Life insurance is a crucial financial tool that provides a safety net for your loved ones in case the unexpected happens. Unfortunately, too many people overlook or underestimate the importance of life insurance, leaving their families vulnerable to financial hardship should the worst happen to them.
No one enjoys thinking about these scenarios. However, understanding the benefits of life insurance and why it's essential to have adequate coverage is critical. Whether you're a young adult just starting out or a seasoned professional planning for retirement, understanding the importance of life insurance can help you make informed decisions about your financial future and protect the ones you love.
What Is Life Insurance?
Life insurance is a contract made between you and your insurance company. Insurance holders pay premiums in regular intervals — usually monthly — so that if the insured person dies while the policy term is in effect, a beneficiary will receive money in the form of a death benefit. This money can be used for a funeral and burial, living expenses, education, or whatever the beneficiary wishes.
Think of life insurance as a protection plan for your family. If you die unexpectedly, your spouse, children or other dependents won’t experience as great a financial burden from the loss of your income and other contributions to the family that would need to be replaced to maintain the same standard of living. Even if you’re not the primary financial contributor in the relationship, your loss can still have a massive financial impact.
What Kinds of Life Insurance Are There?
There are several types of life insurance, and each has different features, benefits and costs.
Term Life Insurance
The importance of term life insurance is that it gives policyholders a specific time period for coverage at a low price. Term coverage is typically the most affordable type of life insurance and can be an excellent choice if you are still in your prime earning years and your family relies on your income. Generally, term policies come in lengths of 1, 5, 10, 15, 20, 25, or 30 years, and the coverage can be as little as a few thousand dollars to several million dollars.
The benefits of term life insurance are that it's comparatively inexpensive and often can be renewed. However, similar to your car and home owners’ insurance, if you don’t have a claim the only benefit you get from your premiums is the peace of mind knowing you are covered during the term of the policy. Of course, with life insurance, a claim would be your death so most people are okay outliving their policies and not needing to have the death benefit paid to their beneficiaries.
Remember that even though your premium payments may never result in benefits paid to your loved ones, the importance of term life insurance is to protect your family from financial burden in the unlikely event of your unexpected death.
Whole Life Insurance
With whole life, there is no expiration date. The importance of whole life insurance is that it will cover you for your entire life and it can grow a cash value, which the policy holder owns even if the policy is canceled. Policyholders may be able to borrow from this cash value at favorable rates, though that does reduce the cash value and death benefit, and it can create tax liabilities.
Still, this type of life insurance is popular because the premiums don’t change and there’s a set rate of return.
Benefits of whole life insurance:
- Stable and unchanging for the life of the policy
- The policy is for life
- Can be borrowed against and repayment is to yourself
Costs of whole life insurance:
For policyholders, the importance of whole life insurance is that it is permanent coverage but it also allows them to keep the value of their premium payments stored in cash value over time earning interest. So whole life coverage is more expensive than term coverage, because the long-term value is greater.
Universal Life Insurance
Think of universal life insurance as similar to whole life but with lower (and sometimes no) cash value. The payment schedules are generally more strict, too, with a single missed payment possibly resulting in a loss of benefits.
Universal life insurance will never expire as long as policyholders pay, and there’s flexibility in tweaking premium payment amounts and death benefit values.
Benefits of universal life insurance:
- Generally less expensive than a traditional whole life policy
- Extra flexibility
Costs of universal life insurance:
- The payment schedule is strict
- Missing payments can result in lost death benefit
- Little to no cash value accumulation
Universal life insurance also has several subtypes, such as guaranteed universal, where premiums never change and the death benefits are guaranteed and indexed universal, which relies on stock market indexes for the cash value.
What Type of Life Insurance Is Best for Military Members?
Members of the armed forces have the option of Servicemembers Group Life Insurance (SGLI), but many find that it doesn’t provide quite enough coverage. This is why many military members choose to supplement their SGLI coverage for policies such as AAFMAA Simple Term. We also offer several policies based on individual needs. For example, we recently introduced our new life insurance policy, BeyondBasic®, which is a perfect life insurance entry point for those who are just starting their military career.
Our Level Term I life insurance, on the other hand, is a good option if you’re considering retiring from the military. This policy can take care of you and your family throughout your military career and after, providing $10,000 of coverage for dependents under 21 and up to $800,000 in death benefits. This level of coverage is available regardless of your rank or deployment status.
What If I Need to Relocate?
As an AAFMAA Member, you can take advantage of your own a Digital Vault for secure document storage, with 24/7 access from anywhere through our Member Center. Moreover, your Membership means that your entire family is eligible for our membership benefits, including life insurance coverage for dependents and our hallmark Survivor Assistance Services. No matter where you are, we stand ready to provide the support you require.
What Other Services Does AAFMAA Provide?
Our Member Benefits team can guide you with information about VA disability claims and benefits, military and government benefits information, and military transition readiness, including active-duty income replacement. In addition to life insurance coverage from one of our many policies tailored exclusively to the needs of the military community, Members have access to articles and webinars on important issues affecting the military and Veteran community, a complementary AUSA membership, and our partnership with A Place for Mom, as well as many other military-affiliated service organizations.
Trust AAFMAA to Cover You and Your Family
Protect your loved ones with life insurance that meets the needs of your unique military lifestyle. AAFMAA, the American Armed Forces Mutual Aid Association, proudly serves the military with advice and planning as well as insurance, investment management, mortgages, and more.
Contact us today to learn more about our life insurance offerings and Membership benefits.
This article was originally published March 16, 2015.