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“Life insurance with premium return”, what is it? Before we answer this question, let’s have a look at what insurance premium is actually and how is it calculated?

What is Insurance Premium?

Insurance Premium is just a decorative word used for the cost that you pay for the insurance policy. In simple words, the insurance premium is the cost of your insurance policy.

This payment can be monthly, quarterly, bi-annually or annually. Some insurance companies also require you to pay in a lump sum. Insurance companies require a lump sum only when you had your insurance policy canceled for non-payment in the past.

You must pay the premium on time to keep your insurance policy valid. If you fail to pay premiums on time, your insurance policy is canceled automatically.

How is Insurance Premium Calculated?

Well, an insurance premium is not a straight forward fixed payment. It varies due to many factors like your age, personal information, zip code, the type of coverage you want or medical history(in case of health insurance), etc.

Other risk factors (for example, if your job is risky) are also considered while calculating the insurance premium.

Following factors are considered generally while calculating insurance premiums:

  1. Age:
    Age is the basic factor for insurance premium calculation. The more age you have, the more expensive your premium will be. It’s because, at a younger age, you’re supposed to get less medical services (in case of health insurance). But in the case of auto insurance, premiums can be expensive even at a younger age, because teenage drivers are still building their driving experience.
  2. Type of Coverage:
    Premium’s cost is also affected by the type of coverage you want. The more expensive coverage you want, the more expensive premium will be.
    Personal Information:
    Your personal information is also considered in the premium’s cost calculation. This information may include driving record, medical history, insurance policy’s claims history, marital status, hobbies, and lifestyle, etc.

Life Insurance With Premium Return

Finally here is the answer to your question!

Life Insurance with Premium Return or Return of Premium (ROP) insurance works the same way as traditional term life insurance, the only difference is that all the premiums, that you’ve been paying throughout the policy’s period, are paid back. But this type of life insurance works only for a certain period of time, usually 12 years. This is the best option if you’re interested in savings for the future.

But premiums for this type of life insurance are a little more expensive because your premiums are paid back at the end of your policy. With this type of life insurance, you can designate more than one beneficiaries. If your primary beneficiary dies before, the payment goes to your secondary beneficiary.

Also check out:  6 Common Types of Life Insurance

Benefits of Life Insurance with Premium Return

  1. You get a full refund at the end of your policy (if the policyholder doesn’t die during the period of the insurance policy).
  2. Best choice if you want to save money for the future.
  3. Financial security for your loved one and children.
  4. Multiple options to pay premiums like monthly, quarterly, biannually or annually.
  5. The amount you get back is not taxable.

Disadvantages:

  1. It’s much more expensive than traditional life insurance.
  2. You don’t earn any interest on your money.
  3. You must pay premiums regularly to keep your policy valid and to get cashback.
  4. If you cancel the policy before it ends, you don’t get any money back. But some companies provide a portion of the premium back feature.
  5. You don’t pay just the premium, you’ll be paying more than that (depending upon the type of policy you’ve)

Bottom Life:

Life Insurance with Premium Return is the best choice to save money for the future, but it is much more expensive than traditional life insurance. You get a full refund of your premiums if you outlive your policy, and the amount you get back is not taxable.

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Is Term Life Insurance Worth it? Before we dive into the term life insurance details, you should know why life insurance is important? Life insurance is a great investment for your loved ones when you die and it’s financial protection for them. When you die, your family or beneficiaries get the non-taxable amount.

For tax details check this out: Are Life Insurance Payouts Taxable?

What Does Term Life Insurance Mean?

Term life insurance, also known as term assurance or temporary insurance, is a type of life insurance that provides coverage for a specific period of time and at a fixed rate of payments. Basically, term life insurance works for a limited period of time or term.

After this term expires, the policyholder is no longer guaranteed the previous rate of premiums. Now the policyholder can either renew the policy or let it expire.

Generally, when you’re buying term life insurance, you need to have a close look at these three things:

  1. Initial or Face amount.
  2. Length of coverage.
  3. The premium.

How Does Term Life Insurance Work?

As the name suggests, term life insurance is effective for a specific period of time or term. These terms can be 5-year terms, 10-year term, etc.

