What Is Life Insurance?
Insurance has become an everyday term today, but you may still be asking “What is life insurance and how does it work?” To put it simply, this type of insurance cover protects those who depend on your paycheck should your die prematurely or unexpectedly. Life insurance provides an ongoing income to your dependents that replaces your income for a limited amount of time, or on a permanent basis. In addition, it provides emergency funds for medical, legal or funeral expenses if needed.
Life insurance benefits
The most common reason for taking out life insurance is to protect your dependents in case you pass away unexpectedly. It could also pay your tax liabilities, debts and other estate costs to ensure your assets are not borrowed against to cover such debts. It can also be used as the vehicle for transferring the wealth you may have accumulated to succeeding generations without having to worry about tax consequences.
How much does it cost?
The cost of life insurance varies depending on several factors including your health, age and occupation. Generally, higher premium charges are applied to individuals who are more likely to die earlier than expected. For instance, a tobacco user would probably pay higher premiums than a non-smoker. Similarly, a pilot would probably have to pay higher premiums than a librarian.
Types of life insurance
Various companies will provide different forms of life insurance. Ideally, you should choose your policy based on your needs and goals. For instance, a single person or a no-dependents household may not need as much life insurance as a sole breadwinner of a large family with little savings. Note that while there are varieties of life insurance, the death benefits for each type are generally tax-free. Life insurance policies could take various forms – the most common include universal life insurance, whole life insurance and term life insurance.
What is term life insurance?
This life insurance policy will only cover you for a specified period that could range from 5 to 35 years. The insurance company typically pays a lump sum to designated beneficiaries in case the insured dies. The premiums remain the same over the life of the policy, which usually ends when you reach a specified age. This is probably the cheapest form of life insurance. Click here for more information.
What is whole life insurance?
This is a permanent life insurance that is meant to provide lifetime coverage, which is the main reason why it demands higher premiums than term life insurance. Typically, the policy premiums are fixed and have a cash value. A portion of what you pay in premiums is used to invest in a fund so it can earn tax-free interest. As such, whole life insurance may be used to build up savings or as a way of preserving the wealth you will transfer to your spouse or children. Read: What Does Income Protection Insurance Cover?
What is universal life insurance?
This is another type of permanent life insurance but unlike whole life insurance, the policies are flexible and may allow you to raise or lower the premium amounts throughout your lifetime. However, it also has a savings component, allowing you to build wealth over time. It is often also used to help preserve wealth for your loved ones.