Life Insurance 101
Life insurance, one of the most important parts of a family's overall financial plan, is equal to sustainability. In fact, purchasing a life insurance policy could be the most important decision you ever make. It is vital to have all of the information necessary to make an informed decision when it comes to making a life insurance purchase.
Life insurance 101 will provide you with the basics of life insurance; this section will allow you to get a sense of what it is, who needs it and how much life insurance coverage will adequately protect your family''s financial future.
What is life insurance?
Life insurance, in its simplest form, is income replacement. In the event that you're not here, it takes care of those who financially depend on you. The life insurance policyholder pays a premium (monthly, quarterly, semi-annually or annually) in return for a life insurance company's promise to pay the death benefit, or face amount, to the named beneficiary. The policy provides your dependents with ongoing income to replace yours.
The value of a life insurance policy is the peace of mind it provides; knowing that if you died tomorrow, your surviving loved ones would be taken care of.
Life insurance is guaranteed protection against the sudden loss of income that would result if the policyholder passed away. The beneficiary is eligible to receive the proceeds and is thereforeprotected from the financial impact of the death of the insured.
Term vs. Permanent Life Insurance
Term life insurance is the most affordable way to purchase a substantial death benefit for a limited period of time. The policy provides coverage at a fixed rate and has a set and definedlimit on the coverage period. Once that period expires, coverage is no longer guaranteed at the previous premium level, and the client must get the policy renewed or lose coverage. If the insured dies during the term, the benefit is paid to the beneficiary. The stated benefit is issued upon the death of the insured, provided that he/she dies within the specified time period.
Term life insurance contrasts with permanent life insurance, where the duration extends until the policy owner's death. Also referred to as whole life insurance, the policies in this category have a savings component that can be used for wealth accumulation (cash value built up). The premiums for whole life are usually much higher than term life insurance policies, but they remain constant throughout the life of the insured.
Who needs it?
If someone depends on you financially, you need life insurance. It's that simple. And NOW is the best time to buy, as rates are at or near all-time lows. Find your particular situation below to find out how life insurance fits into your overall financial plan.
Married with no Children
Married couples share financial obligations. That's why it's important for each spouse to have their own life insurance policy. In the event of a spouse's death, a life insurance policy would allow the surviving spouse to cover shared expenses.
Married with Children
It's not only important that your spouse is protected, but it's important that your children will be able to continue living the lifestyle they're used to. When buying life insurance, consider their financial needs, such as living expenses, college tuition and marriage.
Single parents serve as the primary caregiver, breadwinner, cook, chauffer, entertainer and more. With so much responsibility and no spouse to share it with, there's no question single parents need life insurance.
Stay-at-home parents make very large financial contributions to their families. For example, things like childcare, transportation, cleaning, cooking and household management all cost money. If you are a stay-at-home parent, it is important to have a life insurance policy that is sufficient enough to cover the cost of these responsibilities if you are no longer around.
If you have an estate, your heirs could be hit with a large estate tax after you die. The proceeds of a life insurance policy are usually paid out immediately, allowing your heirs to cover the estate tax and other final expenses.
Small Business Owner
Life insurance can protect your small business. If you, a partner or another key employee died, a life insurance policy would cover the business' financial loss. Life insurance for businesses can be structured to fund a "buy-sell" agreement, where the surviving partners would have the funds to buy the company interests at a previously agreed upon price. This is called “key person insurance," which provides the owners with the proceeds needed to hire a replacement.
Single people need life insurance, too. For example, some singles provide financial assistance for ill parents, and some people are carrying significant debt, like student loans, that they wouldn't want to leave their co-signers with. But also consider insurability. Buying a life insurance policy while you're young and healthy will guarantee your insurability for life (you never know what the future holds in terms of your health).
How much do I need?
Life insurance 101 experts suggest buying a life insurance policy that is 10 to 20 times your annual salary, but your annual salary isn't the only important factor in determining your life insurance needs. You must consider how much money will be enough to protect your family when you're no longer around.
Here's some advice from Byron Udell, Founder, President & CEO of AccuQuote. Byron is one of the foremost life insurance experts in the country.
(Tips to determine how much life insurance you need)
Ask yourself the following two questions.
- How much money will my family need to fund final expenses, such as the cost of my funeral and outstanding debts?
- How much money will my family need to continue living the lifestyle they're used to, pay off the mortgage and fund future expenses (college tuition, weddings, etc.)?
Our term life insurance calculator can help you answer these questions and determine how much life insurance you need.
If you have more questions about life insurance,the impact of health and lifestyle on insurance, the process, products or services, we're here to answer them.
We've created a comprehensive FAQs section just for these types of questions!
And for further clarification, jump to our Life Insurance Glossary. Of course, you can always call us at 800-442-9899 and we'll walk you through the life insurance process.