The Basics of Life Insurance
At some point in our lives we all need to consider the unavoidable — that death is a part of life, and it is inevitable. On a long enough time line, every human being will shuffle off this mortal coil. It is a truth which shouldn’t be overlooked.
In preparation for that inevitable day, Life Insurance is a financial policy that stands apart from every other kind of insurance. The reason for this is that if you have a health insurance policy, and never get sick or never have to visit the hospital, then you’ll never have need for the benefits, or if you have a car insurance policy and never get in an accident, then you’ll never need to file any claim there either.
Life insurance is a contract between an insurer and a policyholder, which is a form of financial protection for named beneficiaries of the insured person in case of their death. And with Life Insurance, 100 percent of policy holders will eventually qualify for a payout of benefits.
In 2021, 52 percent of Americans owned life insurance. In 2019, 37 percent of policyholders said that they owned life insurance to replace income, whereas 30 percent said it was to cover burial or final expenses.
There are many types of Life Insurance policies available. But the two main types of life insurance are Term life and Whole life. Term policies provide life insurance protection for a specific term, in other words a specific period of time, and if you were to pass away during the cover-age period, (usually 10, 20 or 30 years) your beneficiary receives the policy's death benefit. This is commonly a lower cost option, but it carries with it a specified time period. After the time period expires, you have the option to renew, but normally at a higher cost.
Whole life can carry higher premiums but will last your entire life — and just as the name implies, whole life insurance is designed to protect you for your whole life. Premiums are quite a bit more expensive than term life policies, not only to compensate for the higher mortality risk in your later years, but because whole life policies accumulate cash value over time.
Many different types of cash value life insurance are available, and with so many types of life insurance available, you're sure to find a policy that meets your needs and your budget. Obviously one should consult their financial advisor to get more information and make a decision based on what’s best for you and your financial goals, your family’s needs, etc.
Life insurance policies offer several tax advantages and in most cases, the money the beneficiary receives is free of income tax.
Permanent life (cash value) policies offer two additional tax benefits:
* Tax-free buildup. Inside the cash value, investment income might be generated — and as long as that cash stays inside the policy, income usually won’t be subject to income tax.
* Tax-free payouts. Policy withdrawals are not taxable, up to the total amount paid in premi-ums. In addition, loans also might not be taxable, depending on the amount or frequency. How-ever, taking withdrawals and loans may reduce the policy’s cash value and death benefit. If you take excessive loans and withdrawals, the policy can lapse and trigger an income tax obligation. Therefore, a cash value life insurance may be a source of funds, tax-free, but distributions should be carefully considered.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Asso-ciates, Inc. This material does not constitute an offer or recommendation to buy or sell securi-ties and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.