Life insurance provides a source of financial protection in the event of an unexpected death. While many people think it’s used primarily for burial costs and expenses, life insurance can also be used in other ways depending on the type of plan a person buys. Determining the type of life insurance plan to purchase involves identifying a person’s current financial situation as well as any anticipated financial needs loved ones may have in the event of a death.
Uses for Life Insurance
Uses for life insurance run the gamut in terms of where and how policy benefits can be applied. This is especially the case with policies that include a “savings” feature in addition to the actual insurance protection. Because of its varied uses, many people use life insurance products as a part of their financial planning goals.
Some of the uses for life insurance benefits include –
• Retirement income
• Paying off debts
• Having an emergency cash reserve to fall back on
• Covering funeral and burial costs
• Education funding for dependents
• Paying off any debt obligations in the event of a person’s death
Ultimately, a person’s individual circumstances determine what type of life insurance will best meet his or her needs.
Obligations and Needs
A person’s current age and financial responsibilities have a significant bearing on the type and amount of life insurance coverage needed. People whose families depend on their income earnings have more to consider in terms of future needs and coverage amounts than a single individual. With older individuals, life insurance costs are typically more expensive so this has a bearing on what a person can afford now versus future coverage needs.
Some areas to consider when determining coverage needs include –
• Current asset holdings
• Sources of continuing income
• Debt obligations
• Anticipated future income
As life insurance is meant to replace lost income in the event of an untimely death, a policy’s benefit amount should be enough to replace this source of income so the financial needs of loved ones are met.
Term Life Plans
Someone looking for the highest amount of coverage protection at the lowest price may want to consider a term life insurance plan. Term life is a straightforward type of coverage that’s based on a “term” or period of time in which coverage remains active. Once the term limit is over, the policy must be renewed in order to remain active.
This type of plan only provides insurance protection, so there’s no cash value involved. When it comes time to renew, the policyholder has aged so the cost of a renewal policy will be more expensive. In effect, this type of plan works well for younger individuals or people just starting a family. After a certain age, the premiums may run too high to be affordable.
Whole Life Plans
Just like the name says, whole life insurance plans provide coverage for the life of the policyholder as long as premium payments remain up-to-date. Cost-wise, whole life policies are more expensive than term life because of the cash value or savings feature included in the plan. This cash value feature can come in handy for emergency purposes, though any amount borrowed must be paid back or else it will be deducted from the total death benefit. It can also provide a source of income once a person reaches retirement age.
While less affordable at the start of coverage, whole life premium costs remain the same throughout the life of the policy. When compared to term life, premium costs run considerably cheaper once a person reaches middle age and beyond.
Variable Life Plans
Much like whole life coverage plans, variable life policies offer a death benefit amount and a cash value feature. Unlike whole life plans, variable policies do not guarantee a minimum death benefit or a minimum cash value amount. With variable life polices, the insurance company invests the policyholder’s premium payments in stocks, bonds, mutual funds, money markets and real estate pools. The success (or failure) of these investments determines how quickly a person’s cash value will grow.
Because of the way they’re structured, variable policies allow for more flexibility in terms of required premium payment amounts during the first five to ten years of plan coverage. This type of plan can work well for young couples who expect to be making more money in five to ten years time. On the other hand, variable life policies can get costly should the underlying investment products perform poorly. When this happens, policyholders have to pay more in premium costs in order to maintain coverage and keep the policy active.
Specialized life insurance plans are designed to meet the coverage needs for specific situations or life circumstances. As such, these plans tend to carry higher coverage costs than the other more standard plan types. For someone wanting to insure his or her immediate family as a group, the Family Policy provides insurance protection for the husband, wife and children.
In the case of insuring two or more persons, Joint Life and Survivor Insurance is designed to pay out death benefits upon the passing of the last insured, with the listed beneficiaries (a child or business partner) receiving the benefit. This type of coverage is often used to pay-off estate taxes so the surviving children aren’t held responsible for the debt.
In the case of insuring two people or a married couple, Joint Life Insurance pays a death benefit when one of the two dies. The remaining person on the policy then becomes the beneficiary. Compared to Joint Life and Survivor Insurance, Joint Life coverage alone carries a higher cost since the likelihood of both people dying is less likely or less “immediate” than the death of one person.
Ultimately, determining which life insurance plan works best means finding a balance between affordability and overall coverage goals. As income earnings can change over time, anticipated future earnings should also be considered when choosing a policy plan.