Your life insurance policy is a contract between you and an insurance provider. You make premium payments toward your policy, like when you pay your monthly cable bill or car insurance bill. In return, when the time comes, the insurance provider provides a lump sum known as a death benefit to your beneficiary.
It would be a mistake to assume that your life insurance policy is just another cost for you to pay monthly. The financial security that you can leave for your family should be enough to convince you of that. Eighty-four percent of Americans think that life insurance is a good idea. However, only 59% have committed to taking out a policy to provide a safety net. Hopefully, the information below will convince you to join the 59%, if you are not already part of that group.
Before getting into the benefits of a life insurance policy, it is vital to understand how it all works.
When It Comes to Life Insurance Policies, One Size Does Not Fit All
A life insurance policy is chosen based on the needs of the insured person. How much do you want to leave behind? How much can you afford to pay in life insurance premiums? Typically, you will have your requirements met with one of the three types of insurance policies available. Once you have a type of policy in mind, you then need to find a policy provider, but let’s save that for later.
Term Life Insurance Policy
A term life policy provides financial protection for a set term, hence the name. You can expect life insurance coverage between 10 and 20 years with this type of policy. With a traditional term life insurance policy, your premium payment amount will stay the same for the time that you have chosen. What happens after the period has passed will depend on the policy issuer.
The most common way of proceeding is that the policy issuer will still offer coverage, but you will find that your premium payment will be higher. There is no right time for term life insurance, though it is popular with those in their 30s and 40s. Even with those higher payments, term life insurance still costs less than a permanent insurance alternative.
One reason you would choose a term life policy is to replace potentially lost income from years you still could have worked. Term life insurance policies taken out on this basis can provide a financial safety net. Your untimely passing may leave your family with debt that they need to manage. It could be a mortgage, student loans, or even keeping a business running.
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Universal Life Insurance Policy
Where a term life policy only offers insurance for a set period, a universal life policy will provide lifetime coverage. A universal life insurance policy is known as permanent life insurance. Another form of permanent life insurance is a whole life policy, which is covered below.
Unlike a whole life policy, a universal life policy offers some flexibility in your coverage. You can raise or lower your premium payments or coverage amount throughout your policy. As a universal life policy is permanent, you should expect to make higher premium payments, which may require some budgeting to make possible.
You can use a universal life policy as part of a flexible estate planning strategy to provide funds to selected beneficiaries. You may also find a universal life policy suitable for offering long-term income replacement. Some universal life insurance policies provide you with a death benefit as well as the chance to build cash value.
Variable Universal Life Policy
A variable universal life policy is similar to a standard universal life policy in almost every way. The difference is in how the cash value aspect gets handled. When a VUL invests your cash value amount, it does so into variable subaccounts. These accounts work in the same way as mutual funds.
There are a lot of subaccounts, which gives you, the policy owner, a choice of where to make your investment. This choice can allow you to make a higher profit than with the standard universal life policy, even after the insurance provider commission and fees are taken out. Instead of account investment, a universal life policy will pay a set amount of interest at a variable rate.
Whole Life Insurance Policy
As stated above and as the name suggests, a whole life policy is another type of permanent policy that provides coverage for your lifetime. As with a universal life policy, you should expect higher premium payments. With whole life insurance policies, your policy premium payments will be a fixed amount with no ability to reduce or increase them. A whole life policy also has a cash value, which can help you with some additional savings.
The best use of a whole life policy is for handing down an inheritance to your beneficiaries.
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Guaranteed Life Insurance
Guaranteed life insurance is not a type of insurance in itself but a type of policy that fits into the above brackets. Such a plan comes with no health requirements, whereas most policies have specific medical terms and conditions. It is rare for someone to be denied this type of policy, though age is still a factor; you can always be too young or too old.
For that reason, the most frequent users for guaranteed life insurance are the elderly who haven’t taken out a policy. The premium payments are usually higher due to the short term of the plan. However, an expensive policy can be better than no policy at all.
What Is Cash Value?
In the above breakdown, cash value gets mentioned several times. If you are new to life insurance policies, then this term may not mean much. However, to get the best deal on your policy, you should know the ins and outs of life insurance. Cash value comes with select permanent life insurance policies.
