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Life insurance is a contract between an insured (policy holder) and an insurer. Under a life insurance policy, an insurer promises to pay a beneficiary a certain sum of money in exchange for a premium, upon the occurrence of the death of the insured person. The lump-sum amount paid to the beneficiary by the insurance company is known as a death benefit. The policy holder pays a premium, either regularly or as a single lump sum. Events such as terminal illness or a critical illness can trigger payment of benefits, depending on the type of contract. Some benefits include expenses such as funeral expenses.
A life insurance contract is normally chosen based on the goals of the owner. Some policies provide protection while others act as an investment base.
The most common types of life insurance include:
- Term life insurance. Term life insurance provides financial protection for a certain period of time. The period may range from 10 to 30+ years and the insured pays the premiums during that time. These policies may offer continued coverage after that period at a higher premium rate.
This type of life insurance is less costly when compared to permanent life insurance. Its proceeds are used to replace lost potential income during your working years. It provides a general safety net and also helps ensure you’re your family’s financial goals are met. Life insurance benefits are paid in a lump sum and not in regular payments.
- Universal life insurance. This refers to a permanent policy that is designed to provide lifetime coverage. Universal life insurance policies are more flexible than whole life insurance policies. Universal life insurance allows you to adjust the amount of premium or coverage amounts throughout your lifetime. Universal life has a tax-deferred savings component, which helps you build wealth over time.
Due to its lifetime coverage, universal life insurance generally has higher premiums. It can also be used as a flexible estate planning strategy and help preserve wealth. Many people use it as long term income replacement, where the purpose extends beyond working years. It is designed to provide both death benefit coverage and cash-building value.
- Whole life insurance. This permanent life insurance policy is also designed to provide lifetime coverage. Because it covers your lifetime, it has higher premiums. Its premiums are fixed and have a cash value. The premiums paid function as a savings component.
Whole life insurance is used to accumulate tax-deferred savings and. It is also used as an estate-planning tool to help preserve wealth.
When it comes to life insurance policies, there are specific exclusions that may limit the liability of the insurer. Claims relating to fraud, suicide, war, riot, and civil commotion are not covered in a life insurance contract. Death benefits from all types of life insurance are income tax-free.
What are the benefits of life insurance?
- It offers legacy protection. Life insurance supports other forms of savings and inheritance. For example, the estate belonging to deceased person is usually taxed in several jurisdictions. Failure to raise the tax money may result in the sale of certain portions of the estate to offset the debt obligation. The existence of life insurance benefits may help relieve the dependents of this financial burden. This goes a long way in protecting the legacy of the insured.
- It allows you to leave behind an inheritance. Life insurance can accumulate savings that will be passed on to your dependents upon your death. Such savings can be used by the dependents to offset mortgages and other expenses that require huge financial endowments.
- Tax avoidance. In most jurisdictions, life insurance is untaxed and its beneficiaries are not required to pay taxes upon the death of the insured. This offers a legitimate method of avoiding high taxes.
- It is affordable. The insurance premiums paid out to the insurance firms under life insurance are usually much lower than other forms of insurance. This is especially true when the person carrying out the policy is still young.
- It contributes to funeral expenses. The amount of money accrued from life insurance may also be used to offset the funeral expenses of the insured should he or she die. This greatly reduces the burdens for the family.
- It boosts financial security. Because your family stands to gain certain benefits upon your death, life insurance will instill a strong of financial security for them.
- It promotes saving. Life insurance involved paying a certain amount of money to the insurance company on a regular basis for a very long duration of time. This type of arrangement has the impact of instilling a savings mindset.
If you would like to learn the proper methods of obtaining life insurance, its benefits and how to apply and, contact a Twin Cities life insurance advisor at Assured Retirement Group today. With an office in Bloomington, we service the entire Minneapolis region, including Edina, St. Paul and St. Louis Park, MN.