Why do I need life insurance?

So you’ve purchased your home insurance, your car insurance and you’ve bought the additional policies necessary to protect your business, high-valued items, flood insurance, and everything in between. While your house and car are protected, what would happen if you suddenly passed away? What would your family be left with? Debt? Unpaid bills? A car payment and home mortgage? If you can get past the morbid idea of needing life insurance, you can move on to realizing that life insurance is strictly “business” -meaning providing your family members an alternate financial means of support to help fill the financial gap from your passing.

No matter what your age, you need life insurance. The younger you start, the more benefits and the lower the premiums.

The type of life insurance you need depends on a lot of different factors, including age, lifestyle and where you are in your life, but there are plenty of policies to fit any budget.

What is Life Insurance and What Does Life Insurance Cover?

Life insurance is the cornerstone of having a well-rounded financial plan and can cover a variety of situations, plus it acts as a safety net for your spouse, partner, children or dependents. In some cases it can even act as an investment.

Here’s what life insurance covers:

Replacement income for dependents

If you have family members or friends that depend on your income and you pass away, your life insurance will replace that income. Most people think of parents and children when discussing this type of coverage, but it also applies to couples with no children, parents that still depend on you for financial stability and any other dependent. Life insurance is especially important if any government or employer sponsored benefits for your spouse or partner will be reduced or removed after you pass away.

Pay final expenses

Life insurance can help cover costly funeral and burial expenses and any other estate costs, debts or medical expenses not covered by your health insurance.

Create an inheritance for your heirs

Regardless if you have any other assets to pass along to your heirs, you can create an inheritance for them by purchasing a life insurance policy and naming them as beneficiaries.

Pay federal “death” taxes and state “death” taxes

Life insurance benefits can pay estate taxes so that your heirs will not have to “liquidate” or sell assets or take a hit to their inheritance.

Make significant charitable contributions

Add your favorite charity to your life insurance policy to make a much larger contribution than you would have been able to with cash.

Create a source of savings

Some types of life insurance coverage have the option to create cash value that can be borrowed or withdrawn on your request. Buying a cash value type of policy, you can create an instant savings plan and the interest credited is tax deferred or tax exempt if the money is paid as a death claim.

There are two main types of life insurance

There are two major types of life insurance—term and permanent insurance (also referred to as cash value).

What is term life insurance?

Term insurance is the the most straight-forward form of life insurance. It pays out only if the death occurs during the term of the policy, which can be anywhere from one to 30 years. Most term life insurance policies have no other benefit provisions. Some policies allow you to purchase a “Return of Premium” rider (ROP) that will reimburse you for all premiums paid if you reach the end of your term and have not passed away.

There are two basic types of term life insurance policies:

  • Level term: This means that the death benefit stays the same throughout the duration of your policy.
  • Decreasing term: This means that the death benefit drops, typically in one-year increments, over the course of the policy’s term.

What is Permanent Insurance?

Permanent insurance pays a death benefit whenever you die—even if you live to 105 if designed properly!

There are three major types, each with their own variation of benefits: traditional whole life, universal life, and variable universal life.

Traditional whole life: In traditional whole life insurance, both the death benefit and the premium stay the same throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, but the insurance company does not increase the premium every year. Instead they keep the premium level by charging a premium that is higher than what realistically is needed to pay claims. This helps keep the premium the same and keeps life insurance affordable for people as they age.

Universal Life Insurance: Universal life insurance can accumulate cash. Money is subtracted monthly from the cash portion of the policy to pay for the cost of the insurance (which increases annually). Any premium payments that exceed the cost of insurance are placed into the cash portion of the policy and earns interest.

Variable Life Insurance: Variable Life Insurance allows the death benefit and the cash value to change according to the investment performance of a special investment account, appropriately called a “separate account.” Since you assume the risk for the investment under a variable life insurance policy, it is considered a security by the U. S. Securities and Exchange Commission (SEC) and is subject to their regulation.