If it is part of your policy, you will find that your premium payments are higher when compared to a policy without cash value. The higher premium payments are split, with part of the amount going toward your death benefit and the other toward the savings portion of your policy, the cash value.
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What Can Cash Value Do for You?
You can consider a cash value policy as a form of investment. The money that goes into the savings portion of your policy builds interest through the years, sometimes more than other retirement funding solutions.
Unlike some other money-saving programs, you can borrow or withdraw money from your cash value. A policy loan typically comes with an interest rate that is better than personal loans issued by a bank.
The longer you commit to cash value, the more you will earn. Insurance companies use sophisticated systems to calculate your cash value amount. For the first few years, you will pay commission and fees instead of putting money into your savings.
You can borrow against that money as suggested or let it build as a retirement fund. It is best to allow it to grow for at least 20 years to have enough to supplement your retirement fund. The investment possibilities with a cash value policy are also enticing and can be an alternative to a 401k, IRA, etc.
If you prefer to keep things simple, you can opt to use your cash value to pay off your policy premiums. No matter the way you choose to take advantage of your cash value, you should note that your beneficiaries do not receive access to the funds.
Don’t Get Caught With an MEC
The initial idea behind the cash value insurance policy was to provide policyholders with tax-free financial growth. You have access to the savings portion of your policy at any time. However, the government has put a maximum limit on how much of your cash value is tax-free.
All cash-value policies get subjected to a seven-pay test. This test is used to assess whether your policy holds the required minimum level of insurance per the premiums paid. A policy that fails this test gets classified as a modified endowment contract.
Once a policy becomes an MEC, the cash value amount will become taxable when withdrawn. An MEC can still serve as a life insurance policy, as the assets are always passed on to your beneficiaries tax-free.
Even if an insurance policy does not turn into an MEC, it does not mean it is free of taxes. It will be free of income tax, but you may be required to cover estate taxes if the amount paid out is large enough.
Planning Ahead Is the Best Course of Action
Knowing about the three main types of insurance policies can give you an idea as to which plan is best suited to your needs. The most popular of the three is term life insurance. A term life policy offers flexibility when other policies cannot. However, just because it is a popular choice does not mean it is the right choice for you.
You need to consider how long you need the policy. Your financial situation will dictate the length of time that you need the coverage offered by a policy. If you have a mortgage or other debt to pay, you should factor in how long it will take to pay off.
As well as outstanding debts, you should also consider who depends on you financially. If you have young children, you may wish to have policy coverage that secures you until they are economically stable themselves.
Other Factors to Consider
The length of coverage you choose can also be determined by how much money you need. If you require a more substantial amount of life insurance proceeds but are working with a tight budget, you may opt for a shorter coverage term. Of course, your life expectancy will also factor into your decision.
As well as the period of coverage, you will also need to consider the amount you require. To reach this figure, you again need to consider your outstanding debts—not so much the length but how much you owe overall.
You should factor your mortgage, personal loans, student loans, and any other debt. As well as the loans you need to cover, you may also have other financial commitments to consider. Perhaps you want to leave some money behind for childcare and tuition fees. If you are without children or other dependents, you may want to provide a retirement fund or long-term care for your spouse.
Though it is not an easy thought, you should also consider your funeral expenses. A traditional funeral for a U.S. family will come with final costs between $7,000 and $10,000.
You should consider what you want your death benefit to cover. Doing so will help you come up with a final figure. Once you have that last figure and a better idea of how long you need coverage, you will be in a position to start the search for a policy.
Where Can I Find the Best Insurance Policies?
With so many insurance providers on the market, it can prove challenging to find an outstanding deal. You could opt to use an insurance broker. An insurance broker that specializes in life insurance has all the necessary knowledge to find you the best deal. They know all of the business terms, as well as what to look out for in the small print.
A broker can also help you assess what you need to get from a life insurance policy if you have not done that yourself. However, if you do not fancy paying someone, you can do the hard work yourself. Some of the best places to start looking for life insurance quotes include:
Northwestern Mutual
Northwestern Mutual is one of the best life insurance providers available to you. Of course, it is easy to say that, but when they are managing financial security for 4.5 million people, it must be true.
An important consideration when looking for an insurance provider to provide your policy is their financial security. It is easy to gauge an insurance company’s ability to payout on your policy by checking their financial strength rating. For Northwestern Mutual, that rating is A++.
