Once you get to a certain age, you inevitably start to think about life insurance. This is especially true if you have family members and children who depend on you and your income. With that said, many people doubt the benefits of life insurance and are often uncertain if having a policy is worth all the time, effort, and — of course — money.

This article will give an overview of life insurance so you can learn more about what it is, who needs it, how it works, and the benefits of having a policy. Time to dive in!

What Is Life Insurance? 

Life insurance is a type of contract that you can sign with an insurance company. Its main goal is to ensure that the people you care about will have funds to live off of in case something happens to you. This contract legally binds the insurance company to pay money to the owner of the policy or the beneficiary in the case of natural or accidental death.

In order for life insurance to remain active, the person who is insured has to pay a premium upfront or continue to make payments over a particular period of time. In most cases, when the policy owner dies, his or her beneficiaries are the ones who receive the payments from the insurance company. 

Typically, when people apply for life insurance, they must disclose numerous details about their personal lives, including their health status (past and current injuries, illnesses, etc.), their job, and any other high-risk activities that may cause sudden death. 

Understanding the Different Types of Life Insurance 

You can get many different kinds of life insurance, and insurance companies are always striving to do more and more in order to conform to the needs and wants of the customers. That’s because the kind of insurance you want to buy will likely depend entirely on your life situation and your short- and long-term needs.

Term Life Insurance

Simply put, term life insurance is a temporary life insurance policy that only lasts a certain number of years. Typically, when you sign the contract, you get to choose when to end the policy. Most commonly, that’s either in 10, 20, or 30 years and depends mainly on the age of the policy owner at the time of the signing. It’s believed that the best life insurances are the ones that offer a balance between long-term financial benefits and affordability. 

  • Decreasing term: This is a life insurance policy that can be renewed; however, over time, its coverage decreases at a pre-determined rate. 
  • Convertible term: This kind of life insurance allows the policy owner to convert a term policy to a permanent one. 
  • Renewable term: With this life insurance, you get a quote for the year when the policy was purchased. You can renew your policy, but prices rise every year based on your age.

Permanent Life Insurance 

As you can probably tell by the name, this life insurance policy remains for the entirety of the life of the person insured, unless, of course, he or she decides to terminate it either by not paying premiums or surrendering the policy. Generally, permanent life insurance policies are a lot more expensive than term policies, and so many avoid them. 

  • Whole life insurance: This type of policy helps collect cash value. This means that it enables the policy owner to use the allocated cash for many purposes, such as paying premiums or as a loan.
  • Universal life insurance: This kind of policy helps you accumulate cash value with an additional opportunity for interest to be earned. It has flexible premiums, which can be adjusted throughout the duration of the policy, with a death benefit that can remain the same or be increased during the period as well. 
  • Indexed universal: With this life insurance, the holder of the policy can choose between earning a fixed or an equity-indexed rate of return on their cash value component. 
  • Variable universal life insurance: This policy enables the policyholder to invest their cash value in another account. Along with that, it has flexible premium payments that can have either a level death benefit or an increasing one. 

How Does Life Insurance Work? 

Term life insurance has two components — a premium and a death benefit. Permanent life insurance also has a cash value component. 

What’s a Death Benefit? 

This term is just what it sounds like. A death benefit is an amount of money (the “benefit”) the insurance company will have to give to the beneficiaries upon the policy owner’s death. The insured has the right to choose the amount that will go to each beneficiary based on their own assumptions.

What’s a Premium? 

Premium is a term used to refer to the money you have to pay for life insurance. In order for a policy to remain valid, its owner has to pay premiums on a regular basis or choose to make one huge payment upfront. The premium rate depends on many factors, including the age of the insured, their job, health, and other risk factors. Typically, the more risk factors there are, the higher the premium will be. 

What’s Cash Value?

Unlike term life insurance policies, permanent policies come with a cash value component. This is basically a savings account that the owner of the policy can use during their life. In such accounts, the cash is collected on a tax-deferred basis.  With that said, some life insurance policies have restrictions either on when this money can be withdrawn or on how it can be used. 

When Should You Consider Getting Life Insurance? 

In general, having life insurance sounds like a good idea. However, it isn’t a necessity for everyone. In most cases, life insurance policies are used to ensure that a certain person’s beneficiaries will be able to get financial aid if that person passes away. Let’s take a look at some examples of people who need to consider getting a life insurance policy: 

  • Parents with small children: If even one working parent dies, the impact on the entire family will be huge, as there will be less income overall. A life insurance policy can help in such cases by providing the remaining family members with financial support. 
  • Parents with special-needs children: Many special-needs children require lifelong care and are unable to support themselves fully. That is why life insurance is needed in such cases as a way to ensure that your children will have resources in case one or both parents die.
  • Stay-at-home spouses: If only one spouse works, then life insurance is a good idea because the entire family relies on their income. If they come to pass away, it puts the other spouse (and children, if present) in a difficult spot.
  • High-asset families: If you come from a wealthy family, life insurance policies are almost always essential, especially if you owe estate taxes. One of the many things life insurance policies can do is provide money to cover taxes and maintain the value of the estate. 
  • Married pensioners: Pensioners can choose to either accept their full pension or use the money to buy life insurance for their spouse. This is called pension maximization. 

What Are The Benefits of Life Insurance?

You get many benefits from having life insurance. Typically, people have life insurance policies so that they can be certain their family members and other beneficiaries will continue to get financial help in case they suddenly pass away. With that said, there are other reasons for having life insurance, most notably being able to avoid paying taxes. 

The benefit received after the death of the insured is typically free of any taxes. That’s why some wealthy individuals choose to have permanent life insurance within a trust to strategically pay estate taxes that must be paid after they pass away. This strategy makes sense, as it helps their heirs keep the entire value of the estate. It’s vital to note that this strategy for minimizing taxes (called tax avoidance) is completely legal and is in no way connected to tax evasion, which is forbidden by law. 

In Conclusion

Life insurance policies help people feel secure and assure them that their family members and other people who depend on them will continue to have financial stability, even if something terrible was to happen to them.

Along with that, life insurance policies can help protect your wealth and keep it in the family in the event of sudden death. With that said, negotiating life insurance or choosing the right policy based on your own circumstances can be difficult, which is where the help of experts comes in handy. 

Alpha Wealth Funds can help you achieve your desired outcomes and protect your wealth by helping you choose a life insurance policy that fits your current and future needs. Reach out to us today to learn more. 

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence

Calendly link https://calendly.com/mt-awf/intro Work: 435.658.1934 Contact: 330.284.3211
Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.

Founded in 2010, our services include boutique hedge funds, separately managed accounts, financial planning, estate & trust services, private placements, and in-house concierge services for high-net-worth individuals, families, and businesses.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk, including the loss of principal.