Why buy life insurance?
Many financial experts consider life insurance to be the cornerstone of sound
financial planning. It is generally a cost-effective way to provide for your
loved ones after you are gone. It can be an important tool in the following
ways:
1. Income replacement
For most people, their key economic asset is their ability to earn a living. If
you have dependents, then you need to consider what would happen to them if
they no longer have your income to rely on. Proceeds from a life insurance
policy can help supplement retirement income. This can be especially useful if
the benefits of your surviving spouse or domestic partner will be reduced after
your death.
2. Pay outstanding debts and long-term obligations
Consider life insurance so that your loved ones have the money to offset burial
costs, credit card debts and medical expenses not covered by health insurance.
In addition, life insurance can be used to pay off the mortgage, supplement
\retirement savings and help pay college tuition.
3. Estate planning
The proceeds of a life insurance policy can be structured to pay estate taxes
so that your heirs will not have to liquidate other assets.
4. Charitable contributions
If you have a favorite charity, you can designate some of the proceeds from
your life insurance to go to this organization.
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How much life insurance do I need?
To decide how much life insurance to buy, you need to first figure out what
your goals are in purchasing this coverage. Ask yourself the following:
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Do I want to spare my loved ones funeral costs and outstanding debts?
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Am I concerned that my spouse or domestic partner will not be able to continue to
pay off the mortgage if I die suddenly?
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Do I have dependents who count on my income?
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Am I concerned about college savings for my children or retirement savings for my
spouse if I die suddenly?
While all situations are different, here are two scenarios to help you think
through the questions you should pose to your insurance professional:
Dependents
If you have children, a spouse who does not work outside the home or aging
parents who you financially support, you have dependents. Alternatively, you
may simply have a spouse or domestic partner who would be unable to pay the
mortgage without your financial contribution. In either case, your loved ones
will no longer have your income to help them pay the bills and maintain their
lifestyle after you are gone. You will have to purchase enough insurance to
provide for their future, while considering how much of your budget should be
devoted to life insurance.
Some insurance experts suggest that you purchase five to eight times your
current income. While this may be a good way to begin estimating your family?s
needs, you will also need to figure how much your dependents will need to pay
for some or all the following:
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Cost of owning a home (mortgage, maintenance, insurance, taxes and utilities)
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College savings
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Food, clothing, utilities
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Child care
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Nursing home or elder care
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Retirement savings
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Funeral expenses and estate taxes
Your family may also need extra money to make some changes after you die. They
may want to relocate or your spouse may need to go back to school to be in a
better position to help support the family.
No dependents
If you are young and plan to have a family in the future, you may also want to
consider purchasing life insurance now so that you can lock in a good rate.
Just because you don?t have dependents, does not mean you don?t have
responsibilities. For instance, you may be concerned with not being an economic
burden to others if you die unexpectedly. You may also want to leave some money
behind to close family, friends or a special charity as a remembrance. In this
case, you should purchase enough coverage to pay funeral and burial expenses,
outstanding debts and tax liabilities, so that the bulk of your estate goes to
your family, friends or charities.
Your insurance needs will vary greatly according to your financial assets and
liabilities, income potential and level of expenses.
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Are there different types of life insurance?
While there a many different types of life insurance policies, they generally
fall into two categories - term and permanent.
Term
Term Insurance is the simplest form of life insurance. It provides financial
protection for a specific time, usually from one to 30 years. These policies
are relatively inexpensive and are well suited for goals, such as insurance
protection during the child-raising years or while paying off a mortgage. They
provide a death benefit, but do not offer cash savings.
Purchasing term insurance is like renting a home. It is a short-term solution.
Monthly costs are usually lower, but you will not be building equity. Just as
many people rent (while saving to buy a home), individuals who need insurance
protection now, but have limited resources, may purchase term coverage and then
switch to permanent protection. Others may view term insurance as a
cost-effective way to protect their family and still have money to put into
other investments.
Permanent
Permanent insurance (such as universal life, variable universal life and whole
life) provides long-term financial protection. These policies include both a
death benefit and, in some cases, cash savings. Because of the savings element,
premiums tend to be higher. This type of insurance is good for long-range
financial goals.
Purchasing permanent insurance is like buying a home instead of renting. You
are taking care of long-term housing needs with a long-term solution. Your
monthly costs may be higher than if you rent, but your payments will build
equity over time. If you purchase permanent insurance, your premiums will pay a
death benefit and may also build cash value that can be accessed in the future.
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What is a beneficiary?
A beneficiary is the person or financial institution, (a trust fund, for
instance) you name in a life insurance policy to receive the proceeds. In
addition to naming a specific beneficiary, you should name a second or
"contingent" beneficiary, in case you outlive the first beneficiary.
If there is no living beneficiary, the proceeds will go to your estate. If
there are probate proceedings this could possible delay your loved ones
receiving the money. The proceeds may also be subject to estate taxes.
Picking a beneficiary, and keeping that choice up-to-date, are important parts
of purchasing life insurance. The birth or adoption of a child, marriage or
divorce can affect your initial choice of who will receive the death benefit
when you die. Review your beneficiary designation as new situations arise to
make sure your choice is still appropriate.
Pay special attention to the wording of your beneficiary designations to ensure
that the right person receives the proceeds of your estate. If you write
"wife/husband of the insured" without using a specific name, an ex-spouse could
receive the proceeds. On the other hand, if you have named specific children,
any later-born or adopted children will not receive the proceeds - - unless the
beneficiary designation is changed.
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How often should I review my policy?
You should review all of your insurance needs at least once a year. If you have
a major life change, you should contact your insurance agent or company
representative. The change in your life may have a significant impact on your
insurance needs. Life changes may include:
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Marriage or divorce
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A child or grandchild who is born or adopted
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Significant changes in your health or that of your spouse/domestic partner
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Taking on the financial responsibility of an aging parent
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Purchasing a new home
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Refinancing your home
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Coming into an inheritance
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