Life insurance offers you the peace of mind of knowing that the people you care most about will be taken care of, if you pass away unexpectedly.
A life insurance policy is a contractual agreement you make with an insurance provider. The terms of the contract are fairly simple: while you’re alive, you’ll pay the company a monthly fee (called a premium) to keep your policy active. In return, should you pass away during the term of the policy, the insurance company will distribute an agreed-upon sum of money (referred to as a death benefit) to the people or organizations you have designated as your beneficiaries.
If your family depends on you as an income earner or as a caregiver, an insurance payout can provide much-needed financial stability. Just as you have the opportunity to affect, support, and empower those around you while you’re alive, an insurance policy makes it possible to continue doing so after you’re gone.
Types of Life Insurance
There are two general types of life insurance: term and permanent. With term life insurance, you choose up front how many years of coverage you want, after which you are no longer covered. With permanent life insurance, you are covered for your entire life. The type of insurance that is right for you depends on the nature of your financial obligations.
Generally speaking, if your financial obligations will go away at a future date, term life is likely the better fit. If you’re like most, your financial obligations are probably low while you’re young — you aren’t financially responsible for kids, a spouse, or mortgage — and increase as you get older and take on such responsibilities. Later in life, you might find that your obligations decrease, as your children will have become self-sufficient, your mortgage will have been paid off, and you’ll have saved enough to leave something when you pass away. If that sounds something like the future you’re planning for, term insurance is likely the way to go.
With a term policy, your premiums will be based on your age, sex, and lifestyle at the time you apply, as well as the coverage amount and number of years of coverage (more or longer coverage results in higher premiums). Your premiums will be locked in for the term of your policy. At the end of the term, you stop paying premiums and your coverage expires. Some term policies allow for renewal of the coverage at the end of the term — however, these renewals are typically at much higher rates than your original premium.
The benefits of a term policy include affordability (a term policy has lower monthly premiums than a permanent one of similar size) and simplicity. It’s also easy to layer multiple term policies, with varying terms and coverage amounts, to match your financial obligations.
On the other hand, if you have an obligation that comes due upon your death (e.g. an estate tax) or if you have a need for advanced estate planning, you might find that permanent life insurance is appropriate. A permanent policy provides coverage for your entire lifetime, without the need for renewal. Premiums will be payable to the insurance company every month until your passing (or, in the case of a ‘T-100 policy’, until you turn 100 years old) but your coverage also does not expire.
The main benefit of a permanent policy is that your beneficiaries will receive a payout regardless of when you die. Also, some types of permanent policies (known as whole life policies) build up a cash surrender value over time, which you can borrow against or cash out while you are alive. However, permanent policies are more expensive than a term policy which means you can get less coverage for the same amount of premium.
So, which type of insurance should you choose? Unless you anticipate having financial obligations that will follow you into your twilight years or come due upon your death, or have a need for advanced estate and tax planning, a term insurance policy is the more affordable option (and the one most younger people choose).
Choosing Your Beneficiaries
Whether you choose a term life insurance policy or permanent one, you will have the ability to specify to whom the funds will be distributed when you die. Your children, spouse, parents, or siblings are common choices.
You might also designate that funds be used to ensure that your business interests don’t collapse in your absence or be gifted to a charity of your choice. This could be important if you have business partners or employees, or you simply wish for your legacy to live on.
If you don’t explicitly designate a beneficiary for your policy, the default beneficiary of your policy will be your Estate, and your insurance payout will be distributed in accordance with your Will. Depending on your situation, this may be disadvantageous from a tax perspective as insurance proceeds paid to a designated individual are generally tax-free, while payouts to your Estate will be applied to any outstanding debts or taxes owed.
It’s never been easier to get the peace of mind that life insurance offers. You can get up to $1 million of term life insurance in just 10 minutes, all online, through Mosaic Life.
