Life Insurance

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Life Insurance: The Basics

Why do I need Life Insurance?

Life insurance is an essential part of financial planning. One reason most people buy life insurance is to replace income that would be lost with the death of a wage earner. The cash provided by life insurance also can help ensure that your dependents are not burdened with significant debt when you die. Life insurance proceeds could mean your dependents will not have to sell assets to pay outstanding bills or taxes. An important feature of life insurance is that no income tax is payable on proceeds paid to beneficiaries. The death benefit of a life policy owned by a C corporation may be included in the calculation of the alternative minimum tax.

short-term-insurance

How much Insurance do I need?

Before buying life insurance, you should assemble personal financial information and review your family’s needs. There are a number of factors to consider when determining how much protection you should have. These include:

  • Any immediate needs at the time of death, such as final illness expenses, burial costs and estate taxes
  • Funds for a readjustment period, to finance a move or to provide time for family members to find a job
  • Ongoing financial needs, such as monthly bills and expenses, day-care costs, college tuition or retirement.

Although there is no substitute for a careful evaluation of the amount of coverage needed to meet your needs, one rule of thumb used is, buy life insurance that is equal to five to seven times annual gross income.

Life Insurance Tips

  • Take your time. On the other hand, don’t put off an important decision that would protect your family. Make sure you fully understand any policy you are considering and that you are comfortable with the company and product.
  • After you have purchased an insurance policy, keep in mind that you may have a “free-look” period usually 10 days after you receive the policy during which you can change your mind. During that period, read your policy carefully. If you decide not to keep the policy, the company will cancel the policy and give you an appropriate refund. Review the copy of your application contained in your policy. Promptly notify your agent or the company of any errors or missing information.
  • Review your policy periodically or when your situation changes to be sure your coverage is adequate.
  • You can cancel or “surrender” the policy — in total or in part — and receive the cash surrender value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value.
  • If you need to stop paying premiums, you can often use the cash surrender value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live if there is sufficient cash value.
  • Usually, you may borrow from the policy, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.
  • The interest crediting rate and therefore cash values of many life insurance policies may be affected by your carrier’s future experience, including mortality rates, expenses and investment earnings.
  • Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash surrender value is the amount of available cash when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity.

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