When you buy a term life insurance, the insurer promises to pay a certain death benefit(amount) to the beneficiaries of your policy. The amount is paid only if you die during the policy’s term.

You pay monthly or yearly premiums for your selected term. Usually, term life insurance premiums cost less than whole life insurance premiums.

If you die within the policy’s term, the beneficiary would file a claim against the death benefit. After insurer’s detailed investigation process, the beneficiary gets paid in a lum-sum or annual payments.

What Does Term Life Insurance Cover?

As term life insurance covers you for a specific period of time. If you die within policy’s term, the following things are covered by your policy,

  1. End of Life Expenses: Including funeral and burial expenses.
  2. Day To Day Bills: Like utility bills, clothes, kids fee, etc.
  3. Mortgage: Term life insurance payouts can be used to pay the mortgage.

What Happens When Term Life Insurance Expires?

Here is the answer. As term life insurance works for only a specified period of time, so there comes a time when you outlay your policy. When term life insurance expires, you can keep your policy, convert it to permanent life insurance or let it expire.

1. Keep Your Policy

When your term life insurance policy comes to an end, you can keep your policy but this time you might be paying a higher premium amount due to age and health condition factors. If you’re in good health, you can also shop around and buy new term life insurance from another company. But remember, the age factor still plays its role in the premium cost calculation.

2. Convert To Permanent Life Insurance

You also have the option to convert your policy to permanent life insurance, if you want to remain insured for the whole life. Although permanent life insurance premiums cost higher than term assurance, it has a lot of other benefits as well. For example, it makes sure that the death benefit doesn’t expire for your loved ones or beneficiaries.

Types of Term Life Insurance

1. Level Term Life Insurance

Level term insurance is the most simple and basic type of term life insurance where the premium you pay for the policy remains the same during the specified period of time or during the term. It means the premiums you pay each year neither increases nor decreases during the term. This thing makes term life insurance an ideal choice for those who want to plan their budget ahead of time. Common level terms are 5-year term, 10-year term, 15-year term, 20-year term, and 30-year term.

2. Convertible or Renewable Term Life Insurance

In this type of term life insurance, the policyholder can convert the policy into another policy like permanent life insurance. If you convert your insurance policy during the term period, you don’t need to take another paramedical exam.

But remember, when you convert your policy into permanent life insurance, you will be paying a higher insurance premium each year. This type of insurance is ideal for those who want to remain insured/eligible for the whole life.

3. Decreasing Term Life Insurance

In this type of term life insurance, the death benefit keeps on decreasing each year while the amount of premium usually remains the same. If you die before the term expires, the beneficiaries get the amount left in your policy.

In term life insurance, the premium amount is usually less than term life insurance premiums. This type of insurance covers specific expenses(such as a mortgage or personal loan) for the death beneficiary.

Decreasing term life insurance makes sure that your debts are not passed onto your loved ones.

4. Increasing Term Life Insurance

Usually, death benefits remain the same in almost all types of life insurance. But in increasing term life insurance, death benefits increase each year. The premiums you pay each year also increase in this type of term life insurance.

These death benefits increase to a certain limit within 2% to 10%. If you’re thinking about long-term protection, then this type of insurance is not a good option because, at some point, the premiums may go higher than the death benefits.

Is term life insurance worth it?

Some people think term life insurance is just a waste of money because it ends after a certain period of time. If you don’t die within this time, the policy simply ends without paying out. Term life insurance policy is the best choice for you if

  1. Someone relies on you.
  2. You have debts.
  3. You want to be insured but within your budget (Term life insurance premiums cost less than permanent life insurance premiums).

Bottom Lines

Term life insurance is a good choice as it provides a large cover for small premiums. If you buy term insurance at a younger age, you would get more benefits. Because of age and health conditions are considered while calculating your premium. So, at a younger age, your premium is less than older age.

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Are life insurance payouts taxable? According to IRS, in general, life insurance payouts are not taxable because insurance payouts are not considered as gross income. It means that the death beneficiaries of your insurance policy will get the full amount. But there are some scenarios when tax is applied to insurance payouts. When it comes to taxation it gets complicated.

So, we do recommend that you contact tax professionals to get detailed information about your personal taxation.