How to choose the right type of life insurance?

Choosing the right type of life insurance can be confusing since there are so many options out there, but it’s an important decision. Here are some simple guidelines that will help you decide which life insurance is best for you:

Consider purchasing term life insurance if:

You need life insurance for a specific period of time. For example, if you have children/teens and want to make sure there will be enough money to pay for their college education, you may buy 15 or 20 year term life insurance.

You need a large amount of life insurance, but are limited by what you can afford. Term life insurance pays only if you die during the term of the policy, so the rate is lower than for permanent life insurance. If you think your financial needs may change, look into “convertible” term policies. These policies allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.

Keep in mind that premiums are lowest when you are young and increase upon renewal with age. Some term insurance policies can be renewed when the policy ends and some policies require a medical examination at renewal to qualify for the lowest rates.

Consider permanent life insurance if:

  • You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be over 90.
  • You want to accumulate a savings element that could be a source of funds if needed. The savings element can be used to pay premiums to keep the life insurance policy ongoing if you can’t pay them otherwise, or it can be used for any other purpose you choose, regardless of your credit.The death benefit is collateral for the loan and if you happen to pass away, the insurance company collects what is due before giving what is left to your beneficiary.
  • You have a large estate and are concerned about an estate tax due at your death.

Premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life. For more details, see our description below on the specific types of policies.

Life Insurance as an Investment Vehicle

In addition to having financial protection, permanent life insurance offers some investment benefits that are worth considering.

Here are some whole life policies that also offer investment features:

Universal Life Insurance: Universal life insurance is similar to term life insurance except it can accumulate cash. Money is subtracted monthly from the cash portion of the policy to pay for the cost of the insurance (which increases annually). Any premium payments that exceed the cost of insurance are placed into the cash portion of the policy and earns interest. Other features of a universal life insurance policy include:

  • A minimum interest rate is guaranteed on the policy’s accumulated value each year. A higher interest rate is paid when interest rates are high.
  • Flexibility regarding premium payments. You can choose to pay additional premium, pay a reduced premium or completely skip a premium payment if there’s sufficient cash in your policy to cover the insurance and administration costs.
  • Policy loans and cash withdrawals are available depending on the cash value.

Universal life insurance requires active monitoring and participation. You will be provided with an annual statement showing all policy activity and will be responsible for reviewing the statement and making any required changes.

Why do I need life insurance?

So you’ve purchased your home insurance, your car insurance and you’ve bought the additional policies necessary to protect your business, high-valued items, flood insurance, and everything in between. While your house and car are protected, what would happen if you suddenly passed away? What would your family be left with? Debt? Unpaid bills? A car payment and home mortgage? If you can get past the morbid idea of needing life insurance, you can move on to realizing that life insurance is strictly “business” -meaning providing your family members an alternate financial means of support to help fill the financial gap from your passing.  

No matter what your age, you need life insurance. The younger you start, the more benefits and the lower the premiums.

The type of life insurance you need depends on a lot of different factors, including age, lifestyle and where you are in your life, but there are plenty of policies to fit any budget.

What is Life Insurance and What Does Life Insurance Cover?

Life insurance is the cornerstone of having a well-rounded financial plan and can cover a variety of situations, plus it acts as a safety net for your spouse, partner, children or dependents. In some cases it can even act as an investment.

Here’s what life insurance covers:

Replacement income for dependents

If you have family members or friends that depend on your income and you pass away, your life insurance will replace that income. Most people think of parents and children when discussing this type of coverage, but it also applies to couples with no children, parents that still depend on you for financial stability and any other dependent. Life insurance is especially important if  any government or employer sponsored benefits for your spouse or partner will be reduced or removed after you pass away.

Pay final expenses

Life insurance can help cover costly funeral and burial expenses and any other estate costs, debts or medical expenses not covered by your health insurance.

Create an inheritance for your heirs

Regardless if you have any other assets to pass along to your heirs, you can create an inheritance for them by purchasing a life insurance policy and naming them as beneficiaries.

