There are several types of life insurance and several reasons for purchasing life insurance. But, what does life insurance mean and represent?
In its simplest form, life insurance is meant to replace a loss of income. For example, lets say John and Mary each make $75,000 per year and they have two young children. One day, John is involved in a serious car accident and is killed. Besides the emotional loss to the family, there is a serious impact to the family’s lifestyle.
They are used to John bringing in $75,000 per year. Now, besides having to deal with the trauma of the loss of their loved one. Mary is left to try and cope with the financial strain of raising her children on half the income they were used to living on.
Life insurance is never intended to make anyone rich. Life insurance is protection for the loss of a life to a person who is critical to a family’s financial lifestyle.
There are other reasons for purchasing life insurance, whether it be personal or business, it is important to establish the appropriate amount and right type of coverage.
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TYPES OF LIFE INSURANCE COVERAGE
There are essentially two types of life insurance coverage with variations to each one. An analogy I often use to describe the difference between term and permanent life insurance is term insurance is like renting a home. When you rent, you do not build up any savings, but at least you had a place to live and with term life, at least you had the coverage when you needed it most. Permanent insurance is similar to owning a home. You may be able to accumulate some equity, but with any type of investment, it takes money to make money.
TERM LIFE INSURANCE
Term Life coverage is normally for a set period of time in your life. Whether it be 10, 20 or 30 year term, the concept is the same. The term relates to how long the premium is guaranteed. So you can expect a term 20 to be more expensive initially than a term 10 because the premium is guaranteed for twice as long.
PERMANENT LIFE INSURANCE
With term life insurance, life insurance companies are betting on you outliving the policy. But, with permanent life insurance, they are betting on you living a long time because the death benefit is paid no matter how long you live.
Some examples of permanent life are Whole Life, Universal Life, and Term to 100. There are variations to each type which is why it is important to speak with an experienced advisor to guide you through the different types of coverage and to establish the appropriate amount for your unique situation.
WHAT IS INVOLVED IN GETTING LIFE INSURANCE?
In most cases, a life insurance medical is needed to qualify. I coordinate connecting with a paramedical company to contact you to set up a date, time and place most convenient for you to have the medical testing done. The tests needed depend on your age and the amount of coverage. In many cases, the approval of the coverage and the issue of the coverage can often take anywhere from 4-6 weeks.
There is also life insurance available for people who are difficult to insure or for people that are adverse to providing blood and urine specimens. This type of insurance does not require a medical and can often be issued in only a few days.
As far as death claims go, once the insured is deceased and at least one of the beneficiaries notifies the insurance company either through the advisor or directly with the insurance company a death claim package is sent to that beneficiary. Instructions will accompany the package and often the death claim is paid in less than a week. Money is paid out tax-free.
BUSINESS KEY-PERSON AND PARTNERSHIP LIFE INSURANCE
A key person is vital to the strength of a company so if this person passes away unexpectedly this could pose a major setback to the organization. To protect against this loss, life insurance can be bought by a company on the life of this key person. In the event of this untimely occurrence, this will provide the company the time to search out a replacement.
A similar situation occurs in a business with one or more partners. Usually a buy-sell agreement is part of any partnership for the distribution of shares of the company to the surviving shareholders. Life insurance is the fastest and least expensive way to fund the buy-sell agreement. This provides tax-free money to the surviving partner(s) to buy back the outstanding shares from the spouse of the deceased partner.