Life Insurance, what is it, what’s the myth, what does it do?
What is Life Insurance? Life insurance is a contract between the owner (you) and an insurance company. Just as most contracts we know of, it has its "terms" and "conditions." Most importantly, a company provides a lump-sum payment to a beneficiary in exchange for premiums paid by the owner(you).
There are two types of life insurance, term life, and whole life.
Term-life Insurance: Usually, has increasing premiums as your age increases and covers you for some time; in most cases, for a specific purpose and premiums are usually cheap. Ex. Term-Life Insurance can be compared to auto-insurance; in most cases, we purchase it to protect an asset hoping we never have to use the benefit. Whole-Life Insurance: Covers the owner or beneficiary for their whole life. Premiums on this contract are usually flat and do not increase throughout the contract; however, they may be considered expensive. Ex. Whole-Life insurance can be compared to health insurance. Typically, everyone gets routine check-ups, teeth cleaning, etc., it is guaranteed to be used. Like whole life insurance, no matter how healthy you may be, the premiums in most cases are still considered expensive.
Yes, there are different forms and variations of the two; IUL, VUL, convertible term, hybrid models but in a nutshell, it all boils down to two questions:
1. How long am I cover before my premium increases?
2. Is my premium a flat rate, or does it fluctuant?
If you have an increasing premium (even if it may cover you over a long period), it is a term-life contract.
If you have a flat premium over a long time, you have a whole-life contract in most cases.
Myths of life insurance
1. Life Insurance is Death Protection Only
Permanent life insurance not only provides death protection but also offers cash value growth potential that can benefit you throughout your lifetime. The cash value in a life insurance policy increases on a tax-deferred basis and, in most cases, can be withdrawn income-tax-free (2172249PH_Jul20)
2. Life Insurance is Only for Families with Children
Since many people only know about the death benefits of permanent life insurance, a common belief is that it doesn't make sense to own without a spouse, children, or other dependents to provide for. But, the truth is, the living benefits of permanent life insurance can be used to meet lifetime financial goals regardless of your life stage. There is an advantage to buying a permanent policy when you’re younger and healthier. This helps lock-in better rates while providing more time to build cash value for whatever the future may hold. (2172249PH_Jul20)
3. Once You Buy Insurance, You’re All Set
As you go through different stages of life, your needs often change. Getting married, having children, buying a house, starting a business, or even changing employment – are all times to reassess your life insurance. Many people assume they are all set once they have life insurance in place. However, life changes can result in the need for a different level or type of insurance to ensure you have a lifetime of protection and possibilities through the additional living benefits that life insurance can provide. (2172249PH_Jul20)
So there we have it. Life insurance is a common need for financial planning. It can provide protection against a multitude of unforeseen financial barriers. Before making any significant financial decision, it is always suggested that you consult with a financial professional, one who has your best interest at heart and understandings your short-term and long-term goals.
Penn Mutual Company (2018). Dispelling the Myths of Permanent Life Insurance
2. McMaken (2020). 4 Types of Insurance Everyone Needs