Pay federal “death” taxes and state “death” taxes

Life insurance benefits can pay estate taxes so that your heirs will not have to “liquidate” or sell assets or take a hit to their inheritance.

Make significant charitable contributions

Add your favorite charity to your life insurance policy to make a much larger contribution than you would have been able to with cash.

Create a source of savings

Some types of life insurance coverage have the option to create cash value that can be borrowed or withdrawn on your request. Buying a cash value type of policy, you can create an instant savings plan and the interest credited is tax deferred or tax exempt if the money is paid as a death claim.

There are two main types of life insurance

There are two major types of life insurance—term and permanent insurance (also referred to as cash value).

What is term life insurance?

Term insurance is the the most straight-forward form of life insurance. It pays out only if the death occurs during the term of the policy, which can be anywhere from one to 30 years. Most term life insurance policies have no other benefit provisions.  Some policies allow you to purchase a “Return of Premium” rider (ROP) that will reimburse you for all premiums paid if you reach the end of your term and have not passed away.

  1. There are two basic types of term life insurance policies:
    1. Level term: This means that the death benefit stays the same throughout the duration of your policy.
    2. Decreasing term: This means that the death benefit drops, typically in one-year increments, over the course of the policy’s term.

What is Permanent Insurance?

Permanent insurance pays a death benefit whenever you die—even if you live to 105 if designed properly!

There are three major types, each with their own variation of benefits: traditional whole life, universal life, and variable universal life.

Traditional whole life: In traditional whole life insurance, both the death benefit and the premium stay the same throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, but the insurance company does not increase the premium every year.  Instead they keep the premium level by charging a premium that is higher than what realistically is needed to pay claims. This helps keep the premium the same and keeps life insurance affordable for people as they age.

Universal Life Insurance: Universal life insurance can accumulate cash. Money is subtracted monthly from the cash portion of the policy to pay for the cost of the insurance (which increases annually). Any premium payments that exceed the cost of insurance are placed into the cash portion of the policy and earns interest.

Variable Life Insurance: Variable Life Insurance allows the death benefit and the cash value to change according to the investment performance of a special investment account, appropriately called a “separate account.” Since you assume the risk for the investment under a variable life insurance policy, it is considered a security by the U. S. Securities and Exchange Commission (SEC) and is subject to their regulation.

How to choose the right type of life insurance?

Choosing the right type of life insurance can be confusing since there are so many options out there, but it’s an important decision. Here are some simple guidelines that will help you decide which life insurance is best for you:

Consider purchasing term life insurance if:

  • You need life insurance for a specific period of time. For example, if you have children/teens and want to make sure there will be enough money to pay for their college education, you may buy 15 or 20 year term life insurance.
  • You need a large amount of life insurance, but are limited by what you can afford. Term life insurance pays only if you die during the term of the policy, so the rate is lower than for permanent  life insurance. If you think your financial needs may change, look into “convertible” term policies. These policies allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.

Keep in mind that premiums are lowest when you are young and increase upon renewal  with age. Some term insurance policies can be renewed when the policy ends and some policies require a medical examination at renewal to qualify for the lowest rates.

Consider permanent life insurance if:

  • You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be over 90.
  • You want to accumulate a savings element that could be a source of funds if needed. The savings element can be used to pay premiums to keep the life insurance policy ongoing if you can’t pay them otherwise, or it can be used for any other purpose you choose, regardless of your credit.The death benefit is collateral for the loan and if you happen to pass away, the insurance company collects what is due before giving what is left to your beneficiary.
  • You have a large estate and are concerned about an estate tax due at your death.

Premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life. For more details, see our description below on the specific types of policies.

Life Insurance as an Investment Vehicle

In addition to having financial protection, permanent life insurance offers some investment benefits that are worth considering.

