Why do you need life insurance?
Life Insurance has been a topic that many families do not like to talk about because of the negative connotations associated with it and the general view that someone has to die to capture the benefits. True, there are life insurance products in the market which require you to pay premiums in order to keep the policy, and if nothing happens you will lose all your money. However there are also many life insurance policies nowadays which give you benefits even while you are living! For example some policies can help you accumulate cash values over time, which can be surrendered to provide funds for other needs. You can also borrow funds from your insurance company with no credit check, insurance company will simply use the cash values as collateral. In recent years the newest kind of life insurance policies can actually turn the death benefits into payments to help pay for chronic illness or long term care expenses!
Who needs life insurance?
There is no such thing as the best time to buy life insurance. However here are some examples of life situations where the need for life insurance is especially critical:
- Marriage: the need to provide funds for final expenses, personal debts and loans and daily living expenses for your spouse.
- Parents: What will happen if you died today and you have a spouse and young children who depend on you? Don’t forget even if your spouse is currently working, the fact that there is only one income left will make life a lot more difficult for the survivors.
- Buying a home: Paying home mortgage is probably one of the biggest expenses in a family household, and paying for it requires you to be around and earn your income. If you are no longer around who will take up the job to pay for the mortgage?
- Retirement Plan: Whether you are young or close to retirement age, life insurance can serve as a vehicle to accumulate cash to supplement your retirement. If death occurs at any given time, the death benefits can help family members avoid or minimize financial hardship.
What are the different kinds of life insurance?
Term Insurance: This kind of insurance provides protection for a specific term, the most popular being 20 years or 30 years. At the end of the term period, the policy will either expire or the premium will increase substantially. There are generally no cash values associated with this type of policy. However in recent years some insurance companies are issuing “refundable” term life, which means at the end of the policy you will receive all premium you have paid (the cost for this “refundable” term life will be higher than regular term life). Term life provides high death benefit for relatively low cost but it will not be suitable if you are looking for coverage beyond the typical term period (e.g. 30 years). Generally speaking buying term life insurance is almost like renting a home: You sign a lease, have relatively lower cost than owning a home but at the end of the lease you need to return the home to the landlord.
Permanent Insurance: This kind of insurance provides protection on a permanent basis provided that you pay your premium on time. The cost of insurance is much higher than term life but it will remain level for the rest of your life. The policy can build cash values and you can use cash values by either surrendering the policy, or you can borrow from the insurance company and your cash values will be used as collateral. Permanent insurance is like owning your home: Your monthly mortgage is usually higher than renting a home, but you will build equity at your home and eventually you can sell your home to recapture your capital (or in some cases having a profit), or you can borrow from a bank in the form of a second mortgage or creating a home equity line of credit. However one major distinction is life insurance company will not perform any credit check to give you a loan while your home equity loan will usually require one.
Do you like renting or owning a home? It depends, right? It is the same logic when you want to consider what type of life insurance to buy. Give Lexim Advisers a call and we are happy to help you decide.