Life Insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person. The policy holder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.
Life insurance provides an infusion of cash for dealing with the adverse financial consequences of the insured's death. It also provides favorable tax treatment unlike any other financial instrument. Death benefits are generally income-tax-free to the beneficiary.
Policy benefits can be used to pay final expenses, including funeral or cremation costs, medical bills not covered by health insurance, estate administration fees or other unpaid obligations. These benefits can also help replace your income if you pass away. Your beneficiaries can use the money to help cover essential expenses, such as a mortgage balance and securing college educations for your children.
Buying a policy with a named heir as a beneficiary secures an inheritance for your loved ones. This death benefit can also serve as a supplement to other inheritance funds you may wish to leave. Your heirs may face an estate tax upon receiving their inheritance, depending upon the state of residence and the amount. Life insurance benefits may be used to partially or completely offset this cost for your heirs.
Life insurance policies can also be created with your favorite charity as a named beneficiary. This can help ensure your philanthropic goals are met after you die, and that benefits are provided to your charity of choice — even if you don’t have a very large nest egg or estate.
Types of Insurance
Term Insurance provides life insurance coverage for a specified term. The policy does not accumulate cash value. Term insurance is significantly less expensive than an equivalent permanent policy but will become higher with age. Policy holders can save to provide for increased term premiums or decrease insurance needs by paying off debts or saving to provide for survivor needs.
Permanent Life Insurance:
Permanent life insurance is life insurance that covers the remaining lifetime of the insured. A permanent insurance policy accumulates a cash value up to its date of maturation. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value. There are three types of permanent insurance;