There may be no greater risk to your family’s financial stability than the risk of your unexpected death. If you have a spouse, children or other dependents, they likely rely on you for financial support. If you were to pass away, they may experience financial hardship. Life insurance can be an effective way to manage this risk.
Life insurance is based on a fairly straightforward concept. You pay regular premiums to a life insurance company, and, in return, the company guarantees a lump-sum payment to your beneficiaries upon your death. Your premium amount is based on your death benefit amount, age, health and other factors at the time you purchase the policy.
There are many different types of life insurance available, but most fall into one of two groups: term and permanent. As the names imply, term coverage lasts for a specific period of time, while permanent coverage is in place as long as you live, assuming you pay all required premiums.
Term insurance is popular because it is usually affordable relative to comparable permanent policies. While term life insurance is often very straightforward, there are a few different types available. Below are descriptions of three of the most common types, along with tips on how they can help you protect your family:
Traditional term insurance is a relatively simple and easy-to-understand tool. You select a death benefit amount and a term. For example, you might select a term of 10, 20 or even 30 years. Your death benefit stays level for that period of time, assuming you stay current with your premium payments.
The coverage expires at the end of the term. Some policies offer the opportunity to renew the coverage, although the premium may be increased based on your older age. You may also have the opportunity to convert to a permanent policy, but the premium will likely change to reflect your age and the different type of policy.
Level term policies are cost-effective strategies when you have a temporary need. For example, many new parents choose term policies to provide coverage while there are minor children in the home. The term policy expires after the children are grown, at which point there may no longer be a sizable life insurance need.
A decreasing term policy is similar to a level term policy but with one important distinction—the death benefit decreases over time. Every year the benefit adjusts down until the end of the policy term, at which point the death benefit is zero. The premium on a decreasing term policy is often lower than that on a traditional term policy.
Decreasing term policies are usually used only for very specific purposes. One common example is to cover an outstanding debt. For instance, your mortgage lender may require you to own sufficient coverage for your family to pay off the loan if you pass away. A decreasing term policy could be an appropriate choice because the death benefit will decrease over time along with the mortgage balance.
Just as there are policies in which the death benefit decreases over time, there are also policies in which the benefit increases. Known as increasing term, these policies usually include cost-of-living adjustments to increase your death benefit along with inflation or some other variable.
Increasing term policies are effective strategies to keep up with a rising coverage need. For instance, you may buy a policy when you have a child and choose an increasing policy because you anticipate having more kids or more expenses to cover in the future.
Ready to develop your life insurance protection plan? Let’s talk about it. Contact us today at Grand Canyon Planning Associates. We can help you analyze your needs and create a strategy. Let’s connect soon and start the conversation.
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