Life Insurance 101: The Basics
Life insurance is one of the most important parts of a family’s overall financial plan. Purchasing a life insurance policy is one of the most important decisions you ever make.
This page will allow you to get a sense of what life insurance is, who needs it and how it works.
What is life insurance?
Life insurance, in its simplest form, is income replacement. When you die, your life insurance will help take care of those who depend on you financially. If you pass away “before your time,” your other investments may not have enough time to grow. But your life insurance gives your family a lump sum of cash at exactly the moment they need it most.
The policyholder makes payments, called premiums, to a life insurance company. The insurance company promises to pay the death benefit to the person or people you choose – assuming the premiums have been kept current. Premiums can be paid monthly, quarterly, semi-annually or annually.
When you own life insurance, you can have peace of mind. If you died tomorrow, you can be confident that your loved ones would have the financial means to maintain their standard of living.
Check out the video below to learn more:
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. This “term” is usually 10, 20 or 30 years. The policy provides coverage with a level premium for the term you pick.
At the end of the term, coverage is not canceled. However, premiums which have been level and inexpensive for many years instantly shoot through the roof. Many people drop their policies because they can no longer pay the premiums.
As long as the insured dies while the policy is in good standing, the benefit is paid to the beneficiary.
Permanent life insurance covers the insured until death – no matter how or when that occurs. There are several different types of permanent life insurance including whole life, universal life, and survivorship (second-to-die) life insurance.
Permanent insurance policies have a savings account that may build cash value that you can withdraw or borrow against in the future.
What’s the right kind of life insurance for you? Check out the video below for some hints:
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; you are as young and healthy as you’re likely to ever be. Rates are at historic lows, too.
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 those shared expenses.
Married with Children
In addition to protecting your spouse, you want to make sure your children will be able to continue living the lifestyle they’re used to. When buying life insurance, consider their current and future needs, such as living expenses, college tuition and weddings.
Single parents serve as the primary caregiver, breadwinner, cook, chauffeur, entertainer and more. With so much responsibility, there’s no question single parents need life insurance.
Stay-at-home parents make very large contributions to their families. For example, things like childcare, transportation, cleaning, cooking and household management all cost money. If stay-at-home parents received salaries, they would earn over $100,000 per year! Stay-at-home parents should have a life insurance policy that is sufficient to cover the cost of these responsibilities.
If you have an estate, your heirs could be hit with a large estate tax after you die. (The top 2015 federal estate tax rate is 40%, and some states have their own estate taxes.) The proceeds of a life insurance policy are usually paid out immediately, just in time to cover the estate tax and other final expenses.
Life insurance can also reduce overall tax liability and help you leave a legacy to your children, grandchildren or charitable causes.
In addition, life insurance can offer additional benefits to cover the costs of long-term care and medical expenses in the case of critical illness. As you get older, these features become increasingly valuable.
Small Business Owner
Life insurance can even 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 aging parents. Some are carrying significant debt, like student loans, that they wouldn’t want to leave their co-signers with.
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. You may be a spouse and/or a parent someday.
How Much Do I Need?
Life insurance experts suggest buying a life insurance policy that is 5 to 10 times your annual salary. But we aren’t crazy about such “rules of thumb.” 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.
Find out more about how to determine how much life insurance is the right amount on our How Much Life Insurance is Enough page.
If you have more questions, we’re here to answer them. Call us at 800-442-9899 and we’ll walk you through the process.
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