Life insurance is a vital part of your long-term financial plan, but many people don’t want to talk about it. The purpose is simple. If you pass away, it can replace your income. But it can be hard to find the right policy with so many options available. The good news is that it doesn’t have to be this way. Knowing about the different kinds of insurance can help you make an informed decision.
Modified Endowment Contract
If you want to leverage the assets you want to leave to your heirs, it’s worth researching what a modified endowment contract (MEC) is. If you have assets you might not use during your life but want to set aside for your heirs, you can convert them into a MEC. This tool lets you leave more to your heirs tax-free. To use it correctly and avoid unnecessary taxes, it’s important to understand the rules governing the distribution and taxation of the vehicles.
Term Life Insurance
This is an affordable and simple kind of insurance. The goal of getting a term policy is to pay certain family members if you pass away. That might include children or a spouse. But this policy isn’t worth anything unless you pass away during its term. Think of a term policy like car insurance. You pay the premium every month, and if you have a wreck, the claim gets paid. But if your car doesn’t get in an accident, you won’t get a refund on the premiums. With a term policy, the company takes on the financial risk of you dying during the time it is active. You might have one that lasts from 10 to 30 years. So, if you have a 15-year policy offering $600,000 in coverage, you’ll pay the company for 15 years. If you pass away before the term is up, the company will give your family a $600,000 check, which is the death benefit.
Permanent Life Insurance
This type of policy offers the same benefits that life insurance does and tries to be a vehicle of investment. It has a cash value; which you can think of as a type of savings account that you deposit money each month. You can borrow against or access this money, and the longer you have had it, the more value it will have. Unlike term policies, permanent life insurance doesn’t expire. It will continue until you stop paying the premium or pass away.
When you purchase whole life, you’re locking the premium in for as long as you keep it. Each month, you’ll pay the premium to the company, and part of that will go to the cash value, growing over the policy’s life. The longer you hold onto that policy, the more value it will develop. Think of it as a savings account that pays your beneficiaries if something happens to you. However, the cash value might not grow as quickly as if you were to put that amount in a mutual fund.