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LIFE INSURANCE 101
Choosing the "Right" Life Insurance
Life is full of uncertainties. And while you can't stop them from happening, life insurance helps you be ready for them when they do.
Who needs life insurance? Well, nearly everyone. But what's even more important is to understand how much coverage is practical and what provisions to include in your policy. That's why making choices under the close guidance of a personal insurance agent is a key factor - to make sure you have exactly what you need for your individual situation.
Life insurance fills three important financial needs. First, it protects what's most important to you. Second, it prepares you for the future and may help you accumulate money for your retirement years. Third, it helps preserve what you've spent your life creating, and makes sure that it goes to whom you intend.
The primary purpose of life insurance is to protect your loved ones should you no longer be able to. Obtaining life insurance is the "gift of love." It ensures the financial well-being of our loved ones. It's also a tax-efficient way of leaving a legacy for those you love.
The ability to provide for your family, now and in the event of your death, is critical to your family's future well-being. That ability is not a certainty, however, and that's where your need for life insurance enters the equation.
Two important questions to ask are: 1) how much life insurance should you have and 2) what type?
Determining how much life insurance coverage you need: If you die early, exactly how much money will your loved ones need? How much will it take to pay off debt? How much to replace your income? Is providing funds to cover college costs for your children important, and if so, how much money will that take? How do you account for inflation?
To determine "how much," we suggest you consider answering these questions:
- What would final expenses (burial and funeral costs) be?
- How much to create a 3 to 6 months emergency fund?
- Can your survivors pay their mortgage or rent payment?
- How much will it take to pay off debt?
- How much to replace your income?
- What about funds for college and education?
- How do you account for inflation?
After you've determined how much life insurance you need, you have to decide which type of policy is best suited to your needs. There are two basic types of life insurance with many variations among each. The biggest difference between them is how long the coverage lasts.
As for the type of life insurance, the main question is: do you want to "rent term" or "buy permanent" insurance that guarantees you will have life insurance when you die?
Permanent life insurance covers you permanently or for your entire life. Your death is certain. And when you die, it pays the death benefit.
Permanent life insurance advocates say, "Why would you want to buy term life insurance that isn't in place when you die?" Permanent insurance can also assist you with funding for big-ticket items while you're alive. These plans also accumulate cash value on a tax-deferred basis which can be used to supplement your retirement income or to put a child through college, for example.
Wouldn't it be great to be protected for your lifetime? You will die; it's a part of life. Permanent life insurance will be in place. Term may not. The benefits of permanent insurance are:
- It takes place when you die, not during a designated term or time period.
- Some permanent life policies offer long term care riders and a way to pay for long term care should you need it (and 50% will)! If you're lucky enough never to need long term care, then your beneficiaries will still receive a tax-free benefit.
- It can assist you during your life with a guaranteed cash value which can be borrowed to pay for big-ticket items while you're alive.
- It accumulates cash value on a tax-deferred basis and can be used to supplement your retirement income or help fund your child through college if necessary.
Term life insurance covers only a part or designated time period of your lifetime. When that part or term ends, so does the coverage. It only pays a death benefit if you die within the designated term or time period.
Permanent is best if you have a family and you care about how they will carry on, upon your death. The amount you wish to leave them on a tax free basis is up to you.
On the surface, term life insurance appears to be a popular choice as it generally costs less than permanent life insurance. However, some would consider term life insurance a tremendous injustice as most term life policies are not in place when the policyholder dies. Once the term period ends, the term life insurance usually ends because the premiums as that point sky-rocket. Term life insurance is extremely profitable for the companies.
One thing is for certain. You want to buy enough life insurance to best fit your needs and budget. Buying when you are young and healthy (even before your parents die) can help you obtain the best rates. Life insurance is just like every other type of insurance - the time to buy it is when you think you don't need it. When your health changes for the worse, your ability to find preferred life insurance rates gets harder.
The Fred Simmons Insurance Agency is ready to help you determine what you are trying to accomplish with your life insurance program. We'll help you choose the life insurance coverage most suited for you. "Insurance of Value" - "smart" coverage for the "right" price!
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