Choosing the right Life Insurance policy
Life insurance helps you accumulate extra income for retirement and allows you to adjust your premium according to your budget. You can choose to pay the minimum required to keep the policy working for you, or you can contribute more, depending on your financial situation.
At a very high level, here’s how it works: A portion of your premium accrues interest over time. You can access the cash value you’ve built up in your policy for anything you want, but many people use it as a cushion for retirement, savings for college or a rainy day fund in case of an emergency.
“The most important thing to remember when choosing a life insurance policy is to pick a product that complements your retirement strategy.”
Here’s a quick glossary of words insurance companies use when describing policies:
- Term: This is essentially the period of time for which you’re covered with life insurance. If you purchase a 30-year policy, for example, and pass away within that time frame, the insurance company will pay your beneficiary a lump sum. If you pass away on the first day of year 31, you are no longer covered.
- Premium: This is what you pay an insurance company, either monthly or annually, to maintain coverage.
- Beneficiary: This is the person who receives money from your insurance company if you pass away.
- Death benefit: Contrary to how it sounds, this is actually a good thing. Your death benefit is sometimes referred to as your “face amount.” At a high level, it’s the amount of money the insurance company will pay your beneficiary if you die. If you purchased a 30-year, $250,000 term life insurance policy, your death benefit, or face amount, is $250,000.
- Cash value: This is what insurance companies call the money you can accrue and eventually withdraw from your life insurance policy. Some policies, such as whole life and universal life, help you build some extra income for retirement. … More on that later.
- Rider: If your life insurance policy is a kitchen mixer, riders are the attachments that help you make pasta or curly fries. They are essentially add-ons that allow you to access your death benefit/face amount for other purposes, such as long-term care.
This article is an extract from the original on CNBC