Life insurance is a good investment for your family and children, as it provides financial security when the sole source of income has gone. Because no one wants to leave their family unprepared.

Also, check out: 6 Common Types of Insurance You Should Know About

Let’s explore the details of “When is Life Insurance Tax Free and When it’s not?

Life insurance beneficiary tax implications are linked to how beneficiaries decide to get the payouts. Whether immediate payouts or regular income or installments.

Two Major Types of Life Insurance Payouts Taxation

There are two main scenarios when tax is applied to life insurance payouts.

1) Interest Income

If you’re earning interest on your income, then interest is taxable. There are times when a policyholder can hold the payout for some time and in that period of time, interest is earned. It means when the beneficiary receives payout after a period of interest accumulation rather than the immediate payout, In this case, the death beneficiary has to pay taxes on this interest.

Sometimes, beneficiaries choose for regular income (incremental payouts). In this case, delayed payouts earn interest which is taxable.

For example, if the death benefit is $500,000 and it earned a 10% interest in the last year, then the beneficiary has to pay a $50,000 tax amount.

2) Estate Tax

You might have this question in your mind “Are Life Insurance Proceeds Taxable To The Estate?”, let me try to answer this question.

If the beneficiary dies before getting the payout and there are no other beneficiaries. In this case, insurance payouts are paid directly to the estate instead of the beneficiary.

And when the other person inherits this payout from the estate, he/she might be held taxable. Because life insurance payouts are now under estate taxes. This tax can be an estate tax or inheritance tax. Check out IRS for detailed estate tax information.

Now we are going to give you a summary of when insurance payout is taxable when it’s not, in bullet form so you can read easily.

When are Life Insurance Payouts Taxable?

The following are the scenarios when life insurance payouts are taxable.

  1. When You’ve Borrowed: If you have borrowed money against your permanent life insurance policy and it’s not paid back yet. If you have gained interest in that period of time, then you are required to pay taxes on the interest you earned along with the borrowed amount.
  2. When You Earn Interest: If the beneficiary decides to get regular income or installments over a period of time, and you earn interest in this period of time. Then the beneficiary is required to pay taxes on the earned interest.
  3. When Three Persons are Involved: As a general rule, when there are three persons involved in the insurance, then insurance payouts are taxable. Three persons mean, insurance provider, insurance policyholder, and the beneficiary.
  4. Surrendering Insurance Policy: Do you have to pay tax on cash surrender value? In short, the answer is “Yes”. If you have taken a payout from your cash value account and then you decide to surrender your life insurance policy, you may be held taxable. If the amount you received exceeds the premiums you paid over the life of the policy, you need to pay taxes on the extra amount you earned.
  5. Selling Insurance Policy: If you decide to sell your insurance policy, the buyer (usually investment company) will continue paying premiums and they will get death benefits from your policy. But the amount you received from selling your life insurance policy is taxable.

When are Life Insurance Payouts Not Taxable?

  1. Cash Value Gains: Permanent life insurance policies are designed in such a way that they build cash value over time. When your beneficiary gets this extra gain along with policy payout. He/she doesn’t need to pay tax on cash value gains.
  2. When Only Two Persons are Involved: As a general rule when there are only two persons (Insurance company and policyholder) involved, then there is no tax.
  3. Surrendering The Policy For Lump-sum: In case of permanent life insurance policy, if you decide to surrender your insurance policy for a lump-sum payment. If this payment is less than the amount you paid for the premiums and fee of the policy, then it’s not taxable.
  4. Dividends: If your mutual insurance company returns the money in the form of dividends, the amount you receive is not taxable as long as it doesn’t exceed the amount you paid for the premiums.
  5. Payouts to Your Spouse: No matter if your estate is large enough to be taxed, your spouse is always excluded from the taxation.

Key Takeaways

  • In general, life insurance payouts are not taxable as they are not considered as gross income.
  • If life insurance payouts are delayed and you earn interest in that period of time. In this case,  you need to pay taxes on the interest.
  • When you surrender your insurance policy and you have taken a payout. If the amount you receive exceeds the premiums you paid over the life, then the amount received is taxable.

Image Credit: Pixabay

Disclaimer:

All the aforementioned information is collected through various sources. We do recommend you to contact your insurance provider and tax professionals for further information.

