What Is Life Insurance?
Life insurance in its simplest form is a contract where you pay premiums to the insurer who in turn, provides you with life insurance, i.e., a promise to pay benefits to beneficiaries when you die.
American Life insurance gives you peace of mind, since you know that your loved ones will be taken care of and major expenses paid for if you die.
Life insurance can be purchased one of two ways. There are protection policies, often called term life insurance, where the benefit is paid as a lump sum in case you die because of an insured event, such as an accident. The other type of life insurance is term life, which is also called universal life or whole life, where the money paid grows over time and can be cashed out at the end of the “term” of the policy. Think of it as a combination of life insurance coverage and an investment fund.
With American whole life insurance, you have the added benefit of being able to borrow against the cash accumulation in the policy without paying taxes. Universal life is similar giving you a higher potential return but with added risk. Finally, there’s variable life insurance, where the investment fund is tied to stocks or bonds.
If you’re interested in buying life insurance, the best time to do it is when you’re young. The premiums are really low – as little as a couple hundred dollars a year for $250,000 in coverage. Insurance starts to get very expensive as you get into your 50s and by the time you’re 70, you can forget about getting life insurance.
While a lot of agents will tell you that you want life insurance for your entire life, that’s not necessarily the case. For example, you may only want to carry life insurance while your children are young, so they are taken care of if something were to happen to you. If your kids are 5 years old right now, you could get a 20-year term policy, so they could be cared for until they’re 25.
If you want to make sure your spouse could enjoy the same standard of living as she does now, you could get a policy that covers you until you would be the normal retirement age, 65. If you’re 40 years old, you could get a 25-year policy.
Finally, stay away from mortgage insurance policies that promise to pay off the mortgage if you die. Instead, roll the cost of your mortgage into your policy needs and buy a bigger life insurance policy so it covers your mortgage in case you die.