Personal investments are important to work on while you’re still young, and one of the most important pillars of individual financing is life insurance. While life insurance is deemed vital for every individual, most people don’t put it into their priorities due to a great deal of confusion and skepticism brought about by its complexity.
To understand life insurance better, you should know why it’s important to your life. Along with this, you’ll be able to choose an insurance provider and compare life insurance companies where you can obtain the best terms.
What Is a Life Insurance Policy?
An insurer and policyholder agrees to a contract, which is a life insurance policy, guaranteeing payment to identified beneficiaries upon the death of the insured individual. The main purpose of having life insurance is to offer financial protection and stability to living dependents, which are the main beneficiaries of a deceased person.
In a life insurance contract, four participants drive the entire negotiation: the insurer, insured, owner, and beneficiary (or beneficiaries). Here is a breakdown of the important roles of each participant:
- Insurer: The insurer is the insurance company, which is responsible to pay out the financial claims in the event of a death. They’re the policymakers of the agreement that must be followed by all parties.
- Insured: Also called the policyholder, is the individual whose life policy is based. Once this person passes away, the insurer should carry out their agreed financial claims.
- Owner: The owner of a life insurance is the person responsible for all payments and financial decisions covering the entire contract. Take note that you can be the owner and insured at the same time, or someone else can be paying for your insurance, or you’re paying for someone else’s.
- Beneficiary: Once the insurer starts paying out the financial amounts, the primary beneficiary will receive these financial benefits. In cases where the primary beneficiary couldn’t receive the claims, then the contingent beneficiaries chosen by the insured will acquire them.
Once you’ve signed up for life insurance, you’ll be asked to choose which variety to apply on your contract. You should be well aware that there are two broad categories of life insurance contracts – which are term and permanent insurance.
- Term life insurance basically covers a specific, pre-agreed period of time. They can be agreed for 1, 10, 15, 20, 25, 30 years, or even subjected for flexibility. This variety of insurance promotes affordability, beneficial for people tight on a budget. It also has a lower monthly premium than the permanent insurance.
- On the other hand, permanent life insurance lasts for an entire lifetime. People who want to maximize their money’s value with lifelong protection are perfect for this type of insurance. You can accumulate a cash value in permanent insurance and use these funds during emergency situations.
The discussion above merely covers the life insurance fundamentals and there’s still a lot of what you need to know about life insurance. To understand the core of life insurances, you should know how important it is for you, because of the following reasons:
1. Protect Your Loved Ones
One of the top reasons why people consider taking out life insurance is to protect their family and loved ones once an unanticipated death happens. Life insurance is actually a must if someone relies on you financially, such as breadwinners, parents, partners, employees, business partners, and many more. Having life insurance and leaving your beneficiaries enough finances to manage once you’re gone will protect them from more financial burdens.
It’s entirely true that once you die, your income and financial opportunities will also die with you. While you’re not merely an income source of your family, having a stable one will help you and your family sustain a particular lifestyle and start building your lives for the future. Through taking out life insurance, you’re also guaranteeing them that they can still continue their lives without being dependent on you.
2. Work Insurance Won’t Do Much
No matter what your career and work position is, always consider personal life insurance as insurance from work wouldn’t be enough. Most companies and employers offer access to life insurance through work, and it’s something to thank for since you’ll gain benefits for free. However, if individual/s rely on you financially, think twice about being content with your work insurance.
First, work insurance isn't customizable. They’re created as group insurance but its financial coverage is too small with someone with a family to support.
Along with contract customization, you can’t add riders to your insurance. Riders involve those additional terms and conditions that will come in handy during specific life situations. Since most work insurance is based on term insurances, that means it’ll come to an expiration date eventually.
Lastly, you can’t take the insurance with you once you leave your job. Your company has offered it, after all. However, some companies might allow you to convert your work insurance into an individual one, but that’s a lot of money on the line.
3. Pay Off Financial Burdens
While life insurance safeguards you from any financial uncertainties in the future, what if you’ve already committed these uncertainties you’re talking about? You don’t have to worry because life insurance still got you covered. Even though using life insurance to pay off financial burdens is entirely optional, it’s still a great safety option.
Using your cash value to pay off debts is a few steps away. You should simply contact your insurance agent or company about this decision and they will allow you to make a policy loan request for application.
You can skip those complex application processes like taking out a loan, which involves application fees, documents, and credit checks. Although they will only let you borrow a valuable portion of your cash value in the insurance policy, it’s still significant for paying off your financial burdens.
4. Saves a Business From Financial Struggles
What makes life insurance unique and reliable is they’re not simply for individuals with families and other relatives to support, but they’re important for businesses as well. Life insurance saves a business from financial struggles and opens up a new doorway of financial opportunity to expand, in many ways.
A specific venture can take out a life insurance policy called a key person life insurance. This type of insurance can save a business after a tragic loss of a key individual building the business. Also, this guarantees the survival of a business upon extreme financial loss.
