Life insurance is an essential part of personal finance, which should be considered by every single household. However, there is still a lot of confusion and even cynicism surrounding life insurance. When you have the right information about life insurance, it simplifies the decision-making process and helps you choose the best policy for you and your family.
Here is some of the most vital information you should know about life insurance:
You need life insurance if anyone financially relies on you
Life insurance is essentially obligatory if you are a spouse or parent of dependent children. You might also require life insurance if you’re someone’s spouse, life partner, a child of dependent parents, the sibling of a dependent adult, an employee, an employer or a business partner. If you’re securely retired or financially independent, no one would suffer financially if you passed away, so you don’t need life insurance.
Life insurance adds more than monetary value
Life insurance also compensates for inevitable financial consequences that accompany death. It will help your family and friends cover the costs of your final expenses, outstanding debts and mortgages, planned educational expenses and lost income. After an unexpected death, life insurance lessens financial burdens when surviving family members are grieving their loved one. It will also provide valuable peace of mind for the policyholder.
There are four primary roles in life insurance policies
These roles belong to the insurer, owner, the insured and the beneficiary. The insurer is the insurance company, responsible for paying claims in case of a death. The owner is responsible for premium payments to the insurance company. The insured is the person upon whose life the policy is based. The beneficiary is the person, trust or other entity due to receive the life insurance claim or death benefit.
It’s a risk management tool
Some life insurance policies have an investment feature that offers a degree of tax privilege, but insurance is rarely an optimal investment. You don’t need life insurance with an investment component if you haven’t filled up emergency cash reserves, paid off all non-mortgage debt, maxed out your 401(k) or Roth IRA, contributed to a savings plan or set money aside for large purchases.
There are two varieties of life insurance
Term life is the simplest, cheapest and most applicable. With term life, a life insurance company bases the policy premium on the probability that you’ll die within a stated term, which is typically 10, 20 or 30 years. The premiums are guaranteed for the length of the term, after which the policy is cost-prohibitive to maintain. Permanent life insurance includes the same probability-of-death calculation while also including a savings element. This is designed to help the policy exist forever. Permanent life insurance gives you the ability to accumulate cash value on a tax-deferred basis and unlike term insurance, a permanent insurance policy is in play for as long as you can pay your premiums.