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Types of Life Insurance. A life insurance policy is a contract with an insurance company. For a premium, the insurance company agrees to pay money, ironically called a death benefit , to the person designated by the policy holder when the insured dies. Single people with no spouse or children often opt against life insurance, but once those kids arrive on the scene and the financial dependents increase, life insurance is an important tool for protecting the wealth of the family left behind . There are different varieties of life insurance policies. To be financially literate you should know a bit about them: Term Life Insurance. This is a common type of life insurance designed to provide financial protection for a specific period of time , like 20 or 30 years, hence the name “term”. It’s purchased during the insured’s income earning years . The insured pays premiums monthly, quarterly, or annually until the expiration of the policy term. Premiums increase as the insured gets older. For example, if an employee buys a 30 year term life insurance policy at age 30, the premiums will be higher at age 55
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Mission: Impossibly Dangerous
Prior to going into space, the Apollo 11 astronauts couldn’t get life insurance. Too risky! Instead, they created their own life insurance by autographing hundreds of photos that could be sold by their families in case they didn’t make it back to earth alive. Today an Apollo 11 insurance autograph can sell for up to $30,000. Source: npr.org
because, statistically, there is a greater risk of death at that age. The purpose of term life insurance is to provide a replacement source of income for the insured’s family in the event the insured dies during the term . For example, someone making $80,000 per year might have a $700,000 policy. The goal is to provide enough money to enable the family to pay funeral costs, pay the mortgage and other debts, and maintain their lifestyle and financial goals. Whole Life Insurance. Whole life insurance provides coverage for the insured’s whole lifetime , hence the name “whole life.” Unlike term life insurance, whole life insurance is permanent and does not expire. Whole life premiums are usually higher than term life premiums. However, whole life premiums are fixed — they will not change over the insured’s lifetime . Whole life insurance has another feature that makes it very different from term life: When you pay your premium, part of the money goes toward the insurance costs, while the rest goes towards building cash value in the policy . That means the policy functions kind of like a savings account where earnings accumulate tax-deferred over time. The longer you pay your premiums, the more cash value you have in the policy. You can even borrow from the insurance policy. When the insured dies, the beneficiary of the policy, usually the surviving spouse, gets the death benefits of the policy plus any accumulated cash. Universal Life Insurance. This is a type of permanent life insurance designed to provide lifetime coverage. Unlike whole life insurance, universal life insurance policies are flexible . The insured can raise or lower their premium or death benefit amounts throughout their lifetime. Many people like this flexibility because their needs change over the years. For example, a 75 year old widow with a substantial net worth and a mortgage that’s paid off may not need a life insurance policy with a large death benefit, particularly if her children are grown and successful in their own right. PRODUCT PREVIEW
Chapter 15 | Protect What You’ve Earned 294
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