Life insurance is very similar to home or auto insurance. You pay an annual premium for a preset amount of coverage. If you pass away while the policy is in place, your beneficiaries will receive a benefit that equates to the amount of coverage. Unlike other types of insurance, some policies allow you to create a cash value on your policy that you are able to use in a variety of ways.
The two main types of insurance are term life insurance and whole life insurance. Term life insurance provides coverage for a set period of time, usually between one and thirty years. Whole life insurance remains intact as long as you live as long as you keep up with the premium payments. The cash value on whole life insurance builds up while you are alive and you can borrow against this amount or withdraw it for personal use. The cash value may also be traded in to increase the death benefit amount.
Why life insurance is a good idea
Life insurance gives your loved ones a financial resource to draw from if you happen to pass away too early. The average funeral costs between $7,000 to $12,000, which can be quite a heavy financial burden for some families. With a good life insurance policy, family members can avoid going into debt by using the life insurance death benefit to pay for funeral expenses.
While the main reason that people purchase life insurance is for final expenses, life insurance has many uses. In fact, 57% of people use it for supplemental retirement income, 50% use it to help pay off mortgages, and 62% of people use it to replace lost wages or income according to a survey done by LIMRA in 2020. Other uses for life insurance include home expenses, charitable gifts and estate taxes. Having the funds to cover these expenses can be very helpful when a loved one has passed away.
What you should include in a life insurance plan
When purchasing a life insurance policy, you customize it with riders to enhance the benefits on your policy. A rider allows you to select coverage that meets your specific needs. The riders will increase your premium, but also will increase the death benefit.
The following are common types of riders that you can use to customize your life insurance plan:
- Children’s Term Rider –This rider is great for parents who wish to add their children to the policy. If the child dies before a specified age, the insurance company will pay a death benefit to the policy holder.
- Accelerated Death Benefit Rider – The accelerated death benefit riders allow you to access your death benefits before you die. This may be helpful if you have been diagnosed with a terminal disease and need help paying medical bills.
- Accidental Death Benefit Rider – This rider is also known as a double indemnity rider. It increases the amount your beneficiary receives if you die from injuries that are due to an accident that is covered.
- Waiver of Premium Rider – Life insurance only stays active if you keep up with the payments. A waiver of premium rider protects you if you can’t make the required premium payment due to an injury or illness.
These additional riders should be included in your plan if you feel that any of these circumstances may occur in your life. The availability and eligibility will vary by company, so make sure that you discuss the options with your insurance company.
Pros and cons to look out for when selecting a life insurance plan
Life insurance provides financial protection for your family and it is relatively affordable to purchase. It is important to understand the advantages and disadvantages to life insurance policies before making a decision on a certain plan.
The following are some of the advantages to life insurance:
- Provides a financial benefit at death.
- The affordable monthly premium fits most budgets.
- Provides you with peace of mind.
- Life insurance has an easy application process.
- The cash value helps you to save.
While the benefits of a life insurance plan are great, if you don’t fully understand life insurance, you could easily be misled. You could end up purchasing more coverage than you need or buy a plan that isn’t as comprehensive as you thought. Life insurance is also very expensive if you are ill or older. The cash value of a life insurance policy isn’t always an optimal investment.
Typically, a life insurance policy is a great investment to enhance your savings and investments. A life insurance policy should be a part of most retirement savings plans. Life insurance will protect your family members, help to maintain your family’s financial health and keep them from going into debt over final expenses.
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