Life Insurance Basics

Life insurance is available for consumers to purchase a policy to provide a cash payment to any beneficiaries named, paid at the time of death.  (Also called a death benefit).  Life insurance’s benefits are 1) to support dependents through their lives and 2) to provide cash to cover expenses incurred upon death.  If an individual does not have any minor children or dependents and they are not in bad financial shape or dependent upon you financially, then life insurance may not be required.  Life insurance is purchased through policies, which require premium payments either monthly, quarterly, semi-annually or annually, and in varying dollar amounts, lengths of time and coverage.  Life insurance policies would assist your dependents in covering the expenses that were caused at the time of your death and would provide them with resources through their life, if they are currently dependent upon you financially.  Examples of some of the reasons for purchasing a life insurance policy include, funeral expenses, hospital bills, living expenses, mortgages and loans, estate and inheritance taxes, educational expenses and retirement funds for the surviving spouse and/or family.

Do you need life insurance?

A few things to consider before purchasing a life insurance policy.

q  How many people are dependent upon you financially?

q  Would these people be able to obtain income elsewhere, from savings, relatives, investments, scholarships, work income, etc?  Considering this, would additional cash be required?

q  Will probate be involved in regards to your estate?  Will there be lengthy court expenses?

q  Are there any alternatives to life insurance, such as available cash, checking or savings accounts, stocks, or other investments that would take care of these expenses after your death?

q  Will you have substantial debts and taxes to be owed after your death? 

q  Will additional cash be required for your business to continue operations?

If it does appear that there will be financial responsibilities after your death that will not be met, then you should consider a life insurance policy.

What type of life insurance policy should you purchase?

Term Life Insurance (yearly renewable term and level premium term) is the most affordable type of coverage to purchase.  Essentially, premiums are paid towards this policy for a specified time period.  If death occurs within this time period, a benefit is paid to the beneficiary.  However, if death occurs outside of this time period, no benefit is paid.  This type of coverage may be required for temporary time periods, such as the time until your children are out of college.

Permanent Insurance (whole life, universal life and variable life) offers protection for life.  These policies are more expensive and will provide a death benefit to your beneficiary at the time of your death.  It provides a cash equity account and funds grow tax-deferred, which may be used as a retirement supplement.

Independent insurance agents can assist you in determining which type of life insurance coverage you would need.  Life insurance may be a little more unfamiliar to most individuals than health insurance policies.  For this case, make sure you ask the agent assisting you questions you may have about the process and the plan itself.   

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The importance of Life Insurance Company Ratings

When purchasing a life insurance policy, you should consider checking the reliability of that insurance company.  Some insurance companies have seen troubled financial waters and have gone out of business.  Unfortunately, there is not a federal insurance guarantee fund for life insurance companies, such as what is available for banks through FDIC.  Some states do have an industry sponsored guarantee fund, it may take awhile to determine if you’d get anything back and how much it will be.  Most analysis recommend companies with at least an “A” rating by A.M. Best.

A.M. Best http://www.ambest.com