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Insurable Interests

Vol. 13, Issue 1 • September 2017

The Types and Uses of Life Insurance

September is National Life Insurance Month, which makes this a good time to refresh your understanding of the uses and types of life insurance.

If you die prematurely, the people who rely on your income might not be able to pay their day-to-day expenses, repay debts or afford things like college for your children. Life insurance helps protect against this possibility. In return for premiums you pay, a life insurance policy can pay a sum of money to the people you choose as your beneficiaries.

The amount of life insurance coverage you need can vary throughout your lifetime. For example, when you are single and childless and have few financial responsibilities, you might not need much coverage. Similarly, when you are older and your children are grown, you might need less coverage too. People usually need the most coverage when they are in their prime earning years and have dependents and other financial responsibilities.

In addition to providing income for your beneficiaries and paying off any debts or other financial obligations, it is possible to use life insurance as part of your estate plan. Life insurance can help increase your estate’s value, especially since life insurance benefits usually are tax-free to your heirs. The proceeds also can help with expenses associated with closing your estate. They can help you equalize an inheritance or ensure that an heir who has unusual needs – such as a child with a disability – has additional money. And you can use life insurance trusts to fund contributions to a favorite charity or to exercise greater control over your estate.

The type of coverage also can vary. In general, there are four kinds of life insurance, although you can choose more than one type of coverage:

Term life. As the name suggests, this insurance lasts only for a specific period of time, although it might be renewable. If you die during the term of the coverage and if you have paid your premiums, the policy pays the amount of the benefit. If the policy term expires before you die, there are no benefits.

Whole life. This coverage lasts until you die, as long as you continue to pay the premiums, which remain the same throughout the life of the policy. The death benefit also remains the same, although these policies sometimes can accrue cash value in addition to the death benefit.

Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.

Variable universal life: You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value goes up or down based on the performance of investments in the subaccounts, which are pools of investor funds professionally managed to pursue a stated investment objective.

Finally, it is important to buy life insurance from a financially stable and reputable company. If the company goes bankrupt before you die, your life insurance could be negatively impacted.

At The Bensman Group, we can help you assess your life insurance needs and help you find a policy that works for you. You can contact us at jfeiger@bensman.com or 847-572-0808.