The Basics of Life Insurance
Life insurance is a type of insurance that protects the policyholder’s loved ones in the event of their death. It involves a contract between the policyholder and an insurer, in which the insurer promises to pay out a lump sum of money upon the death of the policyholder. It is commonly used to provide a source of funds for final expenses, outstanding debt, and legacy planning.
The terms of the policy may vary depending on the insurer, but the basic idea is that a person pays a premium for the life of the insured, and the insurer promises to pay out a specified amount upon the death of the insured person. The amount of the payment can be fixed or based on a percentage of the sum assured (the face value of the policy).
Costs for Life Insurance
There are many factors that affect the cost of life insurance. Some of them are outside your control, like your age and health, while others can be managed by you to reduce the overall premium.
You can often lower the costs of your life insurance by taking steps to manage your risk, such as by avoiding smoking or excessive drinking, and by being physically active. You can also consider modifying your coverage with a rider, which can increase the payout or the total amount of coverage.
Benefits versus Tax Ramifications of Life Insurance
A life insurance policy is usually a form of estate planning and may need to be filed with the IRS. The premiums are not generally deductible against income tax or corporate tax, but some policies do attract the Life Assurance Premium Relief (LAPR) tax deduction.
Coverage Limitations and Suicide Clauses
In addition to life insurance’s benefits, many policies have restrictions regarding how the beneficiary can use the death benefit. For example, some companies won’t pay out if the policyholder dies by suicide within a certain period of time, and others will deny claims if they believe the deceased was engaged in high-risk activities at the time of death.
Riders and Exclusions
Most life insurance policies have riders, which allow the policyholder to change the terms of their plan in ways that are not directly related to the death benefit. For example, a person can add a death benefit rider that allows them to choose who should receive the death benefit in the event of their death. The rider also provides the insured with the option to add coverage for medical expenses, funeral costs, and other events that might not be covered by standard life insurance.
When choosing a rider, the policyholder should consult with an expert to determine the most appropriate rider for their situation and needs. The rider may be included in the base premium, or it may require an additional fee to activate.
If the policyholder has a child, a rider that allows the parent to name the child as the insured’s beneficiary is an option that can provide peace of mind for both parents and their children. Similarly, if the policyholder is an elderly person, a rider that allows them to name a caretaker or a family member as their beneficiary can help ensure that they will be taken care of in their own home after their death.