What is ‘Life Insurance’?
Life insurance is a type of coverage that pays benefits upon a person’s premature death to designated beneficiaries. In some cases, there may be a maturity date, where the insured, if still living, can receive the proceeds.
Insurance is a contract between 2 parties, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The insurance company pools all their clients’ risks to make payments more affordable for the insured.
Life insurance is a type of coverage that pays benefits upon a person’s pre-mature death to designated beneficiaries. In some cases, there may be a maturity date, where the insured, if still living, can receive the proceeds.
A small premium gives you immediate coverage and provides for a large death benefit payable upon the death of the insured to provide capital to provide an income for dependents.
Tax deferred interest accounts are allowed with some types of life insurance to offer insurance in tandem with an investment component, which can allow increased funds to pass tax free to heirs. This advanced estate planning tool is used by tax specialists who maximize the estate value while using life insurance. The investment after achieving growth can enhance retirement income.
Types of Life insurance may be divided into two classes: Short Term or Permanent
1. Term Life or non permanent
Term Insurance is less expensive but most term periods are only temporary. Temporary periods are set in periods such as 5, 10, or 20 years; or a lifetime level term to age 100. Other periods can run to age 65, 75.
The premium remains constant for the length of the term purchased.
The cost of insurance for a certain level of death benefit is the essence of this plan, generally with less emphasis on a cash value, though some Term to age 100 plans have cash-out options, and some can be quickly paid up, while some also offer tax-deferral options.
You can buy more term coverage for less premium, which does increase upon each term period renewal (for example a five-year term rises in cost in the sixth and eleventh year and so on).
Term insurance may be converted to Permanent Life Insurance coverage without medical underwriting if your insurance contract allows it, but check with your advisor about renewal and conversion options when you plan to buy a policy.
2. Permanent Life
Insurance continues to the decease of the insured or alternatively pays one a level or an increasing lump sum at a certain age of maturity (usually age 100), or offers cash value or tax-advantage or premium pre-payment incentives. Where there are cash values associated with a Permanent plan, the amount of risk is reduced for the insurer. This often allows the cost of the insurance to be lowered as the increasing cash funds accumulating in the plan, increasingly reduce by replacing, the level of insurance needed.
Permanent Life Insurance plans include:
- Whole Life, offering a level premium and a cash value table in the policy guaranteed by the insurer;
- Limited Premium Payment, where the policy can be paid up fully in a specific period of time (such as over 10 or 20 years; or paid up at age 65).
- Endowment Life where the cash value grows to a level equal to the insurance coverage, and A hybrid mixture of life insurance and investment referred to as Universal Life.