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Why do I Need Life Insurance Buying life insurance is one of the most important decisions you'll ever make. Why? while it's nice to think we'll all get to enjoy a
long, healthy life, the truth is...sometimes we don't. If you have life insurance, you have a way to:
- Take care of your family when you're gone.
- Replace your income when you're gone.
- Take care of your final expenses so your family doesn't have to worry about it.
- Give your family the resources to handle financial obligations they'd otherwise face alone.
- Supplement your retirement.
- Give your survivors choices about their future... if you own a home, your life insurance might pay off the mortgage so your family can stay in the house rather than being forced to sell it.
- Provide an income to let your family maintain their standard of living and cover everyday expenses like groceries, bills, rent, the mortgage, etc.
- Help cover the expense of raising your children.
- Help pay for your children's education.
- Provide peace of mind for you now and for your family when you die.
Remember, you're not buying life insurance for yourself. You're buying it for the loved ones you leave behind.
How Much Life Insurance is Enough Financial experts often
recommend that you need an amount equal to anywhere between five to ten times your annual salary. The actual range varies slightly depending on who you ask, but the bottom line is that according to this guideline,
most people are underinsured. Another point to keep in mind is that your needs may increase in the future. Some of the things you should consider are:
- How much your dependents would receive if you died tomorrow, and how much they would actually need. Your insurance policy should come as close to making up the difference as you can afford.
- Any immediate needs at the time of death, such as medical expenses, burial costs, and estate taxes.
- Funds for a readjustment period, to finance a move or provide time for family members to find a job.
- Ongoing or future financial needs, such as monthly bills and expenses, daycare costs, college tuition, or a spouse's retirement.
There are many names for the various types of life insurance but when you step back and take a look at them all, there are really only two basic types to choose from: Term or Permanent.
Term insurance provides a death benefit for a specified length of time. Permanent life insurance provides a death benefit when you die, and it also accumulates a tax-deferred cash surrender value.
The kind of
coverage you decide on depends on your unique circumstances.
For many, a combination of term and permanent insurance could be a good solution.
TERM INSURANCE
Term Insurance offers basic, "no
frills" life insurance protection for a specific period of time. It pays a benefit only if you die during the term. It's usually the best choice when you need life insurance for a limited number of years or
if you are concerned about being able to afford the premium payments. Term insurance offers the most coverage at the lowest cost.
There are several different kinds of Term Insurance: Level Premium Term
policies have premium payments that are designed to remain the same for a period of time -- 10, 15, 20, 25, or even 30 years. These policies have become very popular because the premium is guaranteed to stay the same every year; they are inexpensive, and they can provide fairly long term coverage. A good level premium term policy should provide a "guarantee of level premiums." Without a guarantee, the insurance company can raise your premiums at any time.
Yearly Renewable Term, or YRT, provides protection for a year at a time and is automatically renewable each year without continued proof of good health. The premiums you pay usually increase each year as
you age, for as long as you keep the policy. YRT may offer the lowest initial cost. Decreasing Term policies provide decreasing amounts of protection each year for a level premium.
PERMANENT LIFE INSURANCE Permanent Life Insurance
(sometimes called Whole Life Insurance) provides protection for your entire life. As long as you pay the necessary premiums, the death benefit will always be there. These policies are designed to provide coverage over a long period, and are a good choice if you do not expect your insurance needs to diminish over time.
Straight Life is the most common type of permanent life insurance. You pay premiums for this kind of policy each year as long as you live.
Most permanent policies, in addition to a death benefit,
also have a feature known as "cash surrender value." A policy's total cash surrender value is made up of two components: cash value and dividends. The cash value will earn interest at a rate based
on the life insurance company's investment performance, but there will always be a guaranteed minimum interest rate. Generally, you don't pay income tax on the cash value earnings until you surrender, or cancel,
the policy, and then only on the amount that's greater than the total of the premiums you've paid. If you hold the policy until you die, no income tax will be due on the policy proceeds. When choosing a
permanent life policy, there are several things you should look for:
- A cash surrender value that's guaranteed in the first year of the policy.
- The policy with the highest cash surrender value in the first year. Look for "participating" policies, which feature the additional benefit of dividends which can add to the total cash surrender value
and increase the total death benefit.
- A policy that lets you surrender, or cancel, the policy and receive the dividend and cash value as a lump sum amount. Compare carefully the guaranteed cash values shown in proposal illustrations.
Also, make sure your policy doesn't have any surrender charges.
- A policy that lets you use the accumulated cash value, if it's sufficient, to pay the premiums and keep your coverage current if you need to stop paying premiums for any reason.
- A policy that lets you borrow from the life insurance company, using the cash value in your life insurance as collateral. If you do not repay the loan, your beneficiary will receive a reduced death
benefit.
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