Different Life Insurance Scenarios

Whether it’s for our vehicle, our home or our health, most of us have some type of insurance. Many states require an individual have car insurance and most employers offer health insurance. You are required to carry home owners insurance if you own a home and many people that do not own a home have renters insurance.

It is easy to understand why we need these types of insurance, however there is another type of insurance that is often overlooked;  life insurance. Life insurance should not be overlooked because it pays money to your beneficiaries when you die, which can be very beneficial in many different situations. Read on to learn more about protecting your assets after your death.

How Life Insurance Works

How life insurance works is actually very simple. A person who has life insurance makes payments, referred to as premiums, so that a sum of money will be paid to their loved ones upon their death. If you are looking to purchase a life insurance plan then there are a few things that you need to be aware of first.

Different Types Of Life Insurance Policies

Even though there are many types of policies out there to consider, these policies mainly fall into three categories of functions. You will need to determine which category you will need in order to determine which policy may be best for you. The three main functions are for estate conservation, protection and long term savings. Each category has different qualifications, costs and benefits.

A large number of people purchase life insurance for the simple reason that they want to provide for loved ones in the event of their death. The life insurance payout can be used to pay final expenses, medical bills, any existing debt and provide money for the family in place of the insured’s income.

If you fall into this category, term life insurance may be the best type of insurance for you. This is a relatively simple plan. The policy will be active for a specific amount of time, or term. You will pay premiums during this tem and there will only a be payout of a death benefit if the death is while the policy is active.

Many people view life insurance as a way to have long term savings. If long term savings is your goal a cash value plan is one you need to consider. With a cash value plan, your beneficiaries receive a payment upon your death based on the full amount of coverage, not the cash value of the plan.

One thing to be aware of is that the value of these types of plans are tied to how the underlying investment of the funds perform. It also will depend on how the investment is structured.

A benefit to consider is that having a portion invested often allows the policy holder to be able to borrow against the accumulated cash value of the policy. This means that if the policy holder needs cash for bills, a college education, or because of a job loss, they can borrow a portion of the cash value and not have to pay it back.

There may be fees associated with borrowing from the policy, and any money borrowed will decrease the death benefit, so be careful to know the specifics and rules that you need to follow.

Many people use life insurance as an estate planning tool as well. If you have a sizable estate to pass on, there are policies that will allow the beneficiaries to receive the benefits without having to pay inheritance tax, which can diminish a sizable amount of the estate. This type of policy covers two lives on one the policy and is payable only after the death of the second person.