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Life insurance can be a confusing component of your financial plan.
Often it is the insurance coverage that completes a financial plan for
your family and loved ones. Simply put, life insurance is another source
of providing income to your beneficiaries if you die. Not the most
enjoyable thought to consider, but here are some of the basics to
consider when completing your financial plan.
How much insurance is the right amount?
To assist you with your efforts determining how much is the
right amount of coverage, use our worksheet...Insurance
Coverage Amounts.
Remember, life insurance is intended to provide for your family's
financial security, and can help bring peace of mind. Calculating the
right amount of coverage to suit your situation can be difficult — and
depends on your personal goals and objectives.
Some insurance companies recommend that your insurance coverage should
equal to five to eight times your annual income. You might use a
combination of the types of life insurance highlighted below to meet
your needs.
Types of
Life Insurance
There are primarily two types of life insurance on the
market today, term and permanent.
Put simply, term life insurance provides death-benefit protection for
a specified period of time (for instance, you might buy a policy that
has to be renewed in two years). Generally speaking, if you're looking
for coverage for a short period of time, term life makes more sense.
But if you are looking to have a policy for the rest of your life, or
have investment goals, permanent insurance might be a better fit.
The two basic types of insurance — term insurance
, which includes Term Life and Group Life, and permanent
insurance , which includes Whole Life, Universal Life,
and Variable Universal Life. The choice between temporary and
permanent insurance will depend upon your personal goals and
objectives.
Temporary insurance
Term Life is one of the simplest, most
cost-effective types of life insurance. Generally, it provides
the largest immediate amount of protection for the lowest cost.
With Term Life, your beneficiaries are paid the entire amount of
your policy if you die during the term, which is typically from
5 to 30 years.
People who purchase Term Life generally have a need for
insurance protection during a specific period of time. They may
be young and have growing families, and need temporary
protection now with the option to convert to permanent coverage
later.
Group Life insurance may be offered as an employee
benefit. Premiums under group policies are generally lower for
younger employees, and higher for older ones.
Permanent insurance
Whole Life insurance combines the security
of lifetime insurance protection with the advantages of
tax-deferred cash accumulation.
In addition to providing a death benefit, Whole Life policies
guarantee that premiums will remain level throughout the life of
the policy. This allows owners to build the cost of their
coverage into their long-term financial plans.
People who purchase Whole Life generally want to ensure that
when they die, money will be available to pay final expenses,
fund college costs, pay estate taxes, care for an elderly
parent, or simply allow loved ones to maintain their lifestyles.
Universal Life insurance combines the security of
lifetime insurance protection with the advantages of policy
flexibility and tax-deferred cash accumulation.
The difference between Universal Life and other forms of
permanent coverage is the flexibility it offers. Within certain
limits, policy owners can increase or decrease their death
benefit according to their changing needs without having to
purchase a new policy. Likewise, owners can increase, decrease,
or cease paying premiums altogether provided the policy has
sufficient cash value.
Like people who buy Whole Life insurance, people who purchase
Universal Life generally want to ensure that money will be
available to pay final expenses, help fund college costs, pay
estate taxes, care for an elderly parent, or simply allow loved
ones to maintain their lifestyle.
Variable Universal Life insurance combines the security
of lifetime insurance protection with the advantages of policy
flexibility and tax-deferred cash accumulation through
investments.
The difference between this and other forms of permanent
coverage is the flexibility and growth potential it offers.
Policy owners determine how the assets within the policy are
invested depending upon their tolerance for risk and the amount
of time over which they will be investing.
People who purchase VUL generally want to ensure that money will
be available to pay final expenses, help fund college costs, pay
estate taxes, care for an elderly parent, or simply allow loved
ones to maintain their lifestyle.
They also like the idea of controlling how their cash values are
invested and are willing to assume some market risk to create a
life insurance program that adjusts to economic conditions.
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