Life insurance is a legal contract between an insurer and an insurance holder, in which the insurer promises to pay out a designated beneficiary an amount of cash upon the insured’s death. Depending on the contract, beneficiaries can be anyone from a spouse to children, to relatives or even pets. Most insurance contracts will specify that the beneficiary should be an individual who is legally entitled to receive the money, such as an heir or someone living far away who is not related to the insured. Some contracts will specify that the beneficiary must be someone the insured loves, while others may choose to restrict beneficiaries to family members or close friends. Beneficiaries can also be chosen by the insurance company, if they prefer, or they can be randomly selected.
In contrast to the term life insurance, permanent life insurance is not a legal contract. Rather, it is an investment strategy in which your premiums are paid over an agreed period of time and your beneficiaries will be granted a lump sum once your policy expires. Permanent life policies can be used to finance mortgages or student loans, and they may also be used for building equity. However, unlike whole life insurance, permanent life policies are not immediately available to your beneficiaries. Instead, you have to wait until your policy expires, then you can decide what to do with your assets.
With permanent life insurance, you make payments according to how much income replacement you receive each month. You can choose to receive payments in fixed interest rates, annuities with guaranteed minimum distributions, or an Internal Revenue Service deferred annuity. The number of years you can take your payments depends on your income, which is figured by taking your monthly income replacement dollars and multiplying it by the number of years you are required to cover expenses until you die. However, your income replacement policies are only available to people who are in good health.
Another type of permanent life insurance is the whole life policy. It differs from the traditional type of policy in that it does not accumulate a cash value. Your premium payments are used as the capital. If you should die during the lifetime of the policy, your beneficiaries will get only the amount of your premium that exceeds the remaining face value of the policy. Unlike a traditional whole life policy, no additional withdrawals can be made prior to retirement until your death benefit has been fully paid out.
Term Life Insurance contracts allow for maximum flexibility and coverage options. These types of coverage generally fall between whole life insurance and universal life insurance. A term life insurance contract usually allows you to create a level of coverage that will pay your dependents a percentage of your death benefits if you die within a certain period of time after the purchase date. In many ways, term life insurance is similar to decreasing the coverage on an existing policy. However, term life insurance contracts typically have a wide range of potential end points. For example, you can buy additional coverage beyond the death benefit up to 30 years from the purchase date.
No matter what type of insurance you choose, always remember that your specific circumstances, as well as your loved ones, deserve the utmost care at all times. When you are ready to purchase life insurance, it is important to do thorough research to ensure you are getting the best deal possible. Following these steps will help you make an informed decision about buying life insurance.