Life insurance is important protection for those who have others depending on their paycheck. In the case of an unforeseen death, your life insurance policy should provide your dependents with ongoing income to replace yours, as well as to accommodate expenses such as funeral or other built up medical costs. Life insurance can also offer reduced income and transfer tax liability, and can be a ready source of cash at times when its likely needed most. Additionally, many high-net worth individuals use life insurance policies to obtain coverage to pay estate taxes so their heirs are not burdened with these expenses. Often, families who haven’t prepared for hefty estate taxes are forced to liquidate assets at unfavorable prices to pay for them.
Term life or cash value insurance?
Term life is often the favored type of life insurance because of its simplicity. With term life insurance, you pay the premiums and are then covered for the term you choose. Conversely, cash value plans are often favored for their tax-sheltered earnings, similar to employer-sponsored retirement plans or IRAs. Cash value plans allow you to invest your premium payments in various investment options.
Annuities are often referred to as “upside-down insurance policies.” While life insurance policies require you to pay small, regular amounts over time to receive a large lump sum in the future, annuities do just the opposite. Generally annuities pay a larger amount in one lump sum in order to receive regular payments over an extended period of time. Payments to you can be arranged to start immediately or at some point in the future.
There are many different types of annuities. For example, with deferred annuities, purchase payments are made in one large sum, and installment payments are set to begin sometime in the future. This is different from an immediate annuity, which is similarly bought in one lump sum, but payments are set to begin immediately. Additionally, there are fixed annuities, in which buyers are guaranteed to receive payments throughout either their lifetime or some fixed period of time. The benefits and riders provided by the insurance company are only as good or reliable as the insurance company providing those benefits and riders. Variable annuity guarantees are all subject to the claims-paying ability of the insurance company issuing the annuity. The amount of these payments is based on many different factors and determined at the time of purchase. Whereas, a variable annuity is one in which the insurer invests premiums in a portfolio of securities. The value of the annuity, and likewise the payments, depends on the performance of the portfolio.
Long-term Care Insurance
Long-term care insurance refers to medical or personal care services you may need should you someday become unable to take care of yourself. Consider that the average nursing home costs per year exceed the costs of a four-year state university education. While it may be difficult to think about, an accident or illness could cause you to need long-term care at any age. While Medicare and Medicaid pay for some long-term care, there are severe restrictions on what they pay for. For example, Medicaid does not cover home care. A long-term care insurance plan ensures you receive adequate care when you need it.
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