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Life insurance can be one of the most important assets in a portfolio. There are many nuances and types of life insurance that can be beneficial depending on the insured. Having a guide to life insurance can help with terminology, different types of life insurance, and what to expect. This Life Insurance Buyer's Guide lays it all out in plain language.
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Life insurance is one of those areas where people hear they need it, but never really understand how it works. Essentially, life insurance is when an individual (or legal guardian) or group and an insurance company contract together so that if the individual dies, their beneficiaries receive a monetary benefit.
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Most people think of life insurance as a safety net that can help with funeral, burial and any outstanding expenses left behind by the deceased. In recent times, the policy has changed to provide more flexibility and financial strength.
To fully understand life insurance, it is important to know the terminology of the industry. While there are different situations where specific terms are used, there are more general terms that can provide information to potential buyers. These conditions include:
An add-on is additional coverage that you can add to your original policy. This may mean adding your children to the policy, settling for pensions and more.
It is important to note that there are two main types of life insurance: whole life insurance versus term insurance. These are also called term and permanent. The difference between these two types of life insurance is that whole life insurance covers the entire life span and builds cash value. If premiums are paid, they do not expire. Term life, on the other hand, covers an individual only for a certain period of time. It's usually a cheaper policy. One of the disadvantages is that if the person exceeds the policy term, the coverage expires.
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Term insurance typically lasts between 10 and 30 years. Whole life insurance grows over time with tax-deferred benefits. It takes an awfully long time to accumulate any real monetary value.
Most people don't know that there are additional types of life insurance. Another type of permanent life insurance that is also for life is called universal. This also incurs a cash value, but premiums can vary and are usually lower than whole life insurance. There is also indexed universal life insurance and variable universal life insurance. Here are the differences.
This type of policy is about investments. The insurer decides where the money will be invested and the policy can have benefits or losses.
The insured has the freedom to invest the money where he sees fit, but there is a huge amount of risk involved.
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What are the benefits of life insurance? It depends on who you ask. One of the most common reasons people get life insurance is that benefit payments are tax-free. That means whoever receives the money doesn't have to report it on their annual tax returns.
For people who have dependents, life insurance is beneficial as it can provide for them throughout their lifetime. Depending on the size of the policy, all living expenses and the money needed in the future can be less of a worry if managed wisely.
Funeral and burial costs can be expensive, and costs continue to rise. This is heavy and a huge burden on families who don't have insurance to cover the costs. Since so many people do not have the money to pay for common emergencies, paying for the service may be out of the question. This helps alleviate those fears and burdens without having to ask others for help with expenses.
Life insurance policies offer additional coverages. Some policies offer additional benefits and early payouts if there is a diagnosis of a terminal illness. These endorsements allow policyholders to get on with their lives during this time without worrying about major expenses.
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People in retirement often use their life insurance policies as a supplement to their savings. This applies to policies that have a cash value, such as whole, variable or universal policies. Once the money is accumulated, it can be used to cover large purchases or other expenses.
When looking for a life insurance policy, especially one that has cash value, this is the right question to ask. Although payments do not have taxes associated with them, there are situations where the payee may be taxed. A tax professional is better suited to answer these questions.
There are different types of taxes where life insurance can be taxed. When policies are too large, the following charges may apply: estate, inheritance, income and generational neglect.
Estate tax applies when the amount is more than allowed. Inheritance tax is applied in states that have this tax, taxing a person who inherits goods, property or money. Income taxes are set by the government, but this is not typical. A succession tax is similar to an estate tax, but it applies when a generation is skipped. There are various ways to avoid paying taxes on life insurance policies. An estate planner will be able to provide more detailed information.
What Is Life Insurance
Some life insurance companies require individuals to undergo a medical exam to prove they are healthy before they can be covered. Exams are conducted by licensed professionals. Depending on the insurer, the exams become more comprehensive. There are some companies that allow life insurance without medical exam provisions.
Medical examinations are required for several reasons, including screening, obtaining additional information about the applicant's medical history, and determining whether there are medical conditions that would cause the application to be denied. Applicants must answer a series of questions about their family history, whether they have had surgery, have high blood pressure or other underlying medical conditions, drink, smoke, exercise, and other screening questions.
Applicants must be willing to provide urine or blood samples. More detailed exams require the doctor to measure blood pressure, weight and other things to help determine the viability of a life insurance applicant. Some insurers also require an electrocardiogram to determine heart health. Eating healthy, staying hydrated, and in some cases fasting are essential before your medical exam. If you are going to a medical facility, you should wear loose clothing as well as enough sleep.
Depending on the insurance company, a representative will come to the home or workplace instead of requiring the person to go to a medical facility. After the examination, the insurance company notifies the applicant about acceptance of insurance.
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When deciding which type of life insurance will work best, it's always good to start with a financial mindset. What are the current needs and what will become a problem in the future? People considering life insurance should check their budgets to start with a reasonable number of premiums they can afford. The next step is to determine how much coverage is needed.
There are simple calculations and worksheets online to help determine this. Healthy people may not feel they need as much insurance right now, but that may change in the future. One of the most important things to remember is that premiums are cheaper when you're young, and costs rise significantly as people age. Individuals should look at their spending habits and decide if they can afford an extra bill. Next, you need to consider how much insurance is required. Do they have a family? The woman? Children? These are all factors when figuring out how much coverage you need. Also, what type of insurance provides the most benefit? Term or whole? Remember, term life insurance is like a lease. You are insured until it runs out, whereas whole life insurance covers the entire life of a person with a monetary incentive.
Different scenarios come into play when deciding how to choose a life insurance policy and how to choose a life insurance company. When choosing a life insurance company, you need to do some homework. There are many insurance companies in the market that may appear to be doing well, but are not as financially sound as they seem. While low prices may seem attractive at first, knowing the company's history makes sense. Also, while a person may be quoted a low price when they start their subscription, things can change.
It is very important to know the specifics of the policy and fully understand what is being offered. What kind of risks does the company have in its portfolio and do they have a good track record in dealing with clients? It is easy to check how financially secure an insurance company is. See financial ratings from Moody's, A.M. Best or Standard & Poor's for higher
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