Here are some whole life policies that also offer investment features:

Universal Life Insurance: Universal life insurance  is similar to term life insurance except it can accumulate cash. Money is subtracted monthly from the cash portion of the policy to pay for the cost of the insurance (which increases annually). Any premium payments that exceed the cost of insurance are placed into the cash portion of the policy and  earns interest. Other features of a universal life insurance policy include:

    1. A minimum interest rate is guaranteed on the policy’s accumulated value each year. A higher interest rate is paid when interest rates are high.
    2. Flexibility regarding  premium payments. You can choose to pay additional premium, pay a reduced premium or completely skip a premium payment if there’s sufficient cash in your policy to cover the insurance and administration costs.
    3. Policy loans and cash withdrawals are available depending on the cash value.

Universal life insurance requires active monitoring and participation. You will be provided with an annual statement showing all policy activity and will be responsible for reviewing the statement and making any required changes.

Variable Life Insurance: Variable Life Insurance allows the death benefit and the cash value to fluctuate according to the investment performance of a special investment account, appropriately called a “separate account”. Since you assume the risk for the investment under a variable life insurance policy, it is considered a security by the U. S. Securities and Exchange Commission (SEC) and is subject to their regulation as well as that of the state Department of Insurance. Features of this policy include:

    1. The ability to  control the investment of the policy’s cash value.
    2. Because benefits and the cash value of the variable account change,  you assume the risk of good or poor investment choices. A variable account contains no guarantees of investment earnings or cash values.
    3. Premium can be either fixed or flexible, depending on the policy you choose.

Remember, this type of policy will requires your active monitoring and participation. It’s the best option for those who are comfortable making investment decisions.

Variable Universal Life Insurance: Variable Universal Life Insurance combines the flexibility of universal life insurance with the investment flexibility (and risk) of variable life insurance. This policy allows you to choose the premium amount and face amount of the policy and also have a separate investment account for the cash value. Like a variable life insurance policy, there is no guarantee of investment earnings or cash values and these policies will be subject to  U. S. Securities and Exchange Commission (SEC) regulations.

As you have read above, life insurance does more than just provide financial protection and is needed for people of all ages. Having a plan if something should happen is important. No matter what your age, you need life insurance. If you have no life insurance your family and dependents will be left with nothing to help fill the financial gap from your passing.  
With so many life insurance policies to chose from, it’s important to decide what factors are important to you (providing for a family, investment, paying off debt) and then meet with a life insurance agent to discuss which policy that meets your needs and budget.

Variable Life Insurance allows the death benefit and the cash value to fluctuate according to the investment performance of a special investment account, appropriately called a “separate account”. Since you assume the risk for the investment under a variable life insurance policy, it is considered a security by the U. S. Securities and Exchange Commission (SEC) and is subject to their regulation as well as that of the state Department of Insurance. Features of this policy include:

  • The ability to control the investment of the policy’s cash value.
  • Because benefits and the cash value of the variable account change, you assume the risk of good or poor investment choices. A variable account contains no guarantees of investment earnings or cash values.
  • Premium can be either fixed or flexible, depending on the policy you choose.

Remember, this type of policy will requires your active monitoring and participation. It’s the best option for those who are comfortable making investment decisions.

Variable Universal Life Insurance: Variable Universal Life Insurance combines the flexibility of universal life insurance with the investment flexibility (and risk) of variable life insurance. This policy allows you to choose the premium amount and face amount of the policy and also have a separate investment account for the cash value. Like a variable life insurance policy, there is no guarantee of investment earnings or cash values and these policies will be subject to U. S. Securities and Exchange Commission (SEC) regulations.

Why do you need life insurance?

As you have read above, life insurance does more than just provide financial protection and is needed for people of all ages. Having a plan if something should happen is important. No matter what your age, you need life insurance. If you have no life insurance your family and dependents will be left with nothing to help fill the financial gap from your passing.
With so many life insurance policies to chose from, it’s important to decide what factors are important to you (providing for a family, investment, paying off debt) and then meet with a life insurance agent to discuss which policy that meets your needs and budget.