What is life insurance?
Life insurance helps provide financial protection for the life you are building and for the most important people in it. Life insurance is a cornerstone to comprehensive financial planning.
Life insurance is a contract between the policy owner and an insurer. The insurer agrees to pay a sum of money upon the insured’s death in return for premium payments made by the insurance policy owner. If you purchase a policy to cover your own life, you would be both the insured and the policy owner (the insured and the policy owner are often, but not always, the same person). One of the biggest benefits is that life insurance proceeds are tax-free to your beneficiary (or beneficiaries) when you die. Depending on the type of policy, there may be other benefits as well. There are typically two main types of life insurance policies, term life and permanent life. We will address the specifics of both types in future articles.
Factors that affect life insurance premiums
As a general rule of thumb, the younger and healthier you are, the less you will pay in premiums. Age, the amount of insurance, and the type of insurance are typically the most important factors in calculating your premium rate. Other factors include:
- Gender – females typically get lower rates because of longer life expectancy
- Results from medical exam and lab work
- Family medical history
- Lifestyle – tobacco use, alcohol consumption, and risky hobbies like skydiving can all increase your premium
Uses for life insurance
While the proceeds from a death benefit can be used at the beneficiary’s discretion, the most common uses for life insurance are:
- Income replacement – Replacing future expected earned income is especially important for young families with children.
- Final expenses – Life insurance can pay funeral and burial costs, as well as estate administration costs.
- Debt payment – Instead of saddling family with the burden of outstanding debt, life insurance can be used to pay off student loans or credit card debt. It can also be used to continue making mortgage payments or pay off the remaining balance.
- Creating a legacy – From funding college for kids or grandkids to creating an endowment for a non-profit, life insurance can be used in a number of ways to help create a personal legacy.
- Pay federal estate tax – The assets of most individuals fall well below the current estate tax exemption of $11.58 million. However, life insurance can also offset inheritance taxes levied by some states.
- Create a source of savings – Some permanent types of life insurance can create a cash value that can be borrowed or withdrawn from the policy. This can help to create another resource available to meet future financial goals.
As you can see, there are several factors that go into life insurance pricing and its possible uses. Our next article will focus on examples of who might need life insurance and how to determine an appropriate amount and length of the policy. If you would like to learn more about life insurance and how it fits into your financial plan, please contact us and one of our advisors will be in touch shortly.