A life insurance policy provides a payment in the event of your death that can help protect your family's lifestyle in the absence of your earning power. "Many people have financial goals they are trying to meet with hard-earned income such as paying off a mortgage, putting a child through college, or supporting an elderly parent. Life insurance can help support your family goals".
Here's how it works: When you purchase a life insurance policy, you're buying a contract with the issuing insurance company. The issuing insurance company guarantees that upon your death, it will pay a preset amount to your beneficiaries. The guarantee is subject to the insurance company's claims-paying ability. The proceeds are typically free from income taxes. The insurance company pays your beneficiaries directly, so they receive the funds without the delays and expenses associated with the probate process that governs assets passed down via a will. Depending on the size of your estate, benefits from a life insurance policy may be subject to estate tax.
Life insurance policies fall into two general categories: term and permanent. A term insurance policy covers a specific period of time, such as 10 or 20 years. At the end of that period, you normally stop paying premiums and your coverage ceases. A permanent insurance policy covers you until your death, regardless of age so long as premium payments are up to date. Permanent insurance generally includes an investment component along with the insurance policy, and generally carries higher premiums as a result. Permanent insurance is commonly used for wealth transfer and estate planning purposes, while term insurance is used for replacing lost income in the event of premature death.
Term insurance is generally more affordable, and in many cases more appropriate, for most purchasers. "Term insurance allows you to gain access to life insurance with a lot less money than you'd need if you were trying to buy the same amount of permanent insurance". One helpful comparison is the economics of leasing a car versus buying one: You can often get a more expensive car for the same payment by leasing, rather than buying, the vehicle.
Many people could benefit by having life insurance. "When someone else is depending on your income, there's generally a need for life insurance".
You may already have life insurance coverage through your employer. Even so, it's usually a good idea to consider purchasing additional coverage independently, because policies you buy outside an employer's plan are portable, meaning your coverage continues even if you lose or leave your job. Also, your employer's coverage may not meet your financial obligations for adequately protecting your family. To learn about insurance options to protect your family's income needs in the event of disability, read Viewpoints: "Insure your paycheck."
There are several ways to go about determining how much coverage you need. One simple method is to buy coverage equal to five to 10 times your annual salary, bonuses, etc.
Other methods are more precise and take certain aspects of your financial situation into consideration, such as the capital you've already accumulated, the liabilities you've accrued, and the specific costs for which you'd like your family to be covered in the future.
As your life progresses, you will likely accrue greater financial responsibilities for your loved ones. Term life insurance can provide the money they need to help meet their expenses and maintain their standard of living.
It doesn't matter how careful you are, there are things in life you can't control. And even the smartest plans can come unstuck if you don't give yourself adequate protection.
Whether you're looking to protect yourself, your family, or your assets, insurance can give you the second chance you need to get on with life without having to start all over again.