Life Insurance 101

Kinds of Life Insurance

September is Life Insurance Awareness Month. Protecting the people we love the most is incredibly important, yet approximately 30% of American households have no life insurance, and over 50% think they are under insured.[1]

Why does a car have a spare tire that almost never gets used? Why does a football team usually keep at least one, if not two backup quarterbacks that hardly play? Why do beach communities have evacuation plans against hurricanes that rarely strike? The simple answer for all three examples is “just in case.” Should the positive expected outcome turn into a negative, having a plan in place would help you be prepared. This is why sound financial plans include a contingency; in case of death, disability or job loss. (We’ll discuss disability and job loss in future posts.)

There is certainly no argument that it is more fun to talk about accumulating wealth, sending children to college, taking vacations, and buying houses then it is to talk about death. In my 20+ years of experience in the financial and insurance industry, I have found that many people are uncomfortable contemplating death, let alone having a conversation about it and how life insurance can help prepare for a family’s financial future. Avoiding the subject, won’t make it go away! So, before considering the purchase of a policy, I would recommend you take time to learn about the types of life insurance available.

There are two categories of life insurance, temporary and permanent. Let’s briefly look at what they are and how they work.

Temporary Life Insurance Coverage

  • Term Insurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either give up the coverage or potentially obtain further coverage with different payments or conditions. If the insured dies during the term, an income tax free death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit, and it represents pure protection only.

Permanent Life Insurance Coverage

  • Permanent Insurance is a global term for a variety of plans that combine a death benefit with tax-sheltered investments or savings. These types of policies are meant to be held and paid into for the entire life of those insured. In each policy, the cost of insurance is the same. Adding the various investment or savings components introduces more moving parts, and adds additional expenses in the policy. Over a long period of time, the tax advantages of cash value inside the policy can make permanent life insurance a valuable accumulation vehicle.

One thing we know for sure is that in life both good and bad things happen. Here’s the bottom line: money can help make the loss of a loved one less stressful to those that are left behind. So expect the best that life has to offer, but be prepared for the worst.

If you are interested in more in-depth information about the benefits, fees and charges of life insurance, please feel free to email me at jkarp@karpfinancial.com.

[1] Facts from LIMRA, Life Insurance Awareness Month, September 2014

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