Key Terms to Remember
- Policyholder: The person that owns the insurance policy.
- Beneficiary: The person or party named by the owner of a life insurance policy to receive the policy benefit.
- Cash Value: The savings element of a permanent life insurance policy, which represents the policy owner’s interest in the policy.
- Premium: The money paid monthly or annually to keep a policy active (or “in-force”). If you stop paying premiums, the policy lapses.
- Death Benefit: Face-amount of a life insurance policy payable to its beneficiary on the death of the insured.
So, What is Life Insurance?
- Life insurance is a contract between you and an insurance company to provide coverage, in exchange for regular premium payments, to named beneficiaries after your death.
- If you (the policyholder) die while the policy is active, the insurer pays beneficiaries a tax-free sum of money – the death benefit.
- Purchasing a life insurance policy is a safety net that ensures your loved one’s future financial obligations are met, covering items such as funeral costs, outstanding debt, estate taxes, and everyday living expenses.
What type of life insurance do I need?
When you purchase a life insurance policy, you determine the amount of your life insurance policy and the type of policy you purchase. Keep in mind that a one-size-fits-all policy doesn’t exist. The type of life insurance policy that best suits you will depend on your unique needs.
There are many different types of life insurance policies but they all can be divided into two broad categories: term and permanent. This division depends on how long a policy type is in effect.
1. Term life insurance – A policy that provides financial coverage over a set period of time. (1-30 years). When you pay your premium, you’re just paying for the death benefit that goes to your beneficiaries in the event of your death. Since it offers a death benefit but no cash value, term life insurance is an inexpensive way to protect your beneficiaries for a specified period of time.
** Term life insurance proceeds can be used to replace lost potential income during working years. This may provide a safety net for your beneficiaries and can also help ensure the family’s financial goals will still be met—goals like paying off a mortgage, keeping a business running, and paying for college.
2. Permanent life insurance – A cash-value policy that provides financial coverage for the remainder of your life. Think of this type of policy as a combination of insurance and investing. Your premium payments are split between the death benefit and cash value. Over time, the death benefit shrinks and the cash value component grows until the policy consists entirely of the cash value. It is sometimes sold as an investment because of the cash value and you can draw out of it or borrow against the amount when you are still alive.
**Permanent life insurance may be ideal for those who have a lifetime need for insurance protection, prefer stable premiums over the life of the policy, want a policy that allows them to build tax-deferred values, and value the high degree of coverage the policy affords.
How much insurance do I need?
To find the right amount of coverage, it’s important to weigh your dependents’ current lifestyle and spending needs against their future sources of income and assets. Our advisors at Boyd Insurance & Investments can help you figure out how much you or your loved ones will need to be protected. Call us today at (941) 745-8300 to learn more!