For instance, the whole tech industry was shocked by the death of Steve Jobs, chairman, and CEO of Apple Computer in 2011. This resulted in the company losing about 5% of its shares.
To save the business, Apple paid a significantly large amount of $2520 for life insurance and another whopping amount of almost $700,000 for security expenses for protecting the new CEO Tim Cook.
While this may be a large sum for the company, taking out life insurance was a great financial move for them, and everyone can witness how Apple is still prominent in the industry today.
Aside from saving the reputation and brand image of a company, life insurances replace a company’s lost profits during the death of a keyman. A company can lose money immediately since the key individual wouldn’t be able to do their roles. The quickest move that a company can do is to ensure their properties, resources, equipment, but their employees are not their priority. They’ll run into more expenses aside from losing profits so they need to act immediately for lost money.
5. Get The Best Value of Your Money
Life insurance is definitely a smart investment to get the most out of your money and efforts. Contrary to the conventional purpose of life insurance, you can grow your money by building up the cash value in your account. However, cash value accumulations are only allowed in the permanent type of life insurance. You might want to take note of that.
Once you’ve accumulated a fair amount in your life insurance and you don’t intend to use these yourself, you can actually choose a larger death benefit for your beneficiaries. The insurance company will tend to accept this offer since they don’t want to lose you.
Another method to get the best value from your insurance is to pay the life insurance premiums. If you’ve collected enough cash value, tap it to cover your life insurance premium payments. In this way, you can save more than $2000 for premiums annually.
There is also an option to convert the life insurance policy into a loan, which has lower interest rates than traditional bank loans. You’re not required to pay the loan immediately or on a regular basis since it’s your own money.
For the last strategy, your life insurance policy can assist you if you’re currently low on funds and has to make a huge emergency purchase. However, of course, your cash value will be deducted or totally wiped out. Also, some insurance companies might subtract more than what you’ve borrowed, so make sure to discuss it first with your insurance agent or company before withdrawing immediately.
6. Acquire Tax Benefits
Paying taxes can be a real pain in the pocket. Still, you can practice tax-paying while minimizing the amount you put up in the line through life insurance policies. An efficient tax plan should lessen your taxes while you’re alive, as well as reduce taxes paid by your family after you die. Thankfully, permanent life insurance hits two birds with one stone.
After your death, your beneficiaries won’t have to pay income tax from every dollar you leave them. With life insurance, it’s a hundred percent guarantee that your beneficiaries will receive the money tax-free.
If you ever encounter an instance where you’ll transfer the life insurance policy to another insured person, you don’t need to pay taxes to transfer this death benefit. It’s both an investment and a lot of savings in the long run.
If you’d like to learn more strategies to maximize your tax benefits, make sure to prepare your tax planning early to cut your tax bill with permanent life insurance.
7. Assist Your Retirement Plan
Even though you’re decades away from retirement, having a retirement plan ready is extremely crucial for your future. Your personal retirement plans will greatly dictate how satisfied you’ll be with your retirement lifestyle soon. Taking out life insurance is an important contributor to your retirement plans, but in what ways?
- Access to tangible cash. You can still receive retirement income even during your retirement years with the help of a life insurance policy. To access this, you’ll have to pay premiums during your working years and upgrade your policy into a retirement income source, along with your other assets.
- Protection from health conditions. People don’t get any healthier as they age. Many life insurance companies allow their insurers to receive the death benefits of the policy even before death. In case you’re chronically ill during your retirement, you can already receive these death benefits to pay for your medical bills and expenses.
- Allow support for widow or widower. A widow or widower can avoid difficult financial situations once they’re spouse unexpectedly passes away, if one of them has life insurance. In case your spouse passes away, you can use his/her death benefits to pay for funeral costs, mortgage debts, or any financial burdens. In this way, you can enjoy your retirement better, knowing that you’re financially safe.
8. Obtain Peace of Mind and Financial Security
Last and most importantly, taking out life insurance can give you the peace of mind of being financially secure and stable. Who doesn’t want that?
Aside from your individual peace of mind, receiving your benefits from life insurance centers on your family’s financial security. During financially tough times, at least you know that you can still get money somewhere, without making hasty financial decisions and being taken advantage of.
While you’re just starting to earn your first paychecks, consider signing up for life insurance immediately. Though the insurance payments add up to your monthly bills, you’re confident that this will yield something great for your future.
Bottom Line
If you think that life insurance is simply a financial burden, think again. While you’re committing to the financial risks of taking out life insurance, not only for yourself, these risks will be worth it in the future. With all the reasons mentioned above, life insurance isn’t something to question and be skeptical about. All you need is a proper understanding of what life insurance is all about, choose the right terms and conditions according to your needs and lifestyle, start your insurance payments, and finally receive the benefits of having one.
