Most people know that they should have life insurance, but not everyone knows what kind they should have or how much insurance is enough to cover their death expenses. Life insurance is an important security to have in place for your family when you pass away. If anyone depends on you financially, it is essential that you have a plan in place before you die. Here are ten things you absolutely need to know about life insurance.
There Is More Than One Type of Life Insurance
There are nearly a dozen different types of life insurance policies. While term life insurance is the easiest to obtain, most people don’t think of term insurance when they hear the words “life insurance.”
Term life insurance is a short term life insurance policy. It is the most basic form of insurance because you pay a premium for the amount of time that you hold the policy, and it pays out the amount that was agreed on when you bought the policy. Term life insurance typically does not require a medical exam either.
There are 5, 10, 15, 20, 25, and 30-year policies. At the end of the term, or policy length, you can either renew your policy for another length of time or convert it to a permanent life plan. If you die during the term, your beneficiary will receive a payment in the amount of the policy. If you don’t die, you forfeit your right to the policy value. It’s like a health insurance policy for your life. You either use it or lose it (although using it means you died).
Permanent life insurance policies cover you from the time you purchase the policy until you die. You will pay monthly or quarterly premiums throughout the length of time you hold the policy. Many permanent life insurance policies have a policy value plus a cash value. Those policies that have a cash value allow you to take money earned out of your policy before your date of death.
The other types of life insurance offer variations on permanent life insurance, their value, cash value, and dividend earnings. Be sure to ask your life insurance providers what the best policy is for you, based on your age and needs.
You Can Take Cash Out of Your Permanent Life Insurance Policies
The option to take cash out of your life insurance policy is available with many permanent life insurance policies.
Insurance companies take the money that you pay in premiums and invest the funds on your behalf. In time, your life insurance builds a cash value that you can take out if you require extra cash. While this money will no longer be available when you die, it is typically a tax-free savings plan, in addition to providing you with life insurance coverage.
You Can Use Your Life Insurance Policy for Long-term Healthcare While You are Still Living
Most people think that life insurance only helps their loved ones after they die; however, some policies allow you to utilize the plan for long-term health care expenses when you are still alive. While it will no longer have its full value at the time of your death, it can help offset your end-of-life living expenses.
You Can Use Your Life Insurance Policy as Retirement Income
If you have a permanent life insurance policy, you can often get annual payments in retirement, rather than it only being payable after you die. For those who don’t have a lot of money in their pensions or retirement savings, this is a viable option to help you cover your living expenses.
You Don’t Have to Make Payments Until the Day You Die
If you have a paid-up permanent life insurance policy, you do not have to make premium payments after a certain point, and you are still guaranteed coverage until the day you die. Essentially, you are pre-funding your life insurance policy so that you don’t have to make payments in retirements. While you need to request this type of policy, as it is not automatically given to you, it’s an excellent way to eliminate expenses from your budget after you retire if you have the funds.
You Can Earn Dividend Payments Off Your Life Insurance Policy
If you want to utilize your life insurance policy as a perpetual money maker, you can purchase a plan that offers dividends. Some life insurance companies invest in stock options. Each quarter, you will receive a dividend check based on the number of stocks you own.
You Can Reinvest Your Dividends of Life Insurance
If you have a dividend earning life insurance policy, you can opt to have the dividends reinvested into your policy. By reinvesting your dividends, your policy will pay out more to your beneficiaries.
You Can Purchase Policies for Your Family Members
If you have children, a spouse, or even an ex-spouse, you can purchase life insurance policies for them. By purchasing policies for people in your life, you are protecting your assets and the assets of those you love.
Policies purchased for your children can cover their funeral expense should they pass away prematurely or decades after you.
If you purchase policies for your spouse or ex-partner, you will have money to cover their funeral, estate expenses, and help to ensure that your children are left with a monetary gift.
While it may seem strange to have a life insurance policy on your ex-husband or wife, it is one of the best decisions you can make to ensure that your joint children are protected from having to pay out of their own pockets for your ex’s incurred debts that were still outstanding.
Life Insurance Should Be Viewed as a Risk Management Tool
If you have a lot of credit card debt, medical bills, or other expenses, life insurance is a risk management tool. Instead of that money being utilized as an investment payout plan, the policy should be in place to help pay off debts that aren’t automatically waved after you die. Where items like your electric bill won’t be an ongoing debt after you pass away, your credit card balances still need to be managed. The last thing you want to do is leave your loved ones with a mountain of debt.
You Should Review Your Life Insurance Net Worth
Some people purchase a life insurance policy and then forget about it. If the monthly or quarterly payments are automatically withdrawn from your bank account, it is easy to not think about; however, you should review your life insurance value every few years.
It is important to make sure that you have enough coverage to take care of all your expenses and beneficiaries. If you have another child, buy a larger house, or are the primary breadwinner and health insurance carrier, you may want to increase the amount you have in life insurance or purchase a second policy to cover additional after-life expenses. You may also want to ensure that you leave an equal amount of money for each of your survivors. Finally, you should make sure that your policies are still active and aren’t expired. Many people who purchase term life insurance policies forget that their policy won’t last forever. You should ensure that the policies haven’t lapsed while you were busy enjoying life.
Sources
Khalfani-Cox, L. (2016, March 8). Life Insurance and 5 Things You Need to Know. AARP. https://www.aarp.org/money/investing/info-2016/life-insurance-things-to-know.html
Maurer, T. (2016, January 15). 10 Things You Absolutely Need To Know About Life Insurance. Forbes. https://www.forbes.com/sites/timmaurer/2016/01/05/10-things-you-absolutely-need-to-know-about-life-insurance/#6e70ce6e560c
Rose, J., Jj, Jj, Sadler, G., Sadler, G., Howard, D., … Lily. (2019, September 18). Different Types of Life Insurance Policies: GoodFinancialCents®. GoodFinancialCents. https://www.goodfinancialcents.com/types-of-life-insurance-policies-explained/
