What is Life Insurance?
Life insurance is insurance that will protect your family and specified dependents in the event of the policyholder’s death. In general, it is an essential component in planning for the future.
Why Should I Purchase Life Insurance?
Here are some of the reasons to consider purchasing Life Insurance:
- Create an inheritance for your heirs
- Pay your final expenses
- Replace income for your dependents
- Pay final taxes on your estate
- Making a charitable contribution
- Some plans may have a savings feature
How Do I Determine How Much Life Insurance to Purchase?
- The first item to consider is funding for your final expenses. If you have prepaid your funeral expenses and you have no family needs or desire to contribute to a charity, then there is little need for life insurance.
- Calculate the Amount Needed by Dependents. If people depend on your income, life insurance can replace that income for them if you die. The most common situation is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to other dependent adults, such as parents, siblings or adult children who continue to rely on you financially.
- Consider Special Circumstances After Death. Will family changes be brought about by your death? For example, it may be necessary for your family to relocate after your death.
- Will Hidden Income be Lost? If you die will certain benefits be curtailed or eliminated? If so, consider these amounts in your life insurance needs determination.
- What about using a multiple of my annual income as a factor in determining the amount of life insurance? Some financial planners recommend this as a rule of thumb. However, this method may be too simplistic for many situations. Some planners recommend 2 – 6 times annual income while other advisors make recommendations as high as 20 times annual income.
- Consider using life insurance to pay off your home mortgage. It may be advantageous to your family to have the homestead paid off when you die.
- Will education costs be covered for dependents? The current cost of college per student per year is between $ 15,000 and 50,000 dollars. Is there a need for this to be funded?
- Are endowments to charitable institutions important? Life insurance as a means of funding charitable causes can be a cost-effective way to magnify your support for that organization.
- What about the needs of your business after death? If you own a business, a special circumstance exists to protect your business upon your death.
What are the Various Types of Life Insurance?
- Whole Life Insurance. Whole life insurance provides permanent protection for your dependents while building a cash value account. With this type of insurance, the insurance company manages the policies various accounts. It pays a death benefit to the beneficiary you name and offers you a low-risk cash value account and tax-deferred cash accumulation. It provides a fixed premium which can’t increase during your lifetime as long as you continue to pay the planned amount. It allows the insurance company to manage the cash value account in your policy exclusively. It provides you the option to receive dividends from your policy or apply them to reduce payments. It offers you the right to withdraw from the policy during your lifetime.
- Term Life Insurance. This type of life insurance provides low-cost protection for a specific period (Term). Term insurance comes in two basic varieties—level term and decreasing term. Most people purchase level term insurance. The terms “level” and “decreasing” refer to the death benefit amount during the term of the policy. A level term policy pays the same benefit amount if death occurs at any point during the term. Level term policies that are an annual renewable may be issued for 5, 10, 15, 20, 15 or 30 years. Also, many companies offer a term to a specific age (term to age 65 is common).
- Universal Life Insurance. This type of policy offers more flexibility than whole life insurance. Some policies allow for an increase the death benefit if you pass a medical examination. The savings vehicle (called a cash value account) earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse, and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.
- Variable Life Insurance. This policy combines death protection with a savings account that you can invest in stocks, bonds, and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.
- Variable Universal Life Insurance. This type of policy has the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.
- Group Life Insurance. You may have a policy provided by your employer or your spouse’s employer for life insurance. Also, many fraternal organizations or financial institutions may offer life insurance as a benefit of membership.
- Special Circumstances Life Insurance. Some policies provide specific life insurance coverage. Coverage for the balance of a loan is often referred to as Credit Life Insurance. Common also are policies for accidental death or dismemberment. Some companies offer policies if you die of a certain disease such as a Cancer Life Insurance Policy. Also available are “Jumping Juveniles” policies offered early in life that increase in value at a predetermined age such as age 18 or age 21.