Life Insurance- the Basics
How would I use life insurance?
- Income replacement
The most common reason for buying life insurance is to replace the income lost when you die. For example, when you die, and your paychecks stop, the life insurance proceeds can be used to continue to support your family members. Such support is needed to pay bills, pay for college education, etc.
- Debt payments
Another common use of life insurance proceeds is to pay off debts. For example, mortgages, car loans, medical bills, and credit card debts are often left unpaid when someone dies. These obligations must be paid from the assets left behind. This can exhaust the resources that your family needs. Life insurance can be used to pay off debts, leaving your other assets for your family to use.
- Creation of a liquid asset
When you die, you may leave some liquid assets (such as cash, CDs, and savings bonds), and some non-liquid assets (such as real estate, an automobile, and stocks). Your liquid assets may not be enough to pay all the debts that you leave behind, plus all the expenses that arise because of your death (such as funeral expenses and estate taxes). Your non-liquid assets may have to be sold in order to meet these obligations when they come due. This may cause a financial loss if the assets must be sold cheaply in order to get the money on time. Life insurance proceeds are available almost immediately upon your death and can help you avert this situation.
- Estate creation
Life insurance creates an estate for your heirs. After your debts and expenses are paid, there may not be much left over for your family. Life insurance can automatically provide assets for them after your death.
- Charitable giving
Life insurance is a great way to give to charity when you die. You may have always had a great philanthropic desire, but not the means to make it a reality. Life insurance can do that for you.
What kinds of life insurance are there?
- Term - Term life insurance policies provide life insurance protection for a specific period of time or term. If you die during the coverage period, the beneficiary named in your policy receives the policy death benefit. If you don't die during the term, your beneficiary receives nothing.
- Permanent - Permanent insurance policies provide insurance protection for your entire life as long as the policy remains in force. In addition to the insurance protection provided, this type of policy also builds internal cash values, often described as a savings account within the policy. A combination of term and permanent insurance may be a good solution.
How do I determine my life insurance needs?
Your life insurance needs change as your life changes. Whether it is a mortgage, a growing family, or other obligations, as you take on responsibility and your family grows, your life insurance needs increase. You should periodically review your needs in order to ensure that your life insurance coverage adequately reflects your life situation.
Use our handy quick planner to help you estimate your needs. Go to QuickPlanner
What are some other tips I should know about life insurance?
- Ask for outlines of coverage so you can compare the features of several policies.
- Make sure that you fully understand any policy you are considering and that you are comfortable with the company, licensed representative, and products.
- Check that the company is licensed in your state.
- Look for a company that is reputable, consumer-oriented, financially strong, and easy to do business with. A number of insurance rating services rate the financial strength of companies, and such information can be obtained from your agent or from public or business libraries. Rating agencies include A.M. Best Company, Standard & Poor's Insurance Rating Services, Duff & Phelps Inc., and Moody's Investor Services Inc.
- Always answer questions about your medical history and health carefully and truthfully.
- Be sure your application is filled out accurately.
- Contact the company if you don't receive your policy within 60 days.
- Always check the date the insurance becomes effective.
- Do not keep life insurance policies in your safe deposit box. In most states, boxes are sealed temporarily on the death of the owner, delaying a settlement when funds may be needed most.
- If you have a complaint about your insurance agent or company, contact the customer service division of your insurance company. If you are still dissatisfied, contact your state insurance department.
- Review your policy periodically or when a major event occurs in your life, such as a birth, marriage, purchasing a home or divorce or remarriage, to be sure your coverage is adequate.