Life Insurance is an important aspect of any financial planning arrangement. After all, any amount of savings/investment acclamation over a short term period pales in comparison to the death benefit insurance creates instantly upon the death of an insured. This benefit can be used for a variety of needs which are created immediately upon the death of the insured. The following is a brief list of some the needs:
- Funeral expenses and potentially final medical related expenses relating to the death of the insured.
- Mortgage payoff along with the incurred debt left to survivors that will have to be addressed for payment.
- College- provides for an immediate college fund to the children/grandchildren of the deceased insured that can be used immediately if college expenses are current or the proceeds can be invested until college expenses are incurred.
- A rent payment fund for the survivors who are renting as opposed to owning a mortgage for their residence; i.e. apartment/condo/home rental.
- Ongoing family income need: provides for a replacement of the deceased insured's income so the monthly expenses can be funded for a period of time depending of course on the amount of life insurance protection purchased.
Term Life Insurance
this type of life insurance serves for a temporary need. The following are some of the term life contract options.
Annual Renewable Term Life
This type of term coverage is established with the first year premium being the lowest and thereafter increasing each year until the term life period ends at the discretion of the insured. The face amount of coverage remains level but the premium increases.
Decreasing Term Life
This type was created to cover a decreasing need for life insurance coverage, i.e. a home mortgage which decreases over the mortgage term period. In this purchase, the premium established for the level of protection determined at the time of purchase remains level for the term coverage period but the death benefit reduces proportionately throughout the term coverage period.
Level Term Life
This type generally comes with options to purchase level term periods of coverage based on a temporary need such as ten year, fifteen year, twenty year, and thirty year coverage periods although some carriers offer in between years and extended term life coverage to thirty five years. In each case, the death benefit purchased and the premium established for the the term period of coverage purchased remains level until the end of the coverage period.
Permanent Life Insurance
Often explained as a cross between term and whole life offering the low cost of term life insurance and the cash value build up that whole life offers. The cash value is basically a reserve fund that is the result of paying premiums over and above the administrative and insurance costs placed in the cash reserve account of the ploicy and then declaring an interest rate on the cash reserve account. Over time, this cash reserve account will grow and offset the mortality cost which will increase over time.
This type of life insurance is the oldest of established policy contracts. Generally speaking, whole life insurance provides for the strongest guarantees of death benefit and cash values for the life expectancy of the insured provided premiums are paid through life expectancy (there are instances to where a product may be considered paid up earlier than life expectancy, but the days of guaranteed paid up policies have all but been taken off the the shelf.