Victor Hugo once wrote: "He who every morning plans the transactions of the day and follows out that plan, carries a thread that will guide him through the maze of the most busy life. But where no plan is laid, where the disposal of time is surrendered to the chance of incidence, chaos will soon reign". Those words underline the importance of planning for the future in a world where the unpredictable reigns. Fortunately, reliable financial planning tools such as life insurance policies shield families from potentially-devastating financial consequences resulting from a breadwinner's death, by ensuring their economic security and well-being. While the elderly tends to be more preoccupied with life insurance coverage than the younger generation, the latter - particularly those under fifty years of age - should keep in mind that it is more affordable when purchased at an earlier age. Generally, individuals under the age of fifty pay significantly less on life insurance premiums. Another element to consider is that it is considerably less costly to take out such an insurance policy when one is in the peak of his or her health.
Life insurance serves the following purposes:
1. Financial protection of beneficiaries upon the insured's death
2. Payment of funeral expenses
3. Vehicle for donations to charities
4. Supplementation of policyholder's retirement income by building tax-sheltered funds in the policy
5. Allocation of educational funds for the insured's children or grandchildren
6. Payment of settlement expenses, such as estate taxes
7. Fund that the policyholder can tap into when diagnosed with a terminal illness or life-threatening disease
8. Payment of liabilities such as credit card balances, loans, or mortgages
Beneficiaries of a life insurance policy are paid the proceeds upon the insured's death. Policies generally mature either when the insured attains a certain age or when he or she dies. Life insurance companies offer two types of policies: 1) term insurance and 2) permanent insurance.
1. Term insurance
Also known as pure insurance or temporary insurance, this type of coverage is for a fixed duration (i.e. 5 years, 10 years; until the last mortgage payment, until the insured attains a certain age, etc..) and lasts as long as the policyholder pays the monthly premium. Consumers may choose from a wide range of term life insurance policies, including (1) 30-year level term, (2) 15-year level term, (3) 10-year level term, (4) 5-year level term, (5) decreasing term, and (6) annual-renewable term. Most policies contain a provision permitting policyholders to convert their term insurance policy to a permanent policy within a designated time frame. Yearly-renewable term policies are bought on an annual basis; however, policyholders need not establish eligibility by submitting proof of sound health each year. A commonly-added rider to
term insurance policies is the accidental death benefit, which pays a supplemental sum equivalent to the policy's face amount per unit purchased upon the insured's accidental death.
2. Permanent insurance
This form of coverage blends insurance with an investment or a savings plan. Permanent insurance policies remain in effect until the insured's death and unlike term policies, they do not expire. Policyholders are covered for the rest of their lives, provided they pay the premiums. The most common types of permanent insurance policies are as follows:
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Whole life insurance. This insurance policy, which combines an investment account or savings fund with life coverage, pays a pre-set amount upon the insured's death. Premiums remain the same throughout the term of the policy. A portion of the policyholder's premium is allocated to building cash value from the life insurance provider's investments. The insured may make withdrawals from the savings fund without being subjected to taxation and the cash value grows tax-deferred annually.
• Universal life insurance. Also known as "adjustable life", this policy combines elements of whole life and term life insurance. It offers an investment of the money market type and allows the insured to withdraw from the fund to pay his or her premiums. The insured can adjust the death benefit and premiums, pursuant to the contractual terms.
• Variable universal life and variable life insurance. These permanent policies consist of an investment fund that is linked to a bond or stock mutual fund. Policyholders are not guaranteed returns.
• Second-to-die or survivor life insurance. This policy, which is designed to pay off estate taxes, covers two individuals and issues benefits upon the death of both.
• Single-premium whole life insurance. Policyholders make one lump sum payment, instead of a series of premium payments extended over the course of years or months.
A multitude of websites offer free
online life insurance quotes from hundreds of top-rated companies. Consumers may consult the ratings of agencies such as
A.M. Best and Standard & Poor's which rank insurance providers on their claims-paying history and ability. To obtain a competitive life insurance quote, prospective policyholders need only submit a simple form. By comparison-shopping, consumers will find the optimal life insurance rates and coverage that matches their particular needs. Providers typically perform a risk evaluation of applicants by examining their health and family history, which in turn provides the basis for the life insurance rates charged by the former. Some of the standard categories under which clients are classified are Tobacco, Standard, Preferred, and Preferred Best. Experts recommend that consumers purchase life insurance that is equal to eight to ten times their yearly income, in view of the fact that the objective of life insurance is income replacement.