Demystifying life insurance

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What is life insurance?

The purpose of life insurance is to protect and financially support loved ones through a payout upon the death of the insured person.

There are two main types of life insurance. Term life insurance provides coverage for a set period of time and simply expires if you’re still alive at the end of it, or stop paying in the meantime. You can choose to decrease or keep your level of coverage consistent over the term. 

Permanent life insurance costs more, but it provides coverage across your entire lifetime and usually includes an investment element. Put simply, this means that a portion of the premiums you pay to stay covered is invested – and if you decide to cancel your insurance, the policy may have a “cash surrender value”. Depending on your preferences around flexibility and risk, you can choose among subtypes such as Whole, Universal, and Variable Universal, with the latter two allowing you to adjust premiums, as well as coverage levels.

The benefits of life insurance

A life insurance policy provides you with the peace of mind that comes from knowing your loved ones will be well provided for when you die.

Crucially, death benefits are generally income tax-free. The payout they provide can help cover estate taxes and preserve your estate for your beneficiaries. Putting your life insurance into a trust may protect this money from inheritance tax liabilities and give you greater control over who benefits from your policy. But you and your loved may also enjoy the tax-deferred investment growth available through a permanent life insurance policy during your lifetime.

Many life insurance policies can be topped up with additional coverage for permanent disability or accidental death. Of course, this protection comes at a cost. The premiums you pay will ultimately depend on coverage size, scope, term, and flexibility, as well as your age and health. Generally speaking, the earlier you purchase a life insurance policy, the less your insurance premiums will be.   

What to know before getting insured

Before applying for life insurance, you’ll need to decide how long you want to be covered for and at what level. This involves assessing your financial situation in order to determine what your family would need to cope without you there.

That said, your circumstances will change over time, and your life insurance coverage should reflect any developments in terms of career, cohabitation, or childcare. Having a trusted advisor who can assess your needs and help you select the right option to meet your goals is crucial.

Finally, it goes without saying that your life insurance policy is only as good as the financial strength of the company issuing it. The provider you choose should have a strong track record and robust credit rating.

Your insurance needs should not be static but reassessed as you reach different milestones in your life and as your wealth grows.

KEY TAKEAWAYS:

 

Life insurance promises to pay out upon the death of the insured person, helping protect their loved ones.

Unlike term life insurance, permanent life insurance can also offer investment benefits. Choosing the right option will depend on your budget and your family situation.

Your insurance needs should be carefully re-evaluated as you hit different life milestones and grow your wealth over time.

Citi Private Bank is dedicated to helping dynamic individuals and their families preserve and grow their wealth. Our clients include some of the world’s leading entrepreneurs, executives, investors and their family offices. We provide customized private banking that crosses borders, including some sophisticated services usually reserved for major global institutions.

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