Life insurance is a high priority but a difficult consideration for many individuals. Assessing the needs of your family and loved ones and passing on your assets is an incredible responsibility, but with the right help, you can establish a plan with less effort than you may think. The primary reason why life insurance is purchased is to ensure financial stability for others after the policyholder’s death, though it can also be used for the purposes of transferring an estate or business as the owner sees fit.
As with medical coverage, you sign a contract with an insurer and pay premiums on your life insurance policy. At the time of your death, the insurance company will provide a certain dollar amount to whomever you have designated to inherit your assets. This gives your family, spouse, or anyone else you care about a safety net after you’re gone.
You can choose between term (temporary, set for a number of years) and permanent (whenever your life ends) policies. If you consider the differences between a short term and long term health insurance plan, you may be able to predict the cost and safety variations between these two. Term life is more practical for those who want to pay a lower premium, but if you do not die by the time you reach the age indicated in your agreement with the insurer, you do not receive any benefits. Permanent life may be a better option for some, but not in every instance.
Life Insurance Costs
Across all life insurance plans, the application and premium rating process is the same, varying costs based on age, health status, and occupation. If a person is at a higher risk of dying at a younger age due to health problems, their premiums are likely to increase. Those who are in good health or have less life-threatening work responsibilities are generally expected to live a longer life, and pay the average cost for coverage. For instance, an administrative assistant will see far lower premiums than a firefighter, as a person in their twenties with an exercise routine would compared to a smoker in their sixties.
Term life insurance covers individuals for a limited amount of time, establishing an anticipated death year for the policyholder. The insured pays monthly premiums for a safety net in the event that they die before the term is over, and if so, the insurance company pays a certain sum of money. Generally, the cash payoff remains the same throughout the duration of your policy, accruing no interest or additional value.
The advantage to having a term life plan is a lower monthly premium rate, which will increase with your risk over the years. However, it is a less expensive option for securing a back up plan for your loved ones as soon as possible. In order to make the plan work in your favor, overestimate your personal expiration date, so that the people you care about and the expenses needing to be covered are taken care of and your investment has not gone to waste.
Unlike term, permanent life does not set a limit on when you can die in order to receive cash benefits. Additionally, these policies start with a certain cash value that accumulates over the years and can be borrowed against. With this ability, these plans become a form of savings account and extra money can be set aside for the future, or be used in the meantime as the basis for a loan from your insurer, used to pay premiums, or if you cancel the policy, removed as a cash settlement.
Premiums never change for permanent insurance, regardless of your age or risk level. Though rates may be higher compared to term when you purchase coverage, they will never increase. While it may seem a disadvantage early on, it creates stability and predictability, which provides peace of mind in always knowing your monthly premium.
Which One Is Right For You?
Are your financial needs permanent or temporary? This will establish which type of coverage is best for you. Those who are more concerned with permanent expenses such as funeral, burial, and estate liquidity costs will be best suited for a permanent life plan. If temporary expenses like college tuition and mortgages are a higher priority, term life is more appropriate. A term insurance plan will eventually become nonrenewable, therefore it is best to anticipate your needs before selecting a plan. Permanent insurance, on the other hand, will not expire.