Life Insurance

Why should I buy life insurance?

We all need life insurance. But what is the difference between one policy and another? How much do we need? When should we buy? Here are a few things to consider:

Replacement of income: If people depend on your income, life insurance can replace that money for them if you die. The most commonly recognized case of this 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 spouse.

Pay final expenses: Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.

Inheritance: Create an inheritance for your heirs even if you have no other assets to pass on. Your survivors can create an inheritance by buying a life insurance policy and naming themselves as beneficiaries.

Create a source of savings: Some types of life insurance create a cash value that, if not paid out as a death benefit, this policy can be borrowed or withdrawn on the owner's request.

Charitable contributions: By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy's premiums.

How much life insurance do I need?

First, in determining how much life insurance you need, plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with "winding up" an estate and passing property to heirs. At a minimum, plan for $15,000.

If you have dependents, you may want to consider buying enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur to replace services you provide. You should also consider planning to replace "hidden income" that would be lost at death. Hidden income is income that you receive through your employment but that isn't part of your gross wages. It includes things like your employer's health insurance premium, the matching contribution to your 401(k) plan, and many other "perks," large and small.

What are the principal types of life insurance?

There are two major types of life insurance, Term and Whole life. Whole life, sometimes called permanent life insurance encompasses several subcategories, including traditional whole life, universal life, variable life and variable universal life. Today, about 6.4 million individual life insurance policies bought are term and about 7.1 million are whole life.

What is a beneficiary?

A beneficiary is the person or entity you name in a life insurance policy to receive the death benefit.

Two "levels" of beneficiaries
Your life insurance policy should have both "primary" and "contingent" beneficiaries. The primary beneficiary gets the death benefits if he or she can be found after your death. Contingent beneficiaries get the death benefits if the primary beneficiary can't be found. If no primary or contingent beneficiaries can be found, the death benefit will be paid to your estate.