Ensuring that your family is financially secure is a critical part of financial planning. If there are people in your life who are either fully or partly dependent on your paycheck (a spouse, children, or aging parent or grandparent), then you probably need life insurance.
Think about it. What would happen to your loved ones if you were unable to financially provide for them? Life insurance helps fill the important gap between the money they need to live in a financially secure way and the amount of money provided by your estate without the insurance. Life insurance creates an immediate estate.
These are the death benefits of life insurance, but do you also know that life insurance can offer you living benefits? In addition to the promise of immediate protection for you and your family, permanent insurance builds cash values that you can access throughout your lifetime. When your policy's cash values reach sufficient levels, you can access this money through loans and withdrawals of dividends. One of the greatest attributes of a permanent life insurance plan is its unique ability to provide available cash, as you need it, throughout your lifetime—often without incurring taxation.
Questions to Ask Before Purchasing Life Insurance
Here are three questions to ask yourself before purchasing life insurance.
- How much do I need?
- How long will I need it?
- What kind of life insurance do I need?
In order to determine how much insurance you’ll need, you need to calculate how much money it will take to protect and educate your family in your absence. Determining this amount depends on your unique situation and your family’s needs. An experienced insurance advisor can help you determine the amount that’s right for you. Since the proceeds from life insurance will generally pass income-tax free to your beneficiaries, you may decide to protect your family for a long period of time.
Term or Permanent (Cash Value) Insurance?
There are two major types of life insurance: term and permanent (cash value). Term life insurance protects you for a certain period of years. If you die during the term of the policy, the insurance company pays out a specific amount of money (the death benefit) to your beneficiaries. Term insurance only provides a death benefit. It does not provide the accumulation benefits associated with permanent, cash value policies. Term policies are intended for people who are either on a budget (it is less expensive initially than cash value policies) or who need to cover responsibilities having a finite time requirement, like a mortgage, business loan or college education.
Permanent insurance, on the other hand, doesn't have an expiration date. It covers you as long as you pay your premiums and frequently longer. It also combines the security of insurance protection with the ability to accumulate cash values. To help build up cash values, a mutual insurance company—which exists primarily to serve its policyowners—credits dividends and/or interest from its investments to the policyowners' policies. During your lifetime, you can borrow against this cash value, or withdraw funds to supplement retirement income, help pay off a mortgage or meet emergencies or other financial needs.
Permanent fixed life insurance can be divided into two major types: whole life and universal life.
Whole Life Insurance
Whole life insurance, as its name implies, is designed to stay in force throughout your lifetime. When you purchase whole life, the insurance company promises that your premium will stay the same over the life of the policy and that the company will give you a fixed amount of life insurance. In addition to this permanent protection, whole life policies generate cash values that combine guaranteed and non-guaranteed elements. The non-guaranteed elements are any dividends that are earned.
Universal life insurance is similar to whole life insurance, but it offers the policyowner more flexibility in premium payments, death benefits and cash accumulation. With universal life, the money you pay in premiums, minus expenses, goes into an interest bearing account. You can decide (within limits) how much money you want to pay in premiums. The policyowner has greater flexibility with universal life because he or she can adjust the policy to fit changing needs throughout life.
Choosing an Insurance Company
When you purchase life insurance, you're establishing a lifelong partnership with your insurance company. Therefore, it’s important to check the financial strength of the company and buy only from a top-rated insurance company with an impeccable reputation. After all, you want the company to be around to protect your family when you aren't.
Mutual Trust was founded in 1904 and is known as "The Whole Life Company,"® because of its specialty in participating whole life insurance. Although life insurance companies are not required to pay dividends, Mutual Trust has paid them for more than 100 years.
For more information on how Mutual Trust Life Insurance Company can help you develop an effective plan for college funding, click here.
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How Long will the Proceeds Last
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