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Life Insurance: The Basics

Life Insurance-Needs

Life Insurance is considered by many financial experts to be the cornerstone to a sound financial plan.  Life insurance can be used for the following situations:

  • Replace Loss Income: If you have family members that depend on your income for daily living, then life insurance can fill that void in the event of an untimely death.

  • Burial Expenses: Life Insurance can be used to pay for burial expenses in the event of a premature death.  The average funeral costs hover around $10,000 and are sure to rise in the future.  Life insurance can give your family members piece of mind that this expense is taken care of.

  • Create a Legacy/Inheritance for Heirs: Life insurance can be the easiest way to pass on an inheritance to your family.  Life insurance is paid out tax free and in most cases the death benefit received is far more than premiums paid in.

  • Savings: Permanent life insurance also comes with a cash value accumulation feature.  Along with paying the COI (Cost of Insurance), the extra premium is deposited into a “savings account” which builds interest.  Interest credited is tax-deferred and withdrawals can also be taken tax-free.

Types of Life Insurance
The two major types of life insurance are:

Term Life:

Term life insurance is the easiest form of life insurance to grasp.  The death benefit and premium are both set amounts laid out when the policy is approved.  They are both guaranteed for the duration of the policy.  The main difference inside a term policy is the duration of the coverage.  With term life insurance you rent the coverage for a certain number of years (usually between 5-30 years). At the end of the chosen term period, the guaranteed premium expires.  You can keep your policy after the term period but understand the premium will increase.

Permanent Life:

Permanent life insurance consists of 2 different types of policies, whole life and universal life insurance. The most commonly known about is whole life insurance.  Permanent life, whether its whole life or universal life, cover you for your lifetime.  Permanent life policies also have a cash value feature attached.  These types policies accumulate cash and is credited with interest/dividends each year.  The cash value grows tax deferred and can be withdrawn tax-free.  Permanent life insurance is going to be more expensive than its counterpart, term life. 

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