What is Life Insurance?
Updated: Mar 19, 2019
There are two types of Life Insurance, Permanent Life Insurance and Term Life Insurance
What is Life Insurance?
Life insurance provides a tax-free benefit to those whom you love after you pass away. A life insurance policy is a contract with an insurance company where upon the death of the insured person they agree to pay a specific lump sum of money, known as a death benefit, exchange for premium payments. The amount of insurance required is dependent upon the individual’s needs and goals, while the cost of insurance is determined by many factors including the amount of insurance, age, gender, medical history, and lifestyle. There are two types of life insurance: permanent life insurance and term life insurance.
Term Life Insurance
Term Insurance provides affordable coverage for a specific period of time. The most common term policies provide coverage for a length of 10 or 20 years. The premium for term insurance is level cost and fully guaranteed, which means the premium and the death benefit does not change for the term that you select. Generally, once the term expires the coverage ceases and you will have to reapply. In the event of your death, the benefit is paid to the beneficiary(s) tax-free.
Permanent Life Insurance
Permanent Life Insurance provides coverage for life. Generally, a portion of the premium goes towards the death benefit while remaining amount is deposited into an investment account. The investment account can be used for a number of purposes such as paying the premium of the policy or increasing the tax-free death benefit. The investment in the insurance policy grows tax sheltered and, upon death, is paid to the beneficiary as a tax-free benefit. Most permanent life insurance policies have a premium that is guaranteed not to increase from the time of initial purchase. Since the cost of insurance is related to your age, the earlier you buy permanent insurance the lower the premium cost that you have “locked-in” for life.
Ideally everyone would buy permanent, level-cost insurance rather than term insurance, which expires and increases in cost when renewed. However, permanent insurance can be expensive and it is important that other financial goals are kept in mind, such as saving or paying off debt. Often the solution is to purchase a hybrid combination of term and permanent life insurance.
At Camaco we work with each our clients to help them find the balance purchasing insurance and meeting their other financial goals. It is our aim to educate each client with the information needed, so that they are empowered to make the decision that is best for them. Everyone's situation is different and it is important to work with an advisor to find the solution that is best for you.