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References:

https://www.finder.com/are-life-insurance-payouts-taxable
https://www.investopedia.com/ask/answers/102015/do-beneficiaries-pay-taxes-life-insurance.asp
https://www.valuepenguin.com/life-insurance/life-insurance-taxable
https://www.daveramsey.com/blog/is-life-insurance-taxable

What is Life Insurance?

Life insurance is basically a contract between you and insurance provider company where you pay regular premiums, and in return, the insurer pays a sum of money in case of specific incidents like upon the death of insurance policyholder. Not only death but other incidents like critical illness or terminal illness are also covered by the life insurance policy.

This contract mentions all coverage and limitations. Life insurance is the thing which is overlooked most of the time but trust me, it’s an important financial part of your life. Because it provides benefits for your family in long terms.

Typically life insurance is purchased so you that your family members would be able to live a balanced life and sustain their bills and education expenses for your kids because no one wants to leave their family unprepared.

Do I need Life Insurance?

If you’re married, have kids or if someone is dependent upon you in any way. Then the answer is “YES” because it covers both your family and your business.

But not everyone needs life insurance, it depends on many factors. The first question that needs to be answered when you want to buy life insurance is “Who you want to protect after you pass away?

After answering this question, you can choose one of the following life insurance plans.

Common Types of Life Insurance

1. Term Life Insurance

Term life insurance is for a specified period of time like 5 – 30 years. It’s a flexible type of life insurance, ideal and affordable for an individual who wishes to buy life insurance for a specified period of time like a person can buy term life insurance until his children reach adulthood. If the policyholder didn’t die within the insurance time period, the policy expires without any payout.

2. Whole Life Insurance

Whole life insurance, also known as permanent life insurance, is another simplest type of life insurance policy. It covers the whole life where you pay annual premiums. It pays benefits to the beneficiary after the death of the policyholder.

Whole life insurance premiums may increase as the policyholder ages and it can become hard to afford when the person lives after 80, but these benefits and premiums can be fixed in most cases. The younger you buy whole life insurance, the cheaper premium payments will be, because the amount, you agree to pay at a younger age, will be the same in 40 years.

3. Universal Life Insurance

Universal life insurance is a flexible type of Whole Life Insurance, it’s flexible because you can change the amount that you pay each year or even you can skip certain premium payments and death benefits are also adjustable. A part of your premium payment goes to your cash account and this cash account earns interest for you and cash value can be withdrawn or you can also take tax-free loans against your cash value.

But the universal life insurance policy is more expensive than a term life insurance plan.

4. Variable Life Insurance

Variable life insurance is another type of life insurance that is similar to the universal life insurance plan. The main difference between variable and universal life insurance is that with variable life insurance, the rate of interest will not be specific in your cash-value account. You can invest a portion of your premium into other investment plans like mutual funds or bonds.

With life variable life insurance, the potential for earning cash value is higher than other life insurance plans. But there is a risk of a drop in cash value earning when you invest in risky investment plans and your investments decline because these investments are subject to the market’s ups and downs. However, you’re still guaranteed minimum death benefits as long as you keep paying the minimum required premium regularly.

5. Mortgage Life Insurance

Mortgage life insurance, also known as Mortgage Protection Insurance, is a type of life insurance but here beneficiary is not your family or children, the mortgage lender is your beneficiary. This policy makes sure that your mortgage lender is paid and your family can stay in the home even after the death of the breadwinner.

In mortgage life insurance, the payout amount decreases over time and this is the biggest drawback of this life insurance plan.

6. Final Expense Life Insurance

Final expense life insurance, also known as Burial Insurance, is another type of life insurance that covers the expenses and bills (medical bills and funeral expenditures) that your family faces after your death. Unfortunately, this barebone insurance plan can cost thousands of dollars.

Disclaimer: This article provides only information about different types of Life Insurance plans. We don’t recommend you to buy any specific Life Insurance Plan, you should consult your insurance provider for further information.

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References:

https://en.wikipedia.org/wiki/Life_insurance
https://www.thebalance.com/compare-term-universal-variable-whole-life-insurance-1289668
https://www.protective.com/learning-center/life-insurance/types-of-life-insurance/