurance, your particular financial goals can help you determine the life insurance policy that’s best for you.
Why Buy Life Insurance?:
Life insurance provides a sum of money for the people you leave behind. Parents with children buy life insurance in order to leave money for their children if they should die before the children reach maturity. A working married couple may purchase life insurance policies so that the surviving spouse can pay off any debts. Companies sometimes purchase life insurance for key employees. Parents sometimes purchase life insurance on their children, though the value of this has been debated. Bankrate.com notes that financial planners don’t always see the merit of life insurance for children, either as an investment or as a safeguard for the future.
Insurance As An Investment:
Some insurance policies serve as a form of savings. You pay your premiums but have the option of cashing the policy in for a lump sum payment. The money the policy earns is tax-deferred until you cash in the policy. The cash value of the policy depends on how long you’ve been paying premiums. An older policy usually has a higher cash value than a newer one. Though many people like the idea of having an insurance policy they can cash in if needed, you may get a higher rate of return on your investment through other types of savings plans. If you are considering buying a life insurance policy for your child in order to provide money for education, look into a 529 savings plan, which allows you to set aside money for your child’s education, tax-free, and may have a higher rate of return than an insurance policy.
Term vs. Whole Life:
Term insurance does not have a cash value. If you have a term life policy, you pay premiums until you die, and at your death your beneficiaries receive a cash settlement. Term policies are usually less expensive than whole life policies. Whole life policies pay a settlement when you die, but you have the option of cashing in the policy before you die and using the money for something else. A limited payment plan is a whole life policy with premiums that run for a set number of years. If you have a 20-year limited payment plan, you pay premiums for 20 years. After that, the policy is paid for and remains in effect. You can cash it in or leave it in force to pay out upon your death. A straight life plan requires you to pay premiums in order to keep the policy in effect. Upon your death, the policy will pay your beneficiaries, but you have the option of drawing out cash beforehand.
Alternatives to Insurance:
Some people prefer to rely on savings instead of life insurance. If you don’t have small children or a lot of debt, you may not need insurance to cover expenses after your death. Taking the equivalent of a premium payment and saving or investing it each month might leave your heirs better off than an insurance policy.
Shopping For Insurance:
To determine how much insurance you need, make a list of all of your debts and other expenses your heirs would incur upon your death, such as taxes or the cost of a funeral. This will give you an idea of how much you want them to realize from your insurance policy. Compare the premium payments for different types of life insurance and consider how these fit into your budget. If you already have a life insurance policy, review whether or not that policy meets your needs. As you get older and your life circumstances change, you may decide you don’t need a life insurance policy, or you may decide to increase your coverage or switch to a different type of policy.