Further credit to how well established they are comes from their position on the Fortune 500. Northwestern Mutual claims their long-running success comes from 160 years of customer-focused business practices. A company with strong financial standing, as well as excellent customer relations is vital when considering your insurance policy provider.
In terms of insurance products, Northwestern offers all three types of policies. You can find term, universal, and whole life policies through their insurance agents.
The Mutual part of the name is also worth noting. The customers partly own a mutual company. If you are a policyholder of Northwestern Mutual, you will receive dividends in return for your custom. Northwestern Mutual intends to pay out $5.6 million in dividends to its customers this year. 
MassMutual
Another mutual company worth your consideration is the Massachusetts Mutual Life Insurance Company. One hundred and sixty years in business should indicate to you that they know how to handle your policy.
If you need more reassurance, they also hold an A++ financial strength rating. If you prefer to do things online, then you may have trouble with this company, as a large number of their policies are offered strictly over the phone.
You can apply for the MassMutual Direct term insurance policy online, however. For further ease, MassMutual does allow their younger clientele to skip the customarily required medical exam.
MassMutual offers more than just life insurance policies. Their wide selection of financial services can help provide everything you need for secure financial planning. These services include investment planning and retirement funds.
Thinking about your life insurance policy is already stressful, so being able to reduce stress by putting your financial security in one place can be significant.
Guardian Life
The potential dividends from mutual companies make them great options to consider for your life insurance policy. Guardian Life Insurance has more than earned the trust of their customers by paying out dividends every year for the last 150 years.
To do this, they should have strong financial security, with their A++ financial strength rating serving as an indicator of such. Unlike MassMutual, you can receive a quote for your policy through their online platform. Although, your actual application must be put through by an insurance agent.
Guardian does offer a few policies and terms that make them stand out among their competitors. One policy to note is the Guardian Estateguard policy. This policy is a joint plan that can be taken out by a couple, making the premium payments the responsibility of both.
Both policyholders must pass on before the policy is paid out to the beneficiary. However, when one of the two people passes, the cash value will see an increase. Guardian Life can also offer a policy to those who are healthy but are living with HIV. You must meet specific requirements for a successful underwriting process. The underwriter will consider an individual’s age and whether they are free of any illnesses that accompany HIV.
Don’t Let Life Insurance Providers Take You for a Ride
When taking out a life insurance policy, you will find additional benefits available to you. These are known as riders. A rider can be beneficial, but because they come at an additional cost, you should ensure it is necessary.
One such rider to take note of is the waiver of premium rider. Choosing this rider means that future premiums get waived if you find yourself permanently disabled or if you lose your income due to injury or critical illness.
You do need to be younger than a specified age for that to take place. Losing a primary income can be crippling for a family. This rider allows you to avoid paying premiums you cannot afford while still holding policy protection.
With any rider, you should check the terms and conditions. One insurance provider’s idea of disability may be different from another’s. When you are ready to get back to work, you can pick up your premium payments once more.
No Surrender
As well as riders, you should also consider your policy’s surrender charges. You pay a surrender charge when you cancel your life insurance policy. The money from that charge is then used to keep your policy on the insurance provider’s books.
If you give enough notice of your cancellation, then you may find that you do not have to pay the fee. When you take out a life insurance policy or another type of investment, your initial premium payments are used to cover the commission of the insurance agent.
If you cancel your policy before the commission is paid off, you will have to pay surrender charges. The amount you pay will depend on when you put through your cancellation. Surrender charges can come into play after 30 days and can be chargeable up until 15 years. The actual amount of time varies per insurance company.
Your Life Insurance Policy Is an Investment
Ideally, it is better to avoid investments with surrender charges. Your life circumstances can change at a moment’s notice. Therefore, flexibility is always better than having to lock your money into a long term investment.
A life insurance policy is a long-term investment and will very rarely come without surrender fees. You will have to continue paying premiums, even if you go through circumstances that make paying your premiums difficult.
You should ensure that your policy outweighs the lack of flexibility. And if flexibility is vital, a term life insurance policy will be better for you than a permanent policy.
Are you ready to take out a life insurance policy? Which policy provider do you use for your life insurance?
