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Clarity on Life Insurance

Life insurance. What is it? What types are there? How can it help me? Life insurance is one of the major pillars of personal finance, according to Forbes Magazine. It is nearly vital for most individuals, and while it can be applicable universally, most still are unclear of its benefits.

What Is It?

Life insurance is a contract between an individual and a life insurance company to transfer the risk of death to the insurer in exchange for a specified amount of premium. An insurance premium is the amount of money that an individual or business must pay for an insurance policy. The official definition of life insurance is “insurance that pays out a sum of money either on the death of the insured person or after a set period.” There are three main components of life insurance contracts: a death benefit, a premium payment, and a cash value account (this is applicable only for permanent life insurance plans).

How Can It Help Me?

It will provide financial stability to a spouse, child, or any other dependents. It is a risk management tool that, in certain cases, can be very affordable. Furthermore, it helps maintain a standard of living for your dependents or any survivors.

Types of Life Insurance

The topic of life insurance can be a complicated and confusing one that many individuals don’t understand. To break it down, there are two different types of life insurance, term life insurance and permanent life insurance.

Term: Exists for a set for a period of time (e.g., 10 years, 20 years, 30 years, etc.)

–       Temporary in coverage

–       Similar to “renting an apartment”

–       No equity

–       Lower cash disbursement

Permanent: Includes whole life insurance, universal life Insurance (UL), variable universal life insurance (VUL), equity-indexed universal life insurance (EIUL).

–       Lasts an entire lifetime

–       Similar to “owning a home”

–       Builds equity

–       Higher cash disbursement

When considering the purchase of life Insurance, many economists and financial advisors suggest that you own 8-10 times your annual income.

Situational Examples

1.     If an individual’s income is $100,000 annually, and they have no children, their life insurance policy is suggested to be around $800,000.

2.     If an individual has two children, has some student loan debt, and has a mortgage, that individual should have $1,000,000 of life insurance.

Disclaimer: These are simply examples and we are not providing advice to any individual.

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