In addition to dental and health benefits, life insurance is one of the ancillary benefits that people look for in a comprehensive employer benefits package. It’s also something you can buy on your own without assistance or restrictions from an employer. Life insurance pays whoever you designate as a beneficiary a lump sum upon your death. You might know a little about life insurance or nothing at all. In either case, here are some facts that might help you choose the best policy.
Types of Whole Life Insurance
There are two categories of life insurance: term and whole life. Within the category of whole life, there are three types, each with different methods of payment and premium calculations. These are:
- Whole life – the most basic type of life insurance. It has a savings component that can be used for cash. It’s more expensive than term insurance but has more guarantees.
- Universal life – a combination of whole life and term insurance. It has a cash value and can be tied to a fixed interest rate like a certificate of deposit (CD) account. It may be less expensive but has fewer guarantees than whole life.
- Variable life – offers insurance for the duration of your life but offers more investment options. The value of your policy can go up or down based on your investments.
Term Life Insurance
Another type of life insurance is term life. This type of insurance is issued for a set term, and benefits are only paid if you die during the term of the policy, usually between 1 and 30 years. Level term policies have a death benefit that remains the same throughout the policy while decreasing term means that the death benefit drops, usually each year, throughout the life of the policy. Most employers offer term life insurance as a benefit and the policy remains in place as long as you are employed. Some employers do choose to offer whole life insurance so that employees can take advantage of the cash value of their policy.
Pros and Cons of Life Insurance
Life insurance can be very beneficial to your family if you pass away. It can help defray funeral expenses and help pay bills that may continue after you’re gone. Death benefits from life insurance are usually income-tax free to your beneficiaries and they may also be estate-tax free. Borrowing against your policy is also tax free, and they are often flexible when it comes to adjusting to your needs.
One disadvantage to life insurance is that you pay premiums during your lifetime to benefit someone else. Complicated family or business situations can make it difficult to position the insurance as far as estate planning, and the acquisition process can be frustrating. You want to be sure that the agent is qualified to sell life insurance. In addition, some policies have extensive underwriting policies that can become overwhelming.
Life insurance is designed to take care of those you leave behind when you die. It’s meant to provide payment for your funeral expenses and to help your loved ones continue to pay bills that will exist after you’re gone. Read any life insurance policy carefully to be sure that it meets your needs, and don’t be afraid to ask specific questions from your broker about the coverage itself. In addition, if you have any life changes, such as a divorce or loss of spouse, you should immediately update your beneficiary so that the right person becomes your beneficiary.